Prepare Your Exit Plan
An entrepreneur regards his business venture having its life cycle. Like, in the stock market, it has its entry and exit doors. Competitive forces tend to reduce the market share. It is extremely important that the owner infuses innovativeness, efficiency, and capital in the business to stay competitive. A well-run business not only feeds to its owners, but also must feed itself to grow fatter. When a business generates in autopilot mode, its owner has to reduce hours of work, should only oversee, make sure that, at the end of the year, there are retained earnings for the business for its growth. This is the peak position, which carries the maximum value in the business. The owner has created this; the owner must enjoy the fruits of hard work. It is now time to make a graceful exit from this healthy business. It may not sound sensible to do, but it is what a smart buyer is looking for, and it is what the owner should conceptualize for the next phase of life. The next phase of life could be starting a new venture of bigger scale and scope by carrying the successful model elsewhere where there is higher expected growth rate. The next phase of life could be the passing on of the business to heir apparent and keeping an eye on it. The next phase of life may be full retirement with regular risk-free cash coming in. This scenario calls for bold planning for an exit strategy. Get to accept the risks of management of business and your own health and waning capacity.
Prepare Your Business for Sale
The underlying rule of preparing your business for sale is to show and prove your business, its accounting practice, its management, and above all the steadiness of its profitability over minimum last three years. This will involve establishing the efficiency of your business by the systems in place that makes the business self-propelling. Discuss your accounting practice with your accountant and tax situation with your CPA. If your emphasis has been the reduction of taxes, it is now time to make a clean slate for next three years when it is time to sell your business. Some of the tips for preparing your business for sale are:
- Discuss with your CPA as to the structure of legal entity of your business and what changes you need to bring to make it tax friendly;
- Check on the financial ratios of your business and maintain low debts to income ratios;
- Discard worn out equipment and replace it to make the business operations efficient;
- Secure relationships with suppliers and customers;
- Train up your employees well and give them benefits to retain them and their loyalty to ensure they continue with new owner;
- Ensure you have good lease on the space and its renewable terms to transfer to the new owner;
- Beef up premises of business to stand out against your competition;
- Write an operating manual and business plan of your business;
- Pay yourself well to show making good living, and treat your personal expenses distinctly away from the business expenses,
- Collect receivables and evolve policy to ensure smooth cash flow;
- Clean up inventory, do not let it stale and stinky on the shelves,
- Make it clear how you get compensated;
- If your business is a corporation or LLC, get entity records in order;
- Keep a accountant prepared statements, CPA prepared tax returns and financial statements for the last three years;
- Money you have loaned to your business entity, or taken from business entity, should be treated as loans and their promissory notes placed in corporate records;
- If you plan to sell real estate with the business, or lease the real estate you own or are buying, work out its pricing details and terms with an expert on commercial real estate;
- Get all contracts with your employees, vendors, and suppliers in order and work out how best you can assign to new owner to make smooth transition;
- Plan on how you want to structure sale of your business, for this will have significant effect on the pricing of the business and how buyer will get attracted to purchase the business;
- Get all local licenses and permits in order;
- If you are selling intellectual property with the business, show its documentation;
- Have believable explanation as to why you are selling the business and what do you plan to do after that.
All these synoptic tips are just to get your business house in order so that you can present your business with your terms of sale. Concurrent with this, have your business evaluated by a professional and get to know how to enhance it. Please call us for a complimentary consultation.
Prepare Yourself to Sell Your Business
Preparing yourself to sell your business generally falls into two categories:
- You have made very thoughtful decision putting all factors together that are in your best interest, and that of your family, to sell the business and move on;
- Situation, not of your choosing, has developed for you to step out of business and move on with life by selling the business.
In either case, it needs emotional preparation and logical decision making to transition to the next phase of life.
In the first category, when you are deliberately thinking of selling your business, you have factored in all scenarios for action. When the time is ripe for action, you may get cold footed and emotionally warm for the business you have nurtured and brought up. The worst comes with the fear of the loss of identity of the owner of a business that hurts personal pride. To get over this mind blockage, convince your spouse and family members that you are not heading on to divorce your business, but parting company with your close friend so that both grow and thrive better. When you have gone past this hurdle, you enter into the implementation phase of joint family decision to prepare your business for sale to get top dollars and structure your sale terms in that way. Oftentimes, there is continuity in the relationship with the buyer of your business over a period, depending on how you structure your sale so that you and the buyers are both winners.
In the second category, events may be compelling beyond your control to sell your business. This could be due to your health, divorce, co-ownership troubles with your partners, no life beyond your store work due to long hours, threatening competition, change of technology, etc. and the like. Selling a business takes time. It may be best to get advice and assessment of your business for its value and the best way to put it out in the market. You must keep the appearance that you are selling your business on your own accord, and may have to bluff a little for reasons of selling it. You should put your best foot forward by showing clean accounts to establish financial health of the business, and price it should sell. Be careful not to make a ‘distress sale’ unless it really is.
Why Are You Selling Your Profitable Business?
At a minimum, buyer of a business is looking to buy a job to make a living. At the optimum level, the buyer is looking to buy a business for self-employment, have 1 -3 employees, and still leave a profit for growth of the business. The next preference for choice of a business purchase is the value of owner’s involvement in the business. When a seller plans to put out business for sale, see from buyer’s vantage point where you and business stand for its pricing and terms.
