Chicago Business Broker

It Is Never To Soon To Start Thinking About Selling Your Business

Selling A Business Is Not Like Selling A House

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Just as it took longer to build you business than it did your house, it will take longer to transfer it to someone else.

If you think  you can simply cash out of your company, you have not prepared yourself to maximize your gains.  It’s best to figure on a 3-7 year post sale involvement.  Selling businesses is about LEVERAGE.  Buyers are looking to minimize their return on investment, which means you (the seller) needs to carry a note (ideally 50% of the sale price) in order to get top dollar.

Carrying a note, or financing the sale, requires you to act as a bank for 2-3 years.  In this capacity you must watch over your investment by reviewing financials on a monthly or quarterly basis, advising the new owners as necessary, and make sure payments are made in a timely fashion.

If all goes well, you’re paid in full in 2-3 years and can move on.  If not, you’ve been paid 60-70% of the price you sold the business for to take a 1-2 year break.  In the case of a default, you regain ownership of the business ,  take1-2 years to prop it back up and sell it again.

Fortunately, a default situation is rather rare (under 5%) but if you don’t prepare yourself for the post sale involvement, you’ll get 30-50% less for you company when selling.

Capital Gains Tax Increase Could Cost You A Maserati

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If you’re considering selling your business in the next 3-5 years, sooner may be better than later.

At the last minute in 2010 the government decided extend  capital gains and personal income tax rates  another two years, giving business owners more time to enjoy low rates.  Don’t let this gift go to waste

As it sits right now,  in 2013 the capital gains and income tax rates will increase and the hike will have a drastic effect on your sale.   A 5% increase in these taxes would increase taxes $100,000 on a $2 million sale. That doesn’t include any federal or state income taxes that will be increasing and taking an even larger portion of your proceeds.

In order to avoid getting hit with these extra taxes consider putting your business up for sale in late 2011 so you can close before the increases kick in.

Business Continuity for Co-Owners

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Imagine, on the eve of your wedding, that you plan to divorce, on a friendly basis of course, in 15 years or so. During those 15 years, you will work diligently, and quite successfully, to build a business.

On the preordained day that your marriage ends, you announce that you are willing to give your soon-to-be ex-spouse one-half of your company’s business value—in cash. And you let your “ex” value your company because those are the terms of the agreement the two of you signed a year after you were married.

Sounds ridiculous, no? Yet, you may have done something quite similar (and similarly ridiculous) in your business with your co-owners.

Few owners begin working together with an expectation of future acrimony, much less litigation. Fewer still give thought to one day leaving the business—even on friendly terms. Indeed most exits are not precipitated by a disagreement among co-owners; instead owners leave for a variety of reasons and simply want to do so with their share of business value.

And remember, one day you will leave your business.

Over time, in business as in marriage, partners can grow apart. We’ve all witnessed the resentments, discord, and wastefulness of a friend’s or acquaintance’s needless nasty divorce. Business divorces can be equally unpleasant—with an added twist: One may be unable to leave the business, or force a partner to leave, without appropriate tax and legal planning.

When you or a co-owner wants out, what will happen? Chances are that when you turn to your company’s buy-sell agreement, you will find that it is woefully out of date. You may also find that it controls the terms of your (or any owner’s) exit from the business not only upon death, but also during lifetime.

If you haven’t looked over your company’s buy-sell agreement since you signed it, dust it off and check out at least four key provisions:

  1. Lifetime and death transfers of ownership:
    • When must an owner sell, or offer to sell?
    • When must an owner (or the company) buy and when does it have the option to buy?
  2. How will the value of the company and the value of a departing owner’s interest be determined?
  3. Does the agreement mandate the use of an independently determined Fair Market Value at the time of transfer? If not, the valuation will favor you or the other owner. It will not treat you even-handedly.
  4. What are the terms (length, down payment, interest and guarantees) of the buyout?

We generally assume that buy-sell agreements control the transfer of an owner’s interest when he or she dies or becomes disabled. Indeed, they do that. But they usually do much more and if you don’t appreciate how much more, disaster looms.

