In his recent article in Smart Business entitled, “How to get your business, and yourself, ready for sale,” author Adam Burroughs explores the key points of getting your business ready to sell. Burroughs points to the truism that, at some point, almost every business owner must sell his or her business. For this reason, it is critical to think about what it takes to get your business ready to sell. Simply stated, it is best to explore and plan for selling your business long before you actually need to place your business on the market. Let’s explore some key points for selling your business.
Broadening Your Options
Burroughs interviews Scott McRill at Clark Schaefer Hackett. McRill notes, “The sooner you think about your exit, the more options you’ll have for yourself and the business when the time comes.” A savvy business owner will always want to give himself or herself as many options as possible. McRill wisely points out that early planning is key, and a failure to engage in early planning could lead to a lower selling price. If you want to get the best price for your business, then planning for the eventual sale as far in advance as possible is a good move.
Planning in Advance
According to Burroughs, business owners should start planning to sell their business at least 2 to 3 years before they actually plan to sell. Part of the reason for this is so that business owners will have enough time to make operational improvements designed to maximize the business’s overall value.
A Financial Review
At the top of every business owners “preparing to sell” list is to have a third-party review the business’s financial situation. This is excellent advice for, as frequent readers of this blog know, any serious prospective buyer will look long and hard at your business’s financials. Getting your business’s financial house in order means that you should turn to an accounting firm for help. You’ll want to review financial statements for at least the previous 2 to 3 years.
Burroughs points out that when it comes to selling a business, there are many variables that business owners often overlook. At the top of the list is the management team.
Your Management Team
Prospective buyers can get very nervous about the stability of the management team once ownership has changed hands. Often, the new buyer may only sign on the dotted line if the owner agrees to stay on after the sale during a transition period. Having a competent and proven team in place, one that is dedicated to staying with the company will help you get your business ready to sell.
There are a lot of variables involved in preparing to sell a business. The sooner that you get experts involved in the process, the better off you will be. A business broker can serve as a guide – one that can point you in the right direction. Find a broker with an abundance of experience, and you’ll have an invaluable ally who can help you navigate the process. It can take a lot of time and effort to sell a business. Working with a business broker can keep you from reinventing the wheel at every step of the process.
It is never too early to start thinking about what tax structure you should use when it comes time to sell your business. A simple, but undeniable, rule of life is that taxes matter and they can’t be overlooked. Tim Fries, a managing director at Lakeview Capital, advisor to the Founders and head of US business development, has written an excellent and quite detailed overview article on what tax issues business owners need to consider before selling their business. His article, “What Tax Structure Should You Use When Selling Your Business?” explores many aspects of a topic that many business owners fail to invest enough time in, namely taxes. The article appears in The Tokenist, a media platform co-founded by Fries for providing relevant, high quality, and differentiated information for the security token industry.
As Fries astutely points out, the taxes involving the sale of a business can be complex and are usually unknown to those selling a business for the first time. Your tax structure can influence how much money you receive at the closing of your deal, so it’s a very good idea to pay attention to all aspects of taxation and your business. It is key to remember, “When you are selling your business – as far as taxes are concerned – you’re ultimately selling a collection of assets.”
Fries points out that taxes and selling a business are no small matter. It is possible that up to 50% of the sale of a business can go to taxes. Don’t worry if you are learning this for the first time and feel more than a little shocked. However, this fact does a good job of illuminating the importance of setting up the right tax structure for your business. While you might not be able to get around taxes altogether by investing the time and effort to set up the right structure for your business, you can keep from paying more taxes than is necessary.
There are a lot of variables that go into how much you will ultimately have to pay in taxes. Let’s take a look at some of the key questions Fries raises in his article.
- Is your sale considered ordinary income or is the sale considered capital gains?
- Are you operating as an LLC, a sole proprietorship, a partnership or are you operating as a corporation?
- What portion of the sale price goes to tangible assets as compared to intangible assets?
- Is there a difference between your tax basis and the proceeds from your sale?
- What does your depreciation look like?
- Don’t expect that the buyer will instantly agree to your terms.
- Realize that the decisions you make during negotiations with a buyer will have tax implications.
- Is an installment sale right for your business?
- With C corporations, sellers usually want a stock sale whereas buyers generally prefer an asset sale.
- Cashing out immediately, where you receive all your funds at once, will increase your tax liability.
- Have you considered switching to an S corporation?
- Have you consulted with experts to decide which tax structure is best for you?
- Have you consulted with a business broker?
Selling a business is obviously complicated. Finding a seasoned business broker can help you demystify many aspects of buying and selling a business. Ultimately, having the best deal structure and finding the right buyer can be a labyrinthian process. Having the very best professional help in your corner is simply a must.
It’s exciting to buy a new business. However, it’s very important to be realistic about future growth. In most cases, if a business is poised to quickly grow substantially, the seller would be far less interested in selling.
When evaluating a business and talking to the owner, many buyers come away with a sense that enormous growth is just “sitting there” waiting to be seized, writes Richard Parker, President of Diomo Corporation – The Business Buyer Resource Center. In a recent article for Forbes entitled “Don’t Be Delusional About Growth When Buying a Business,” Parker seeks to instill a smart degree of caution into prospective buyers. Parker, who works with investors buying and selling small businesses, says buyers should be very careful if they are buying into an industry that they know nothing about.
Buying into an industry you don’t know comes with a lot of potential problems. The opportunities that you see may not have been tapped into by the existing owner for many reasons, Parker says. Without knowing more about the industry, you’re unlikely to spot those problems. Since you are an outsider, you likely lack the proper perspective and understanding. The seller may have already tried and failed at the growth opportunities you’ve identified. Until you actually own the business and are running it on a day to day basis, you can’t make a proper assessment of how best to grow that business.
