Questions Business Owners Ask Business Brokers
By Loren Schmerler, CPC, APC, President, Bottom Line Management, Inc.
Longtime GABB member Loren Schmerler answers seven questions business owners often ask him.
- How much is my business worth?
The correct answer is the price a Buyer offers you that you are willing to accept. It makes no difference whether you are making money or losing money. It makes no difference whether sales are increasing, declining or flat. It makes no difference how much blood, sweat and tears you have put into your business. It makes no difference how much money you have invested in the business. It makes no difference how much money you owe to the bank or to yourself. It makes no difference what a business valuation or appraisal says. It makes no difference what your hard assets are. It makes no difference what your customer list or client list contains. It makes no difference what your patents or service marks cost you. It makes no difference whether you are a Franchiser, Franchisee, Licensor, Licensee, Distributor or Independent Contractor. The bottom line is that what you finally accept is what your business is worth. - How long will it take to sell my business?
The correct answer is no one knows for sure. But I tell my clients that the average time is seven months from listing to closing. For companies that sell for $1 million or more, the average is nine to twelve months. But I also explain that the quickest I ever sold a business was one week, and the longest it ever took me to sell a business was six years. Additionally, I explain that price and terms sell a business. The lower the price the more affordable the business will be. The lower the down payment, the more people will be able to consider it. The greater the amount of owner financing, the easier the business will be to sell. - Is there anything I can do to make my business more desirable?
The answer is yes. The most important thing you can do is to put your ego aside and not make the business dependent upon you. Ideally, the goodwill of the business should be at the lowest level that interfaces with customers or clients. This means that you want to hire and keep employees that make your customers happy with high quality work and excellent customer service. - Is there anything I should not due during the listing period?
The answer is that you should not slack off in any way. You need to stay focused and operate your business as if it will never sell. You need to work as hard or harder no matter how burned out you feel. Do not make any major changes during the listing period. Try to retain all good and excellent employees and remove those that are not contributing as they should. Try to keep your inventory fresh and eliminate any obsolete items. Keep your equipment and machinery well maintained and properly functioning. - What is due diligence?
It is the process where the Buyer examines all your books and records , gets approved by the Landlord, gets approved (if applicable) by the Franchiser, Licenser, Distributor, bank, etc. Your books and records need to be current and “bullet proof.” Your tax returns for payroll taxes, sales tax, state income tax, federal income tax, county income tax, city income tax and any other municipality taxes are 100% current. Your various licenses need to be current whether or not the buyer will have to apply for their own. You want to fully disclose everything and not leave any skeletons in the closet. - What else do you suggest I do to impress a Buyer?
Have a job description for each employee. Put together a Policies and Procedures Manual. This will make the corporate buyer feel more comfortable about taking over the reins. Make sure all your employee reviews are current. The last thing a new owner wants to do is to sit down in a vacuum with an employee who is expecting a raise. Make sure you clean everything that is dirty. Make sure you fix anything that is broken. You do not want the Buyer to wonder what else might be a potential problem. Prepare a business plan and/or marketing plan to show the Buyer how he or she can grow the business. Put together a transition plan that shows the Buyer how you will assist them daily for a period of 28 days. The Buyer may not want you for the full transition period, but at least you are showing that you have thought it through and are willing to make yourself available. - What happens if I agree to do some owner financing and the Buyer misses a payment?
The way the closing attorney prepares the paperwork, if a Buyer misses a rent payment or a note payment, it is considered an event of default under the note. This will allow you to take back the business in a worst-case scenario or enter into serious discussions to protect your financial interests. While the best outcome is a Seller getting paid all their money and a Buyer being successful, you must plan for the worst and hope for the best. But I also tell my clients that they should never sell their business to a person they feel will not treat their employees, customers, clients or vendors properly. If you ever get a knot in your stomach during the negotiation that is the time to throw in the towel and let me gently explain to the Buyer that you do not feel it is a good fit.
I hope this list of questions and answers has been helpful. I offer a free no obligation consultation 7 days/7 nights should you wish to discuss the sale of your business or the purchase of another business. Loren Marc Schmerler, CPC, APC, President, Bottom Line Management, Inc., 404-550-1417 www.BOTLINE.com.
Read MoreTop Ten Must-dos When Selling a Business
By Loren Schmerler of Bottom Line Management, Inc.
Are you ready to sell your business? Thinking about starting new adventures? Certain changes you may make now can help you increase your business value. Below are top 10 tips on how to prepare your business for sale from expert, Bottom Line Management, Inc. founder, Loren Marc Schmerler, a Certified Professional Consultant and Accredited Professional Consultant.
Top Ten Must-dos When Selling a Business
- Know why you want to sell your business. Make sure it’s a good reason and not just to dump your problems into someone else’s lap.
- Give some thought as to what you will do with your time after your business sells. Finding yourself with nothing to do can be very demoralizing.
- Make certain that your taxes are current. This includes sales taxes, unemployment taxes, payroll taxes, state income taxes and federal income taxes.