At his annual physical, Steve Hughes complained that he was bone tired. After a battery of tests, Steve’s doctor observed that, while there was nothing physically amiss, Steve did seem depressed. After some introspection, Steve was able to articulate that he had no interest in continuing as a partner in a successful CPA firm. Like many owners, Steve had lost the passion and commitment to the business that still stoked his younger co-owners. He decided to sell out before his partners demanded it.

Steve broke the news of his departure to his two partners and noted that their buy-sell agreement controlled only a buyout at death and an option for the company to buy Steve’s stock if he were to sell it to a third party. Attempting to sell a partial interest in most businesses to a third party is always a difficult proposition, but current economic challenges made that course of action impossible.

Steve and his partners were left in a classic dilemma: remaining shareholders want to purchase the departing shareholder’s interest so that future stock appreciation—due solely to their efforts—would be fully available to them. Conversely, because the profits of a closely-held corporation are either accumulated by the company or distributed to the active shareholders in the form of salaries, bonuses and other perks, the departing shareholder (now an inactive owner) rarely receives significant income in the form of distributions or dividends.

Naturally, Steve wanted and needed maximum value for his interest while his co-owners were convinced that the company’s cash flow could not support Steve’s buyout.

So, look again at your business continuity agreement: If you are the one leaving, is it as fair as it is if you are the one left behind?

When you sit for the first time across the bargaining table from your partner, you will want that table set with a fair valuation method, a thoughtfully designed lifetime buyout provision (that may well reduce the cash flow required for a buyout by 20 to 30 percent), and manageable payment provisions. Since it is exceedingly difficult to design these provisions when buyer and seller are at the bargaining table, agree to and document the valuation, cash flow, tax, and payment provisions long before potential discord or differences of outlook arise.

Your first step toward avoiding the problems described in this article is to conduct a thorough review of your business continuity agreement.

**Thanks to Ted Thomas, a colleague of mine and Exit Planning specialist for providing this content.

Thinking of Selling in 2011? Claim All Your 2010 Income!

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We all know that cash heavy operations like restaurants and retail stores often have unreported income.  This can hurt you when selling your business.

If you’re considering selling your business in 2011, it may be a good strategic move to claim all your income on your 2010 taxes.  Although this will increase your tax liability costing you $.25-$.35 on the dollar in taxes, it will return to you $2 to $4 on the dollar in the price you receive for the business.

Seeing that we’re pulling out of a recession a sudden spike in revenues, even 50% to 100%, could be chalked up to the “recovery” not would not be that uncommon.   Business are primarily sold on tax returns and off the books cash income is hard to prove and even harder to trust.    When we market a business we can only state cash flows that can be proven with documentation therefore a business with 25% of their cash flow deriving from off the books cash will look less attractive and is more likely to be passed over.

Be sure to talk this over with your accountant and tax advisor.

When Bad Things Happen, Keep Your Perspective

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Sometimes in business events occur that knock us off kilter but have little or no consequences on the bottom line or big picture.  As owners, we take our business and all that surrounds it personally so we find ourselves susceptible to emotional reactions that distort our focus and distract us.  We begin to worry about these events and blow them out of proportion so that we have trouble being productive for hours or even days at a time.

At times like these we need to remember that business is a game with profit and cash flow as the score card.  Although we may be upset with a specific screw up or let down, rarely are they occurrences that will derail a company or even be noticed in the P&L at the end of the year.  At times like these, keep your perspective, take a look at the scorecard, give yourself a 10 minutes to acknowledge and feel the emotional reaction and then leave it behind you.

Dale Carnegie says that 90% of the things we worry about never happen.   Worry can be paralyzing and one of the hardest things about owning a business is overcoming these moments.  Teach yourself how to recognize these moments and deal with them so you can remain focused and productive.

The Essence of Strategy – You Can’t Sell Luck

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Strategy starts with a vision, a vision of your company in the future.  Picture your company 5 years from now and describe it in great detail, how many employees, what do they do, what are your revenues, how many clients make up those revenues, from where does your company operate, what is the culture of your organization and what are your day to day tasks.  Include as much as possible.

This vision becomes your destination.  In order to get to that destination you must follow a road.  The road you must follow is made up of milestones which are reached through accomplishing tasks.  Tasks are the essence of strategy and the DNA of all success stories.  Each task must lead to a goal and each goal to a milestone, therefore the tasks must be well defined, measurable and realistic.  Constant measuring of your tasks will determine if they are realistic and if they’re not you must re-adjust the formula.  Tasks that are not repeatable or sustainable make for a poor strategy.

