Sooner or later you are going to exit your
business. The question isn't whether or not you will be ready. The
sixty four thousand dollar question is whether or not your business
will be ready. It is estimated that seven out of ten privately held
businesses have no succession plan to transfer the business to the next
generation of owners. What does that mean to you? It means that if you
do not currently have a plan in place to transfer your business to
family members, existing partners, management or employees, someday you
will think about selling your business.
That day might come sooner than you anticipate. Don't make the
mistake of thinking that just because you are not currently ready to
retire that you have plenty of time to prepare your business for sale.
As a business broker, I have been involved in a number of
transactions (and potential transactions) where the business owner
wanted to sell, or in some instances, was forced to exit the business
earlier than expected. In fact, retirement is NOT the number one reason
why businesses sell.
Here is a list of the most common reasons why owners sell (or otherwise discontinue) their businesses:
Burn-out (the number one reason for selling)
Health issues
Personal diversification
Retirement/semi-retirement
Death
Divorce/partner disputes
Business growing too fast
Second generation not up to the task
Loss of market share
TAKE GOOD CARE The sad truth is that many business owners do not
take good care of their most valuable asset: the business. They don't
groom someone to continue the business in their absence, and do not
keep the business in salable shape during the time they operate the
business.
Business owners tend to get too bogged down in the day to day
business operations to worry about--or plan for an event that they
perceive won't occur until sometime in the distant future; selling the
business.
Unfortunately, fate sometimes dictates circumstances beyond your
control, and tough decisions must be made. If your business isn't ready
to sell when the time comes, what are your alternatives?
1. Liquidation of business assets—may be a solution, but one that
usually returns very little money to the business owner. If the
business had been an operating business, the underlying assets (except
for real estate) may be outdated and of little use to anyone. At
auction, the assets will bring only what the attending bidders are
willing to pay. In some instances, underlying assets are sold to
liquidators (or scrap) for only pennies on the dollar. Liquidation of a
going business often occurs where the owners have become ill or
disabled, or need to retire and have not planned adequately for their
exit from the business. 2. Closing the business—is even less attractive
than liquidation. That is because many who find themselves in this
situation have a tendency to "put off" liquidating the underlying
assets in hope that maybe someone will come along to buy this business.
This almost never happens. BUILD WEALTH NOW BY PLANNING FOR THE SALE OF
YOUR BUSINESS Okay, so you think you have enough to do without throwing
more onto the pile. Am I right? That is why I have written this article
for you. It provides a "down and dirty" overview of things that you
ought to begin thinking about and planning for right now. Doing so will
provide you with an additional safety net that will help safeguard your
valuable business asset.
Here are just a few of the benefits of planning now: A planned sale
allows for your goals and objectives on your timetable You may begin to
identify potential buyers You may be able to create an attractive
acquisition candidate You can begin to understand why a buyer may want
to buy You might learn why buyers would not want to buy—and be able to
fix the problems You may begin to realize the worth of your business
now, and learn how to increase the value as part of your retirement
planning
BUSINESS VALUE HOUSEKEEPING CHECKLIST
Record All Sales Business owners often invent remarkable ways to
beat the tax collector. But the taxman can be a business owner's best
friend when it comes to selling one's business. Income taxes are a
great investment in the years immediately preceding an anticipated sale
of the business.
Paying income tax proves to the buyer AND the banker that your
business operations have been profitable. Nobody wants to pay more
income tax. But consider this example: Ronald Bunk systematically
underreported business income by an average of $20,000 per year.
Assuming a combined tax rate of 40%, Mr. Bunk saved $8,000 in taxes per
year. But, the underreported income also reduced the company's earnings
base by $20,000 per year. If, for example, the business could be sold
for a multiple of 5x the company's reported earning base---the company
would sell for $100,000 less ($20,000 average earning base not reported
times the price multiple of 5) than it is really worth!
Without considering the time value of money, it would take in excess
of twelve years of (illegal) tax savings to make up for the loss of
$100,000 in business value. The lesson: In trying to screw the
government, business owners often find themselves on the short end of
the stick; often in more ways than one.
Eliminate co-mingling of business and non business assets A common
practice among closely held companies is to co-mingle non business
assets and expenses with business assets and expenses. I have seen
businesses owning motor coaches, boats and airplanes; all reported as
business assets. The costs of maintaining and operating the assets were
expensed as regular business operating expenses.