- Document all your policies, procedures and controls. Not only will this help during the transition period when you train the buyer, but this will make your business more appealing to the corporate buyer who is accustomed to formal documentation.
- If possible, develop and train a strong “second in command” who can fill in for you when necessary. The buyer might be hands-on or hands-off, and having a strong assistant provides flexibility. Many business sales are lost when there is no depth of management.
- Review each employee’s strengths and weaknesses and show when they were last reviewed and when they next need to be reviewed by the new owner. Not reviewing an employee on time can cause anxiety and diminish loyalty.
- Make sure your financial statements and tax returns are “bullet proof.” You do not want the transaction to fall apart when the buyer or buyer’s CPA finds discrepancies.
- Prepare a business and marketing plan that will help a new owner understand where the opportunities for growth exist. This plan should include an Executive Summary that explains why the business was started, how it progressed to its current status and what a new owner should do to take it to the next level.
- Select an asking price that is based on reality – not fantasy. Be able to justify it based on a multiple of Owner’s Discretionary Cash Flow. Bad reasons include “it’s what I want”, “this is what I have in it”, “this is what I owe the banks” “I have put blood, sweat and tears over x years into the business.”
- Be willing to be flexible on price, terms or both. Deal structure can make or break a transaction. When each party to the transaction is willing to bend, there is a higher probability of success.
IRS Regulations for S Corp vs LLC: a CPA Explains
By Greg DeFoor
One of the questions I get asked by aspiring or new business owners as a CPA and Business Broker is about S Corporations vs LLCs. Before deciding whether to form an S Corp or an LLC, there are a number of issues to consider. Assuming there is only one owner or a few owners and that all owners are qualified to own their respective shares or member units, here are factors to consider.
More Formal vs Less Formal
S corporations are more formal and require a little more in terms of documentation. When you form a corporation and elect S Corp status, you are required to elect officers and hold annual shareholder meetings. You need corporate bylaws in writing when you establish the corporation. You need to prepare minutes no less than annually that document decisions made during the year. It would be wise to get an attorney to help you with a form or template for completing these minutes.
LLCs are less formal. Once you form an LLC and prepare an operating agreement, there is no requirement for minutes or annual meetings.
Net Income and Distributions
Net income and distributions are not necessarily treated the same in S Corps and LLCs. In an S Corp, net income must be allocated based on ownership percentage. Distributions must be made by ownership percentage. In an LLC, there can be a disproportionate allocation of net income and unequal member draws. When there is only one owner, there really won’t be a difference. However, when there is more than one owner, S Corp shareholders are treated equally in terms of allocated items, and LLC members are treated based on how the operating agreement says they will be treated.
If you need an entity that allows for owner treatment that varies from ownership percentage, an LLC will allow that whereas an S Corp will not.
Guaranteed Payments vs Salary and Self-Employment Tax
In an LLC, you should not pay yourself a salary. Instead, you should take guaranteed payments. Guaranteed payments are subject to self-employment tax but are not paid as W-2 wages. They are treated more like a draw than as payroll. In an S Corp, you need to pay yourself a reasonable salary.
The net earnings from an LLC, except for earnings from the net rental of real estate held for investment, are subject to self-employment tax. The net earnings of an S Corp are not. One of the primary benefits of being a shareholder of an S Corp is the ability to take distributions that are not subject to self-employment tax. You are taxed on the net income of the S Corp. You pay yourself a reasonable salary, and any other net income may be distributed as a shareholder distribution.
Disregarded Entity and Tax Returns
If you are a single member LLC, you are a disregarded entity for tax purposes and the LLC income and expenses flow through your personal tax return on Schedule C. If there are more than one member of the LLC, the LLC files a partnership return. An S Corp files a corporate tax return specifically for S corporations. Both a partnerhip and S corporation are flow through entities. Neither pays income tax at the entity level; rather, both pass taxable income and other tax items directly through to the owner’s individual tax return.
To further complicate matters, an LLC can be an LLC for legal purposes but can also elect to be taxed as an S corporation for tax purposes. If an LLC elects S Corp status for tax purposes, tax matters have the attributes of an S corporation.
Distributions of Property
An S Corp is not necessarily a good entity to hold appreciating property in. That is why S Corp owners who also own the business real estate usually own the business real estate in a separate entity that is an LLC. The reason is usually a tax reason. You can’t distribute appreciated property, such as real estate, out of an S Corp to the S Corp shareholders without triggering a taxable event as if the real estate had been sold. With some restrictions and limitations, you can distribute appreciated property, such as real estate, out of an LLC to the LLC members without triggering a taxable event. In an LLC, the members assume the basis of the distributed property and there is no realizable gain or loss until the property is disposed of.
Elections
In order to be an S Corp, you form a corporation and then you file an election to be taxed as an S corporation with the IRS. The election is filed on IRS Form 2553. You must file the election within 75 days of the start of the year you want to elect S Corp status, or within 75 days of forming the entity if you want to elect S Corp status from the beginning.
