CHAPTER 1, PART 1 – INTRODUCTION / PREPARATION
Summary
Every business is eventually sold or closed… You can’t help but do this!
But most businesses that are for sale NEVER SELL!
The purpose of this column is to help Business Owners plan and execute a successful internal or external business succession/transition, and to help buyers find and successfully buy a valued business. We’ll teach practical “street level” stuff on how to do this, but we don’t intend to make you a legal or tax expert. You’ll still need your lawyer and CPA, but you’ll know how to find the main issues, and you’ll know the main options available to you. This should translate to huge profits for you when the time comes to transition your business.
Get ready first. We’ll provide more details in a future article, but here’s an overview.
Seller
If you’re not a really willing seller, with realistic price expectations and terms, then you’re probably wasting your time. Know your business value realistically. Some companies are worth twice the annual revenue for example, but most are not. Is your company for sale, but only if you can earn X times the annual gross income?
Know your tax situation, and what to do if you face a potential tax disaster. For example, if your company is a “C” company (or has been in the last 10 years), then an incorrect sales structure means that some sellers may owe the IRS more than half of the company’s total selling price? Do you know if you have this problem? If so, do you know how to “fix” it?
How about the payment terms? They affect taxes and risks for both parties. Buyers can afford to pay more if the risk is less, or the tax impact is better. In the end, “Price” is not “Price” — a very important term. Most importantly the after tax cash you get after you leave!
Perhaps MOST important: Be emotionally prepared. This is your baby — are you really ready to part with it?
Contractually protect what you sell. Can some or all of your employees go and take key accounts with them after you sell? Can you realistically sell a company that might lose most of its business that way?
Make it easy for successors to retain what you sell. Post-sales customer retention is critical. How can you help buyers retain what you just sold?
Make buying decisions easy for your successors. Start by preparing a brief summary of your business as follows:
First, be able to answer three questions:
1. WHO are your best buyers (build a top prospect list)?
2. WHY do they want to buy YOUR business?
3. Why NOW? If your business is so good, why are you being sold?
Create a defensible pro-forma cash flow spreadsheet that shows the true benefits of holdings you have received in the past.
If you receive ownership benefits in addition to profits and salary, make it easy for potential buyers to see. Provide an explanation for all the adjustments you need to make.
Sometimes you may 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 goal is to determine the actual financial benefits of ownership.
If you sell more than just customer accounts, create a pro forma balance as well.
Know how much business you do with your top account, and how you’ll ensure they stay with the company after you’re gone.
Get to know your vendors and how they will react when you retire.
Be prepared with all of these answers ahead of time, with most of them written down — maybe even have a presentation book ready.
Put your best foot forward, but don’t misunderstand 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” the outcome. Doing so can even be grounds for canceling the transaction if things don’t work out for your successor.
Be prepared before you have your first meeting.
Have brief material ready for discussion and/or display, and be prepared to provide more detailed information as soon as mutual interests are reached and a nondisclosure agreement has been signed.
This may be the biggest sale of your life — you owe it to yourself to be prepared.
What about “Price”?: “Price” deserves special attention, partly because it is often quite an emotional issue. “Price” can be more than just money for the seller. Even unconsciously it can be seen as a measure of the value of one’s life work.
One way to keep things in perspective is to remember that the sale has to make financial sense to the buyer or you won’t make the sale. It should be “cross out”.
What about Payment terms?: Terms are very important to how the sale will be “recorded”. In fact, terms are often more important than price. In addition to having a major impact on annual cash flow, terms affect risk and tax for both parties.
Win/Win Negotiations: You most likely don’t HAVE to sell, at least to one particular buyer. Similarly, buyers most likely DO NOT HAVE to buy your business. That means the sale is likely to fall apart once one party deems the sale “lost.” Terms are often the key to a “win/win” outcome. The creative term could even become “win/win/lose”. (“The “lose” 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, internal shareholder buy and sell agreements, related estate planning, employment contracts, and non-competition.
The authors will give you a practical understanding of the basic legal, tax, and financial concepts you need to know about the biggest financial events in your business life – there’s nothing else quite like it.
Since many business owners are buyers, and every business is eventually sold or closed, this is a must for anyone who owns, plans to buy, or will eventually sell a business.
You’ll learn a better way to buy, sell, merge or preserve a company internally from the team of experts responsible for hundreds of successful business transactions. You don’t need to be a technical expert, but you should know enough to guide your attorney and CPA. It will teach you how.
In addition to the essential groundwork on sale/purchase arrangements for any company, this material covers related estate planning, valuation and tax issues, shareholder sale/purchase agreements, employment and non-competition contracts, all as essential parts of a comprehensive business documentation package.