A Comprehensive Look at the Best Ways to Handle the Biggest Events in the Life of Your Company
By Larry Morrison and Gary Jacobson
CHAPTER 1, PART 1 - INTRODUCTION / GETTING READY
Every business is eventually sold or shut down... you don't get to not do this!
But most businesses that are put up for sale NEVER SELL!
The purpose of this column is to help Business Owners plan and execute a successful internal or external succession/transition of a business, and to help buyers find and successfully buy worthwhile businesses. We will teach practical “street level” nuts and bolts about how to do this, but we do not intend to make you a legal or tax expert. You will still need your attorney and C.P.A., but you will know how to spot key issues, and you’ll know the major options available to you. This should translate into a major advantage for you when the time comes to transition your business.
Get ready first. We’ll provide more details in future articles, but here’s an overview.
If you are not really a willing seller, with realistic price and terms expectations, then you are probably just wasting your time. Know what your business is realistically worth. Some companies are worth two times annual revenues for example, but most are not. Is your company for sale, but only if you can get X times annual gross revenues?
Know your tax situation, and what to do if you are sitting on a potential tax disaster. For instance, if your company is a “C” corporation (or has been within the last 10 years), then the wrong sale structure means some sellers might owe the IRS more than half of the total sales price for the company? Do you know if you have this problem? If so, do you know how to “fix” it?
What about payment terms? They affect both taxes and risk for both sides. The buyer can afford to pay more if the risk is less, or the tax effects are better. Ultimately, the “Price” is not the “Price” -- terms are crucial. What counts is the after-tax cash-in-pocket you get to KEEP after you leave!
Perhaps MOST important: Be emotionally ready. This is your baby -- are you really ready to part with it?
Contractually protect what you are selling. Can some or all of your employees leave and take key accounts with them after you sell? Can you realistically sell a company that might lose large blocks of its business in that manner?
Make it easy for successors to preserve what you are selling. Customer retention post-sale is crucial. How can you help the buyer keep what you just sold?
Make the buying decision easy for your successors. Start by preparing a short summary of your business as follows:
First, be able to answer three questions:
1. WHO’s your best buyer (make a list of top prospects)?
2. WHY would they want to buy YOUR business?
3. Why NOW? If your business is so wonderful, why are you for sale?
- Create defensible pro-forma cash flow spreadsheets that show the true benefits of ownership you have received in the past.
- If you receive benefits of ownership other than just profits and salary, make it easy for potential buyers to see it. Provide explanations for all the adjustments you need to make.
- You may sometimes see this referred to as “free cash flow”, “available cash flow”, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Regardless of the terminology used, the objective is to determine the true financial benefits of ownership.
- If you are selling more than just customer accounts, create a pro-forma balance sheet as well.
- Know how much business you do with your top accounts, and how you are going to ensure that they stay with the company after you are gone.
- Know your vendors and how they are likely to react when you retire.
- Be ready with all of these answers in advance, with most of them written down -- perhaps even prepare a presentation book.
- Put your best foot forward, but don’t misrepresent and don’t predict the future. You don’t know how the buyer will do in the future, and you don’t want to do anything that “predicts” results. Doing so can even be grounds for rescission of the transaction if things don’t work out for your successors.
- Be ready before you have the first meeting.
- Have abbreviated material ready to discuss and/or show, and be ready to provide more detailed information as soon as mutual interest is established and a confidentiality agreement has been signed.
What about “Price”?: “Price” deserves special attention, partly because it often quite an emotional issue. “Price” can be much more than just money to a seller. It can even be subconsciously seen as a measure of the value of a person’s life’s work.
One way to keep things in perspective is to keep in mind that the sale has to make financial sense to the buyer or you will not have a sale. It will have to “pencil out”.
What about payment Terms?: Terms are crucial to how a sale will “pencil out”. In fact, terms are often more important that price. In addition to a major impact on annual cash flow, terms affect both risk and taxes for both sides.
Win/Win Negotiations: Most likely you do not HAVE to sell, at least to one specific buyer. Likewise, the buyer most likely does not HAVE to buy your business. That means the sale is likely to fall apart as soon as either party perceives the sale to be a “lose”. Terms are often the key to a “win/win” result. Creative terms can even be a “win/win/lose”. (The “loser” is the IRS.)
Editor's note: This is the first installment in a series of columns on buy/sell arrangements for any company, valuation and tax issues, shareholder internal buy/sell agreements, related estate planning, employment contracts and non-competes.
The authors will give you practical street-level understanding of the fundamental legal, tax and financial concepts you need to know about regarding the biggest financial events in the life of your business -- there is nothing else like it available.
Since many business owners are buyers, and every business is eventually sold or shut down, this is a must for everyone who owns, plans to buy, or will eventually sell a business.
You'll learn better ways to buy, sell, merge or internally perpetuate a company from a team of experts responsible for hundreds of successful business transactions. You do not need to be a technical expert, but you need to know enough to guide your attorney and C.P.A. This will teach you how.
In addition to the essential foundation on buy/sell arrangements for any company, this material covers related estate planning, valuation and tax issues, shareholder buy/sell agreements, employment contracts and non-competes, all as essential parts of a comprehensive package of business documentation.