If you file an LLC for legal purposes but want it to be taxed as an S Corp, you file the same type of election for the LLC you do for a corporation, with the S Corp election for an LLC also having the 75 day requirement.
The catch is, once you elect for either your corporation or LLC to be taxed as an S Corp, you cannot revoke the election. The S Corp election can only be terminated by filing a request with the IRS and receiving permission from the IRS for the S Corp status to be terminated. For this reason, electing S Corp status needs to be entered into carefully, as it cannot be easily undone.
S Corp vs LLC
In deciding S Corp vs LLC, seek advice of a tax professional and an attorney, and find out both the legal and tax reasons for electing one entity over the other. There is certainly more involved than what this article can cover, but this article should be enough to let you know there are a number of things to consider before choosing choice of entity for your business. Make sure you use an advisor that is familiar with business transaction services.
Greg DeFoor, CPA, CFE, has been a CPA for more than thirty years and is also a licensed Business Broker and Past President of the Georgia Association of Business Brokers.
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Business Valuation: Document Shredding Businesses
By Tim Greene, Business Broker and Consultant, DeFoor Business Services
Recently I exchanged emails with the owner of a document shredding business. He asked me to explain the logic behind current business valuations for document shredding businesses. I show his questions and my answers below.
Why are business valuations stated as a multiple of revenue?
Most buyers actually calculate a recast EBITDA number when they are considering the acquisition of a document destruction business. EBITDA is an acronym that means Earnings Before Interest, Taxes, Depreciation and Amortization and is a measure of the free cash flow of the business. Buyers multiply the recast EBITDA number by around 4-5 to arrive at a value for your business. So it is easier for the seller to understand, they divide the value they’ve determined by your total revenue. Then they present their offer as a multiple of total revenue. A typical multiple for a document shredding company is 1.5-1.7 times total revenue. The multiple of revenue valuation they present in their offer is based on the conclusion of their EBITDA analysis. It is not the starting point for their offer.
Which assets are included in the sale of the business?
At the valuation multiple mentioned above (1.5-1.7 times), the trucks, containers and any other equipment used to generate your revenue are typically included in the transaction. You’d pay off all truck debt (or remaining lease payments) at closing using your own funds or down payment funds provided by the buyer. The buyer would receive free and clear title to the trucks once closing was complete. Other assets included in the sale are shown below.
Tangible assets
- trucks
- bins and containers
- hard drive shredding equipment
Intangible Assets
- customer lists including contact information
- customer agreements and contracts
- books and records
- goodwill
- website, phone numbers, fax numbers and email addresses
- company name
- seller non-compete agreement
Which assets are excluded from the sale of the business?
Normally at these valuation levels, you’d keep all accounts receivable (AR), accounts payable (AP) and cash in the bank as of the day of closing. The buyer would assume responsibility for those items after closing. Recycled paper inventory is often liquidated by the seller prior to closing and in essence, becomes AR. Every buyer is different, and occasionally they want to retain some level of working capital or current AR. Other assets excluded are shown below.
Tangible Assets
- office furniture and computers (sometimes but not always)
- cash in company accounts as of the day of closing
- accounts receivable as of the day of closing (you keep accounts payable thru closing as well)
- seller owned real estate
Some buyers don’t want to purchase shredding trucks for a variety of reasons (age, make, model). If you agreed to remove the trucks from the transaction and sell them independently of the remaining assets, then the equation changes. Both the purchase price and the 1.5-1.7 times multiple would be lower by the value of the trucks. You wouldn’t need to pay off the truck note balances until you sold them to another buyer.
The value of your real estate is excluded under this valuation method. If a buyer is interested in purchasing your real estate, it would be in addition to the value of the business.
Asset Sales versus Stock Sales
Most buyers prefer asset purchases over stock purchases in small business transactions. In an asset purchase, the buyer isn’t purchasing the stock of your corporation, just the assets of your corporation. As a result, the buyer does not inherit past liabilities such as workers comp issues, lawsuits, warranties, unpaid liabilities, etc. After closing, you’d still own the corporate shell of your business. Asset purchases frequently minimize tax consequences as well.
Summary
Keep in mind, these are the terms under which the business is offered in a memorandum to the buyer. Anything is negotiable as part of the sales process. As a result, the terms of purchase are frequently different than the terms of the offering. Every circumstance is different and “rule of thumb” valuation multiples can’t be applied across the board, as all businesses are unique.
I hope that helps in your understanding of valuation for document shredding businesses and valuation of small businesses in general.
Business Broker and Consultant
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Pratt’s Stats Private Deal Update 3rd Quarter 2016
The information provided below is excerpted from the Pratt’s Stats Private Deal Update: 3rd Quarter 2016, which is copyrighted by and available exclusively
from Business Valuation Resources, LLC. Brokers who contribute transaction details to Pratt’s Stats on closed business sales receive the complete Private
Deal Update plus three months of free access to the database for each deal included in Pratt’s Stats.
pratts-stats-pdu_excerpt_3q2016
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