CHAPTER 1, PART 1 – INTRODUCTION / PREPARATIONS
Overview
All businesses are eventually sold or closed … 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 successfully find and purchase worthwhile businesses. We will teach you the “street level” practicalities of how to do this, but we do not pretend to make you a legal or tax expert. You will still need your attorney and CPA, but you will know how to spot key issues and the top 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 will provide more details in future articles, but here is an overview.
Vendors
If you’re really not a willing seller, with realistic price expectations and terms, then you’re probably just wasting your time. Know what your business is really worth. Some companies are worth twice the annual income, for example, but most are not. Is your business for sale, but only if you can make X times the annual gross income?
Learn about your tax situation and what to do if you encounter a potential tax disaster. For example, if your business is a “C” corporation (or has been for the past 10 years), then the wrong sales structure means that some sellers could owe the IRS more than half of the company’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 pay more if the risk is lower or the tax effects are better. Ultimately, the “price” is not the “price”, the terms are crucial. What counts is the cash in your pocket after taxes you get to KEEP after you leave!
Perhaps MOST important: Be emotionally prepared. This is your baby, are you really ready to part with him?
Contractually protect what you sell. Can some or all of your employees leave 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 are selling. Customer retention after the sale is crucial. How can you help the buyer keep what they just sold?
Make the purchase decision easy for your successors. Start by preparing a short summary of your business as follows:
First, you will 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 property benefits in addition to earnings and salary, make it easy for potential buyers to see it. Please provide explanations for all the adjustments you need to make.
Sometimes you may see this 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 economic benefits of the property.
If you sell more than customer accounts, create a pro forma balance sheet as well.
Know how much business you do with your main accounts and how you will ensure that they remain with the business after you are gone.
Get to know your providers and how they are likely to react when you retire.
Be prepared with all these answers beforehand, with most of them written, maybe even prepare a presentation book.
Do your best, but do not distort and do not 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” results. Doing so may even be grounds for terminating the transaction if things don’t work out for your successors.
Be prepared before you have the first meeting.
Have abbreviated material ready to discuss and / or show, and be ready to provide more detailed information as soon as a mutual interest is established and a confidentiality agreement has been signed.
This is probably the biggest sale of your life; you owe it to yourself to be ready.
What about “Price” ?: “Price” deserves special attention, in part because it is often quite an emotional topic. The “price” can be much more than money for a seller. It can even be unconsciously viewed as a measure of the value of a person’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 will not have a sale. You will have to “draw it in pencil”.
What about payment terms ?: Terms are crucial to how a sale will be “shaped.” In fact, terms are often more important than price. In addition to having a significant impact on annual cash flow, the terms affect both risk and tax for both parties.
Win / Win Negotiations: You most likely don’t HAVE to sell, at least 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 to be a “loss.” The terms are often the key to a “win / win” result. Creative terms can even be “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 business, appraisal and tax issues, internal shareholder buy / sell agreements, related estate planning, employment contracts, and non-competition.
The authors will provide you with a practical street-level understanding of the fundamental legal, tax and financial concepts you need to know regarding the most important financial events in the life of your business; there is nothing similar 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 perpetuate a business internally 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 foundation on buy / sell agreements for any business, this material covers topics related to estate planning, valuation and taxes, shareholder buy / sell agreements, employment contracts and non-competition, all as parties. essentials of a comprehensive business package. documentation.