It is true that those businesses (not audited by the IRS) are saving
a certain amount of income tax, and providing an extra "fringe" benefit
for the owners of the company. Wise business owners should endeavor to
separate non business assets from the business in the three to five
years before a planned sale of the company. Doing so will make it much
easier to accurately measure and reflect the true earning power of the
business, as it will be unfettered by the capital investment in non
business assets and the associated costs. Buyers of your business are
generally purchasing future income and benefit streams that will be
produced by your business. The leaner and more productive your business
is—the more it is worth. It is never too early to begin segregating non
business assets from your business, as it may take some planning and
time. Do your own due diligence
Some executives of both public and private firms get a physical
check-up once a year. Many of these same executives think nothing of
having their personal investments reviewed at least once a year, if not
more often. Yet, these same prudent executives never consider giving
their company an annual physical, unless they are required to by
company rules, regulations or some other necessary reason. Anyone
interested in purchasing your business will perform "due diligence"
procedures on your business before closing on the purchase. All too
often, sellers are surprised at the skeletons purchasers can find in
the closet. These skeletons can reduce the value of your company, and
in some cases, kill any chance at closing a sale. What skeletons are
your company's closets?
Why not give your business a periodic physical? In essence, I am
suggesting you would do well to treat your business as if someone else
owned it—and you were the potential purchaser. What problems would you
discover that could cause you and your advisors to reduce or withdraw
your offer?
Spending the time and money to discover and fix your company's
problems now will pay huge dividends in the form of increased company
value—which is exactly what you want when it's time to sell.
Compliance with taxing and regulatory authorities Mountains of
regulation often seem to impede a company's growth and profitability.
Some regulations might seem rather easy to "slight" or ignore.
Take for example one of my recent sellers who swore to me that the
business had no regulatory violations of any type. I reminded the
seller that anything "hidden in the closet" would most likely be
discovered in a buyer's due diligence (investigatory) process. "Nope—no
problems of any kind" I was assured. Well, guess what the buyer's due
diligence turned up? Seems the seller had a couple of shipping/storage
containers sitting behind the building—which the sellers KNEW were in
violation of local zoning ordinances. How did they know? They had
received four previous "reminders" from the trustees about the
containers, and the need to remove them. "Why didn't you mention that
to me, or disclose that fact on your disclosure statement?" I asked.
"Gee, nothing ever happened and the township never did anything—so we
just figured it was no big deal." Was the seller's reasoning.
No big deal, except when the purchaser turned up the non compliance
issue, it threw a few extra wrinkles into the mix. In that case, the
issue was easily resolved (yet, much to the additional cost and chagrin
of the sellers). But, sometimes known violations are not so easily
remedied. In those instances, a seller runs the risk of blowing a good
deal.
What's the bottom line?
Clean up any tax, industry, OSHA, EPA or zoning issues with which your company does not comply.
Organize and keep records available. One never knows when
opportunity might knock. If and when it does knock, will you be ready
to strike while the iron is hot? How many times have you heard someone
say something like, "I'd sell anything, including my business for the
right price?"
Maybe you have even said it yourself. But would you know what
paperwork and documents a serious buyer will immediately need in order
to pursue the purchase? When a qualified buyer is ready to begin
serious due diligence, they will need a variety of company documents.
Following is a partial list of things a buyer will ask for:
• Three to five years income tax returns
• Copies of one to three years quarterly payroll reports
• Three to five years CPA prepared financial statements
• Current year to date financial statements
• Detailed depreciation schedules listing each fixed asset owned by your company
• Corporate Minute Book with updated minutes
• Recent aged accounts receivable trial balance
• Recent aged accounts payable trial balance
• Company organization chart
• Copy of the Summary of Insurance Coverage (provided by your carrier)
• Information about Employee Benefits provided by the company
• Information about Employee Retirement Plans
• Copies of labor contracts
• Copies of other contracts to which the company is a party
• Copies of licenses, registrations for patents, copyrights, trademarks, etc.
The foregoing list is an example of the types of records your
company should have up to date and on hand at all times. These records
are extremely important to speed the sales process along. Though this
advice sounds basic, I often encounter companies whose records are not
complete and up to date. This situation can dramatically affect a
potential sale.
I suggest using a three ring binder to keep the basic updated
records available at all times. This also makes other business needs
for the documents much more manageable.
CONCLUSION
You can increase your wealth by knowing a few simple ground rules
for successfully selling your business. Just like other owners of
closely-held businesses, you know how to operate your business on a day
to day, month to month and year to year basis. But your experience in
running the business has not prepared you to know how to sell your
business.
While the information I provided in this article is not all
inclusive, it should help you get started in preparing your business
for a successful sale—no mater when the business might be sold.
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