So you’ve decided it’s time to turn that lifetime of sweat equity accumulated in your business into cash to support your dreams of traveling around the world, or at least around a few golf courses. You are convinced that it is worth millions, but when that first offer comes, you find that at best, after a broker’s commission and income taxes, you will see a third or more evaporate before you have the chance to find a broker to invest those few remaining bucks.
Here are a few suggestions to consider:
1 – Allocate as much of the sale to the sale of goodwill, not toward non complete agreements or asset sales. That will maximize the portion of the sale to be taxed at capital gains rates.
2 – Consider selling under an installment agreement, meaning that you hold a note for a few years from the buying instead of taking it all in cash. That defers the income tax over the life of the note keeping your annual income down. It also will pay you a rate of interest somewhat higher than you would get at a bank. It might even get you a better price, because they can better afford to pay more over time than in a lump sum. It could save the buyer some closing costs over bank financing.
3 – If you aren’t ready to quit working, and you agree to an asset sale instead of a stock sale, then keep the business alive for a few more years. Then you can continue taking a salary and add a robust retirement plan or other fringe benefits to shelter some of the sales deferred proceeds. In a few years, you can withdrawal from that plan when your taxable income may be lower. This will also work well if you agree to stay on to help the buyer for a few years, by taking that compensation through your old corporate shell instead of as a W-2 from the buyer.
4 – For a larger business, look into selling all or part of your stock to an ESOP (Employee Stock Ownership Agreement). It can make some or all of your sales proceeds tax deferred. It can keep your business going and your employees incentivized to make it succeed in the future. Banks generally love to fund loans to these plans for the purchase, giving you liquidity from the sale or an infusion into the business at a small financial cost, other than some dilution of your ownership share.
Each sale is different and it can be worth some planning before committing totally to that first asset purchase agreement shoved in front of you. A few hours talking to some advisors could yield a large tax savings and/or better proceeds at closing.
By Mark Patrick, CPA & Exit Stage Left Trusted Advisor
Do you need an Exit Plan? If you are an owner of a small business, of course you do. Then why aren’t you doing it?
We know there can be a number of reasons, sometimes used as “excuses.” We also know that at least 75% of all small business owners do not have a written plan for an inevitable certainty – transition of ownership. About two thirds of all privately held businesses are owned by baby boomers. The vast majority of these small business owners want to sell and leave their company within the next ten years. This lack of action can and will significantly impact their financial security.
Here are some of the typical comments we hear from owners as they contemplate their exit (none of which are valid reasons for procrastination):
- “No time! It will take too much time for me to take this on now. Don’t bother me; I’m busy operating the business. I know it should be done and it is important but frankly I am so tied up in the day-to-day decisions that it has not reached the top of my priority list.” – This is a sign that you have not initiated a succession strategy for your functions. This company must be able to operate without you, or it won’t be worth what you expect.
- “I have talked to friends and colleagues who have tried to exit and now regret it.” – That is probably true. Unfortunately it is all too common for an owner to regret his/her transition. However the overwhelming reason for this is the lack of good planning. Do an exit plan!
- “I can’t leave. I don’t want to. This company is my life. I’ll just keep working until I die. I’ll never retire.” – We understand. You have probably worked hard over many years to build the business and it may be very difficult to leave the company. There is natural fear of change and this will be life changing. Know there are options that can keep you involved while you exit. And look at this as not an end, but rather the beginning of the rest of your life.
- “The plan is in my head. No problem. My child will take over the business when I decide to leave. Or, the company will sell easily to a competitor with a strategic fit, or if not, an investor will see the potential payback.” – OK, you have a crystal ball. It’s nice to be positive, but wise to be realistic. a) Are you sure your child wants to take over, and is capable of it? b) How can you guarantee that the fit will be there down the road, c) You can’t predict the economy and a buyers’ or sellers’ market. Get busy; document your plan; find out the facts.
- “When it is time, a buyer will contact me and make me an offer I can’t refuse.” – Not so fast. This is a risky assumption. Timing is critical. A number of factors come into play – the economy, your industry, your health, family, employee issues, your competition, the buyer’s readiness and many more. Plan ahead and you can control the timing for the sale of your business.
- “It’s too complicated. I am confused. I don’t understand what is involved and I am getting conflicting information about how to go about my exit. Why can’t it be simple?” – It’s easy to be confused when you are getting advice from a variety of expert sources that look at exiting from their particular point of view. In simple terms, exit planning is part of good business strategy (planning). You run a business that is complicated … you can do an exit plan.
- “The value of my company is not as high as I would like it to be. I need the income that the business provides and I don’t have confidence that selling will bring the net proceeds to fill my financial requirement for retirement.” – First, are your calculations correct? Make sure the current market valuation is accurate. Use an experienced appraiser. Also is the estimate of your needs realistic? Then, if you are short of your expectations a value enhancement project is in order as the key step to your exit.
- “I’ll need help. Who do I call?” – Yes you do. You will need support from an experienced team. A number of disciplines are involved, such as: legal, valuation, financial, estate planning. The Exit Stage Left staff at the FSBDC has referrals that can assist.