The seductive lure of growth shouldn’t be the determining factor when you are looking for a business. A far more important and ultimately reliable factor is stability. “The key question to address is whether or not the business will maintain its revenue and profit levels after you take over,” Parker advises. A business that doesn’t have to grow to remain viable is a better value.
As Parker points out, the majority of small business buyers will buy in a sector where they don’t have much experience, and that is fine. It’s more important that the buyer “has the core skills to operate and drive the business than having direct industry experience.” What is not fine is paying a lot for a business because you believe you can greatly grow the business. If you can, that’s great and certainly icing on the cake. But Parker says you shouldn’t depend on that growth.
In the end, everyone has some ideas that work and some that don’t. You may take over a business and, thanks to having a different perspective than the previous owner, you find ways to make that business grow. Just realize that many of your ideas for growing the business may fail completely.
“To be a successful business buyer, your approach has to be effective, realistic and practical,” Parker says. “Don’t fall in love with the business or fall prey to your own sales job. You have to evaluate all scenarios and adopt the philosophy that stability is a top priority.”
A professional business broker will be able to help you determine what business is best for you, and to determine a fair asking price for that business. A business broker will help keep you focused on what matters most and steer you clear of the mistakes that buyers frequently make when buying a business.
Negotiations can be tricky affairs. One wrong move can undo a tremendous amount of work. In negotiations, it is best to take a moment and think about the other party’s motivations.
What are their needs and how best can you meet them? Understanding where your buyer is coming from increases the chances of a successful negotiation.
What Appeals to Most Buyers?
When it comes to selling a business, you likely will not know your buyer personally. This means that you will not know what they value most, how exacting their standards will be, and how easy or challenging they will be during negotiations. That’s why it is imperative to err on the side of caution and act in such a way that would appeal to most buyers.
Ensuring that your business is in strong financial health means that your business will be appealing to both a corporate executive as well as an individual buyer with a leadership/managerial background. Keep in mind that individuals who buy businesses will want a strong ROI, and often they will want the responsibilities that accompany that investment to not interfere too greatly with their current lifestyle.
Playing into Emotions
In general, buyers tend to be the most excited at the beginning of the sale process. It is at this point that you can expect your buyer’s passion to be its strongest. As a result, the first stages are when you want to keep your presentation and approach the most realistic. The reason is that once the surge of passion has worn off, your buyer may otherwise feel that you have tried to oversell your business.
Being Forthcoming with Information
It is quite common that you will not at first know if your buyer has previous experience in your market. As a result, you shouldn’t assume that they understand anything about your business or industry. In short, it is definitely in your best interest to be very honest about your business and what is involved in running it. If there are issues that they will invariably discover, then it is best to go ahead and disclose those issues early on as it establishes trust and goodwill.
Another area to consider is what a buyer may expect of you after the sale. A buyer who already possesses a background in your niche would already be very familiar with the ins and outs of your industry. Having you around after the sale may not be viewed as necessary or beneficial.
However, with that said, the exact opposite may also be true. You may be dealing with a buyer who is in dire need of your expertise. These factors could be of critical importance in what you offer your buyer in terms of your availability. Again, that’s why it’s best to not make assumptions and make sure your terms would appeal to a wide variety of backgrounds.
An Investment of Value
Invest the time to understanding your buyer’s motivation. The more you understand what it is that your buyer wants out of the transaction, the greater your chances of focusing on the areas of your business that best match those expectations.
When it comes to the motivations and concerns that prospective buyers may have, a business broker can add a new level of understanding. The value that your broker adds to the process of selling a business is difficult to overstate.Read More
Components of the Deal
Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. Purchase agreements cover everything from definitions and executive provisions to representatives, warranties and schedules, indemnifications and interim and post-closing covenants. Indemnification provisions help define who should be liable for issues that arise after the deal closes. The closing conditions detail requirements for buyer and seller between the signing of the purchase agreement and the ultimate closing date. Such agreements also have “break-up fees” that detail the circumstances either party will be able to terminate the deal and whether the party terminating the transaction will pay a set fee to the other side.
Advice for Sellers
Negotiating a purchase agreement (as well as the different stages involved in finalizing that agreement) can be both time-consuming and stressful, Daniels warns business sellers.
As any good business broker will tell you, business owners have to be careful not to let their businesses suffer while they are going through the complex process of selling. Selling a business is hard work, and this fact underscores the importance of working with a proven broker.
Likewise, any serious buyer will look quite closely at your business’s financials, yet another reason to work with key professionals during the process. Business sellers risk losing the sale altogether if the financials are off; so don’t wait until the last moment to get your “financial house in order.”
The sooner you begin working on getting your finances together, the better off you’ll be.
Use Trusted Pros
During negotiations to sell a business, tension is inevitable because every party is looking to protect their own best interests, Daniels warns. Having an experienced negotiator in your corner is a must. Make sure your negotiator has bought and sold businesses in the past, and they will understand what pitfalls and potential problems may be lurking on the horizon. The sale price isn’t the only variable of importance, Daniels notes. The terms of the deal matter. Such terms include “how much control will you have, what stake is being transferred, is there any seller financing, (and) what are your liabilities” after the closing?
The bottom line is that there are many reasons to work with a business broker. Brokers who are members of the Georgia Association of Business Brokers have committed to a code of ethics and understand the diverse complexities of an M&A purchase agreement. They also have experience helping business owners organize their financial information and are valuable partners during negotiations. For most business owners, selling their business is the single most important business decision they will ever make. Find someone who understands the process and can act as a guide through the process.
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