The vision is your beacon, every decision you make must be looked at through the prism of your vision and evaluated in terms its consistency with reaching it.  Your job as the owner is to convey the vision to your employees and make it part of your company’s culture.

When you start with a vision and follow a well defined and measured strategy you end up with a very detailed road map of of the path taken to your success.   This road map is what buyers pay big money for.  Business are purchased because the buyer does not want to carve out the paths on his own so the more well defined the map is that you have, the more valuable and desirable your company becomes.

Success is achieved through strategy or luck.  Only one is transferable.

Buy Low, Sell High – Your Company is the Best Stock in Your Portfolio

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When I began investing in the stock market, I was great at picking the stocks that would shoot up 25%, 50% , 100% but invariably held on to these too long and watched them come right back down.  I can still name them today, Tempur Pedic, Jones Soda, Lucent and Under Amour; just to name a few.  It wasn’t until I learned to develop an exit strategy for each stock I purchased that I began seeing some serious growth in my portfolio.

Business owners start their companies and run them every day never giving serious thought to when they should cash out.  This is a serious mistake.  As we’ve all learned from the past five years, things change and there are many factors that are outside of our control.  Key employees leave, economic trends fluctuate, and competition can come out of nowhere.  Just like with stocks, each small business has an optimal time to sell it.

Procrastinating when it comes to thinking about selling your company can cost you dearly.  Educating themselves on the selling of their business should be included in the top priorities of each business owner.  It should rank up there with increasing revenues, reducing costs and managing cash flow.

The worst plan is no plan at all.

Business Valuation Myth – I only have to do it when I sell.

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Myth: Valuing a private business should only be done when the business is ready to be sold or a lender requires a valuation as part of its due diligence process.
Although the business sales and lending processes generally require that valuations be completed, if these events represent the first time an owner has a valuation completed, then you can be sure critical business and estate planning issues have not been addressed. If the business is to have a life beyond that of its current owners, then effective planning for ownership transition requires a regular valuation of the business.

Ownership transition may include gifting some percentage of ownership shares to family members during the owner’s life, thus reducing any tax on the owner’s estate at death. If a firm has several owners, a buy-sell agreement with accompanying life insurance should be in place so that if an owner dies, the remaining owners have sufficient funds to purchase the deceased owner’s interest at an agreed upon value. The buy-out value under these agreements should be updated regularly to reflect the firm’s financial progress over time and the valuation approach used should be one of several acceptable to the IRS.

***By Dr. Stanley J. Feldman, Chairman, Axiom Valuation Solutions and Associate Professor of Finance, Bentley College

Selling a business in 2011: What Lies Ahead?

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Our Managing Partner was featured on the front page of Small Business Chicago with an article titled Selling a business in 2011: What Lies Ahead? Great article, check it out here:

K.I.S.S. Keep It Simple – Make Money

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Sometimes the simplest concepts make the best businesses.  In my time working as a business broker I am constantly astonished at the plethora of unique business models and ways to make money.

If you would have approached me three years ago and asked me my opinion on a dog walking business or an e-bay reselling business I would have chuckled and dismissed both concepts.  Well, let me tell you, I may have chuckled, but these business owners are laughing…laughing all the way to the bank!

The bottom line in business is profit and the number one factor to selling a business is the transferability of said profit.  Therefore the simpler the business model the easier it is to transfer the cash flow to someone else and the more people want to buy it.

With the dog walking model, you typically get paid in advance in the form of a package (60 walks for $300) and then hire independent contractors to walk the dogs that get paid after they perform the service.  This serves two huge purposes, it provides awesome cash flow and makes your largest expense a variable one – almost a guarantee against an operating loss.

The E-Bay business model is primarily a consignment one and can be operated from home until a steady revenue stream warrants otherwise.  This means no cost of goods sold and basically a risk free business model.  The largest investment that has to be made is the time listing the items.

Both of these businesses are such that customers tend to be a little hard to find, but are largely referral based and extremely loyal.  So the customer list becomes a very tangible asset and easily transferable.

So if your considering starting a business or already running one, the simpler you keep it’s operation the easier it will be to sell it.  Keep it simple – make money.