- “It is too expensive to hire the people that I need for assistance.” – True, there is a cost associated with good planning. However, do the research. Make sure you understand the cost/benefit equation. The benefits can be extremely significant. Then you can make the choice.
- “Admittedly, I have no other interests. What would I do? I have no idea what to do other than work – I love it. I am respected here. I’m the boss. It bolsters my ego.” – You do have other interests, and you will be doing some serious thinking about the rest of your life. First we need to prepare your business so you have viable options. This will go a long way to reducing your fear of stepping out of your comfort zone.
- “After the transaction the new owner will want me to work for an extended period of time” – Not necessarily. It depends, among other things, upon the exit strategy you select, the terms of sale, if you choose a phased exit and if the buyer requires your expertise.
- “Confidentiality is important to me. I am afraid to start the exit process because I would have to share my intentions and company information with others. That information may affect my relationship with customers, vendors, employees, family members, etc.” – A common mindset but overrated. You do own particular information about your company that is sensitive. But it does not need to be shared until the proper time. However, consider that a) if you are a baby boomer, those around you already know you should be looking to exit, and b) being somewhat transparent with your key people can give them confidence you are planning properly.
- “What’s the use? It will be time consuming, confusing, expensive, and what do I gain?” – With a good Exit Plan you gain a lot. It will have huge positive impacts on your future! … Financial security for you and your family, peace of mind, and legacy to name a few. Without a plan, the risks are high that your retirement will not be what you expect.
Perhaps some of the above reflects your thinking about preparing for an ownership transition. If it does, don’t allow it to stop you from beginning a process that will have a critical impact on the future for you and your family – an Exit Plan!
By Jay Simecek, Exit Stage Left Trusted Advisor
Many business owners are so focused on running their business and putting out daily fires, they often don’t consider the long term ramifications of a few small decisions. What might seem like a quick fix today, could end up destroying the value of your business!
As we review small businesses (under $10M sales) to sell, here are 3 of the most common ways that business owners have devalued their business.
1. Not reporting cash.
We had a bar owner that would take the cash out of the register every night. It was his “pocket” money. He didn’t see anything wrong with this. It was “his” money. Sadly, when that is not the way the IRS or buyers look it at. When all the revenues are not reported to the IRS, a buyer become suspicious of how the seller is doing their books and starts to question what else is not being reported. A buyer will often say to us, “If they are willing to lie to the IRS, I am sure they will lie to me.” Since many businesses are valued based on a multiple of profits (or sometime revenue), when both values are artificially low from cash being removed. This reduces the value of the business and can make the business unsellable at any price turning it into a liquidation of assets, sold for pennies on the dollar.
TIP: Report ALL income in the business on your P&L and tax returns. It is better to pay the 30 cents in taxes, than loose the $2.50 that the buyer would have given you!
2. Not having options on their leases
Recently a retail location contacted us and they had less than 1 year left on the lease. When buyers learned about this, they immediately hesitated and wanted to talk with the landlord to make sure the business was going to have a place to stay. It turned out the landlord did not renew the lease and the business liquidated. All because they did not have a “place for the business to live” and there was no option to protect the business owner.
TIP: To prevent your landlord from killing the value of your business, always get 2-3 options when you renew your lease. An option, means the tenant has the right to renew the lease for a number of set terms when the current lease expires. This gives the tenant more control and helps secure the value of your business.
3. Too many family members in the business
We worked with a towing company that had 5 family members in the business and 2 employees. In order for a buyer to take over the business they would have to replace the many employees. It Is hard enough to learn a business and when you add hiring and training employees on top of that, buyers walk away and look for other businesses to buy. To add to the problem, the family had been working together for so long, they had no written procedures and everyone just “knew what to do.” So a new owner had nothing to guide them in training the new employees once the family had left. It was a disaster waiting to happen. When a business is being sold and some or most of the intellectual property (including knowledge of how to run the business, relationships with vendors and clients) leaves, the business is drastically devalued and buyers are less interested in the business. Buyer will pay much less for this kind of business since there is more risk with the intellectual property is leaving soon as after the sale.
TIP: Slowly phase out family members YEARS before you want to sell. Transfer their knowledge to employees that will stay. Also create standard operating procedures for the new owner to take over easily. This will reduce the risk for the buyer and increase the value.
The best way to not have your business devalued is to begin to prepare to exit your business long before you ever plan to leave the business.
By Kimberly A. Deas, Murphy Business & Financial Services, Exit Stage Left Trusted Advisor
With so many paths to consider, you may find it useful to consult a map or establish a framework to get you out of the business-exit woods and to your post-exit destination. This is exactly what Phil Everson (a fictional owner) looked for as he began his exit.
Phil was assessing the pros and cons of various paths when he sat down with his Exit-Planning advisor, Doug. Phil told Doug, “I’ve been thinking about selling my business to an outside buyer, or maybe to my management team. Or maybe I should give it to my only child. All three have some advantages, but all three also have disadvantages. So, I’m stuck.”
Countless business owners have found themselves stuck on the road to a successful exit at one point or another. After all, most owners only ever have one experience selling a business that they’ve created and nurtured to the point where it could exist without them. But that’s precisely what you’ve done, and now you find yourself asking, “Now what? How do I choose the best way to exit my business?”
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