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.
Find out how your business-for-sale offering memorandum can help attracting buyers and obtain financing by attending the Feb. 19 meeting of the Georgia Association of Business Brokers.
Stephen “Steve” Mariani, owner of Diamond Financial Services and a board member of the International Business Brokers Association (IBBA), will speak to business brokers about compiling a listing memorandum. The GABB, an IBBA affiliate, is the state’s premier organization dedicated to professionals who buy and sell businesses in Georgia. The meeting will begin at 10:30 a.m., preceded at 9:45 a.m. by a free continental breakfast and networking session sponsored by GABB Affiliate Chris Fonzi of Logic Environmental, Inc. The GABB meets at the auditorium of the Georgia Association of Realtors building at 6065 Barfield Road, Sandy Springs, GA, 30328. GABB’s meetings are free and open to the public; please fill out the form below to attend the meeting as a guest.
Mr. Mariani will discuss what buyers look for in a business-for-sale listing, and why lenders read your offering memorandum. A complete and comprehensive memorandum is not only a great advertising tool, but lenders use them for internal write-ups. He will also cover items to be sure you leave out of your offering memorandum.
Mr. Mariani’s company has helped small business owners realize their dreams by funding more than $1 billion in acquisition loans during the past 24 years. Diamond has become largest privately owned non-bank SBA acquisition loan generator in the nation serving only the broker markets. Steve has also been producing and presenting broker training webinars and workshops for the last 11 years at various conference events.
After witnessing the difficulty and challenges some business buyers experienced securing business loans to acquire a business, Mr. Mariani learned the intricate, complicated world of the Small Business Administration (SBA) loan process. He mastered the SBA SOP (Standard Operating Procedure) rules and regulations and has become a major source for many national lenders. Business Brokers, lenders and owners nationwide seek Steve’s advice and he has become the “expert” in SBA loans. His understanding of SBA rules also allows for providing the most aggressive financing available nationwide.
The GABB is the state’s largest and oldest association of professionals who specialize in brokering the purchase and sale of businesses and franchises. Broker members help owners determine the asking price of their business, create marketing plans and strategies for selling their business, identify and qualify buyers, and have the knowledge, experience and skills needed to help maintain the confidential nature of the process. The professionals of GABB relentlessly pursue professional development so they can provide superior, ethical services for all customers and clients. Affiliate members include bankers, lawyers, appraisers, insurers and other professionals who work closely with brokers to help owners and buyers get to the closing table.
For more information about GABB, please contact GABB President Dean Burnette at 912-247-3209 or firstname.lastname@example.org, or GABB Executive Director Diane Loupe at email@example.com or 404-374-3990.
If you are not a GABB member and wish to attend the meeting, please fill out this form. GABB meetings are free and open to the public.
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.
Business owners who are preparing to sell their businesses always want to know how much their company will bring on the market. Often they have an idea of what they think the business is worth, but that price is often high.
There is the old anecdote about the immigrant who opened his own business in the United States. Like many small business owners, he had his own bookkeeping system. He kept his accounts payable in a cigar box on the left side of his cash register, his daily receipts – cash and credit card receipts – in the cash register, and his invoices and paid bills in a cigar box on the right side of his cash register.
When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping system. “I don’t know how you can run a business that way,” his son said. “How do you know what your profits are?”
“Well, son,” the father replied, “when I came to this country, I had nothing but the clothes I was wearing. Today, your brother is a doctor, your sister is a lawyer, and you are an accountant. Your mother and I have a nice car, a city house and a place at the beach. We have a good business and everything is paid for. Add that all together, subtract the clothes, and there’s your profit.”
That accounting method won’t help you to sell your business, however,
A commonly accepted method to price a small business is to use Seller’s Discretionary Earnings (SDE). The International Business Brokers Association (IBBA) defines SDE as follows:
Discretionary Earnings – The earnings of a business enterprise prior to the following items:
nonrecurring income and expenses
non-operating income and expenses
depreciation and amortization
interest expense or income
owner’s total compensation for one owner/operator, after adjusting the total compensation of all other owners to market value
Here are some terms as defined by the IBBA:
Owner’s salary – The salary or wages paid to the owner, including related payroll tax burden.
