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CHAPTER 1, PART 1 – INTRODUCTION / PREPARATION
Overview
All businesses eventually sell or go out of business…you can’t stop doing 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 business succession/transition, and to help buyers find and successfully purchase worthwhile businesses. We’ll teach you the practical “street level” details of how to do this, but we’re not trying to make you a legal or tax expert. You’ll still need your lawyer and CPA, but you’ll know how to spot key issues and learn about the main options available to you. This should translate to a huge advantage for you when it comes time to transition your business.
Prepare yourself first. We’ll provide more details in future articles, but here’s an overview.
vendors
If you’re not really a willing seller, with realistic expectations of prices and terms, then you’re probably wasting your time. Know what your business is really worth. Some companies are worth twice the annual revenue, for example, but most are not. Is your business for sale, but only if you can earn X times the annual gross revenue?
Learn about your tax situation and what to do if you are facing a potential tax disaster. For example, if your business is a “C” corporation (or has been in the last 10 years), then the wrong sales structure means that some sellers could owe the IRS more than half of the business’s total sales price. . Do you know if you have this problem? If so, do you know how to “fix” it?
What about the payment terms? They affect both taxes and risk for both parties. The buyer can afford to pay more if the risk is lower or the tax effects are better. Ultimately, the “Price” is not the “Price” – the terms are crucial. It’s the after-tax cash you can KEEP after you leave that counts!
Perhaps MOST important: be emotionally prepared. 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 walk away and take key accounts with them after they sell? Can you realistically sell a company that could lose large blocks of its business that way?
Make it easy for successors to keep what you’re selling. Customer retention after the sale is crucial. How can you help the buyer keep what you just sold?
Make the purchase decision easier for your successors. Start by preparing a brief summary of your business as follows:
First, be able to answer three questions:
1. WHO is your best buyer (make a list of the best prospects)?
2. Why would they want to buy YOUR business?
3. Why NOW? If your business is so wonderful, why is it for sale?
Create defensible pro forma cash flow spreadsheets that show the true benefits of the property you have received in the past.
If you receive benefits from the property other than just profit and salary, make it easy for potential buyers to see. Provide explanations for all the settings 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 goal is to determine the true financial benefits of the property.
If you’re selling more than just customer accounts, create a pro forma balance sheet as well.
Learn how much business you do with your primary accounts and how you’ll ensure they stay with the company after you’re gone.
Get to know your providers and how they are likely to react when you retire.
Be prepared with all of these answers beforehand, with most of them written down, maybe even put together a pitch book.
Do your best, but don’t misrepresent or predict the future. You don’t know how the buyer will fare in the future, and you don’t want to do anything that “predicts” the results. Doing so may even be grounds for termination of the transaction if things don’t work out for your successors.
Be prepared before you have the first meeting.
Have abridged 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.
This is probably the biggest sale of your life – you need to be ready.
What About “Price”?: “Price” deserves special attention, in part because it’s often quite an emotional topic. “Price” can be much more than money to a seller. It can even be seen subconsciously 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 must make financial sense to the buyer or you won’t have a sale. You will have to “pull pencil”.
What About Payment Terms? Terms are crucial in determining how a sale will “go”. In fact, the terms are often more important than the price. In addition to a major impact on annual cash flow, the terms affect both risk and taxes for both parties.
Win/Win Negotiations: Most likely, you DO NOT have to sell, at least not to a specific buyer. Similarly, 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 as a “loss.” Terms are often the key to a “win/win” outcome. The 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 agreements for any company, valuation and tax issues, internal shareholder buy/sell agreements, related estate planning, employment contracts, and non-competition.
The authors will give you a practical, street-level understanding of the fundamental legal, tax, and financial concepts you need to know about the most important financial events in the life of your business; there is nothing like it available.
Since many business owners are buyers, and all businesses eventually sell or close, 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 business from a team of experts responsible for hundreds of successful business transactions. You don’t need to be a technical expert, but you do need to know enough to guide your attorney and CPA. This will teach you how to do it.
In addition to the essential background on buy/sell agreements for any business, this material covers estate planning, valuation and tax issues, shareholder buy/sell agreements, employment contracts and non-compete, all as essential parts of a comprehensive business package. documentation.