Owner’s total compensation – Total of owner’s salary and perquisites.
Perquisites – Expenses incurred at the discretion of the owner which are unnecessary to the continued operation of the business.
Developing a Multiplier
Once the SDE has been calculated, a multiplier has to be developed. The following (just as a guideline) should be rated from 0 to 5 with 5 being the highest. For example, if the business is a highly desirable business in the current market, “desirability” would be rated a 4 or 5. If the business is in an industry that is quickly declining or nearly obsolete, “industry” would be given a 0 or 1 rating.
Age: Number of years the seller has owned and operated the business.
- Terms: Is the seller willing to offer terms? For example, will the seller accept 40 percent as a down payment with the seller carrying back 60 percent at terms the business can afford while still providing a living for the buyer?
- Competition: Consider the local market.
- Risk: Is the business itself risky?
- Growth trend of the business: Is it up or down?
- Desirability: How popular is the business in the current market?
- Industry: Is the industry itself declining or growing?
- Type of business: Is the business type easily duplicated?
The average business sells for about 1.8 to 2.5. Obviously, if the SDE is solid and the multiple is above average, the price will be higher. Keep in mind that the price outlined includes all of the assets including fixtures and equipment, goodwill, etc. It does not include real estate or saleable inventory. The price determined above assumes that the business will be delivered to the buyer free and clear of any debt.
When all else fails, the words of a veteran business broker will work.
Asking Price is what the seller wants.
Selling Price is what the seller gets.
Fair Market Value is the highest price the buyer is willing to pay and the lowest price the seller is willing to accept.
Sellers should keep in mind that the actual price of a small business is usually about 80 percent of the seller’s asking price. A professional business broker will be familiar with the best way to price your business so that it sells.Read More
Georgia Association of Business Brokers can now post business-for-sale listings on the new GABB website. But, as BizBuySell points out, it’s important to create a well-written online listing. You want to attract qualified buyers. According to BizBuySell’s latest demographic survey, business buyers tend to be college educated and earn over $100,000 per year. Buyers are more likely to respond to listings with these specific attributes, according to the website.
1. Specify a location.
Most buyers search for a business by state, many by a specific county. Confidential listings receive more views when they included a location.
2. The listing appears in their search category.
More than a third of prospective business buyers search in a specific category of business. You can improve that percentage by selecting two or more appropriate categories for your listing.
3. Include key financials.
Most buyers want to know the asking price, followedg by cash flow. Including these important financial details makes it easier for serious buyers to find your listing in a search and contact you.
4. A great headline.
“Profitable coffee shop in busy shopping mall,” and other headings with key details are better than “popular cafe.”
5. A well-written description.
A good description has all the essential facts, such as the business’s strengths and potential, number of employees, the owner’s reason for selling, and opportunities for expansion. Beware of exaggerations. A hyped-up listing will alienate serious buyers.
6. An attractive photo.
Even if you cannot use a photo of the actual business for confidentiality reasons, you should still post a stock photo. A good site to find generic, free stock photos is Pexels. The GABB administrator can also help you find photos. Buyers are more likely to notice listings with photos.
7. Seller financing!
Experienced business brokers know that financing is one obstacle in selling a business. So it’s a huge advantage if the owner is willing to carry part of the financing. Seller-financed businesses are more likely to sell than those that are not.
8. Broker contact details.
Your listing should include details on how to reach you easily. Every prospective buyer should receive a response from their inquiry within the first 24 hours. A slow response might mean you miss a qualified buyer.
The GABB website’s new listing feature is still undergoing improvements, so please let us know if you have suggestions for using this feature. To date, this feature is included in your GABB broker membership at no additional charge. For help with this feature, please contact GABB Executive Director Diane Loupe at firstname.lastname@example.org or GABB President Dean Burnette at 912-247-3209 or email@example.com.Read More