Retire From Your Business
More than 50% of small businesses in the US are family owned. These small businesses provide self-employment and some security for the future. Unless there is growth in the business to absorb the next generation with capability to take over, decay sets in. It is necessary to do detached analysis for continuation or discontinuation of business to prepare for a prudent action plan, whether to retain or sell the business. Less than one-third of family run businesses may survive to second generation. The key to retirement is to make a succession and estate plan.
As you grow older, retirement is inevitable. You have no choice, but to plan for old age. If no member of your family is ready to take over, you do need a plan to derive a steady income for old age. Social Security and Medicare may be the bread, not the butter you need on top. If you believe you can help a close relative in your business to help you, it is essentially a sale deal over time, which must be well conceived and implemented. You should regard your relative to be a buyer whom you are collaborating with and withdrawing your share progressively under your close control, less you lose money and besides your close relationship. Do get your business evaluated to know market value. A business is what owners’ make of it is. Remember, you have friends and relatives generally in good times only.
Enhance Market Value of Your Business
When you plan to sell your business, preparation of accounts and their presentation is the key to place value on the business. Review your Income and Expense Statement and detect what is expensed which not business related. Remove or rationalize these items, and you see the bottom line of business profitability increases. This is what you are selling to the buyer, and this is what a buyer has to be convinced. In preparation for sale, it is extremely important to clean up your accounting cupboard. The cash flow at the bottom line determines the value of the business. From the different methods of valuation of the business, a market factor related to risk is applied to the bottom line. For example, a multiple of two will mean that, for every dollar increase, there is $2 increase of the business value. Your objective should be to maximize net operating profit for two to three years prior to the sale, even if means higher income taxes. By keeping transparency in accounting, you will make up well in the sale of the business. Here are some tips:
- Increase your business income and reduce your expenses.
- Improve on converting leases and financed business assets to the ownership.
- Review your contracts with suppliers and vendors and renegotiate them to reduce material and delivery costs.
- Check your plants and equipment and replace inefficient equipment with more efficient equipment.
- Evaluate your employees’ cost and check where you can reduce.
- Check if changing technology can bring about efficiency in business and reduction of costs.
- Remove owner specific perquisites and benefits out of business.
- Discard the line of business that does not contribute to overall profitability.
- Clean up inventory, and bring accounts receivable up to date.
- Modify all leases, mortgages, agreements, and contract so that they are assignable to the new owner.
- Settle all outstanding liens, disputes, and grievances.
- Train up a smart manager to run your business, and step out of it slowly. The business must be able to make a smooth transition for the new owner.
- Do not incur new debts, and defer significant improvement.
- If you own real estate, place it under a new entity.
- Offer attractive terms of sale to the buyer, and be prepared to stay with the business for certain duration.
- All intangible intellectual properties should be well documented and placed in books.
- Have your financial statements well prepared by an accountant.
Growth of Business Wealth
A mom ‘n pop shop turning into a franchise is a great American model of growth of the business. The name grows, and so does the chain of stores and corporate revenue. This is one example of growth of business wealth. A small IT startup company with an infusion of venture capital and intellectual properties of talented owners and employees may grow to be a multimillion-dollar venture. Even a college undergraduate may work his or her way out to innovate and invent that has powerhouse buyers. Even for a small mill grinder shop, the growth model may be slow and steady, so that the founders retire, and the business runs through its employees and managers. If a business is not growing to release its owners of their time involvement, it is tying up its owners for reasonable paying job to make a living. Technology has internationalized business entrepreneurship. Every starter of a business makes growth plans to stay in business. Whatever be the starting point, the owners are the prime movers to move business motors and crank up revenues. This is the growth of business wealth!
Your Dear Partner in Your Business Sale – IRS
The third partner in the sale of a business is the IRS. If you have run the business for a while and have built up its value, you will have to pay taxes on the gain when you sell the business. When you are planning to sell the business, it is best to discuss with your CPA and have him or her draw out tax strategy plan for you. The salient features of tax planning with your CPA should cover following features:
- Should you sell the business as a corporate entity, or should the corporate entity sell its business assets. Understand clearly the difference between two forms of sale, and the tax consequences.
- If it is assets sale, estimate the approximate sale price of your business broken down into tangible and non-tangible assets. Go over IRS Form 8594 regarding assets sale of a business. This form will be part of the closing, which the seller and the buyer sign. There may be conflicting interests of the buyer and the seller in agreeing to allocation of the components of the sale price, which should be resolved at the stage of Sale/Purchase Agreement.
- Consider tax advantages of seller financing, especially if you are selling real estate, as well.
- Evaluate all taxable elements, tax rates applicable on these elements including agreement of non-complete, and payments for post-closing services.
These are some synoptic tips for you to emphasize the importance of tax planning. Discuss with your broker how you plan to sell the business, and take his or her help for valuation of the business, and to evolve terms of sale.
Structure and Terms of Sale of Your Business
For small businesses, there are virtually no institutional financiers or lenders that a buyer can go to get a loan to finance purchase. The principle of leveraging down payment kicks in to sell businesses, with innovative ways to finance the balance of purchase price over deferred payment basis. Inasmuch as it is favorable to the buyer, so it is favorable to the seller since income tax on deferred payments will make sense to structure the sale price. Some of the ways to negotiate deferred payment are:
- Consider a secured promissory note from the buyer, preferably real property as collateral. A seasoned promissory note carries value to pick up loan from a small commercial bank instead of selling the note at discounted price and paying capital gain tax on it.
- If you own real estate with the business, sell it separate from the business and offer seller financing on it. This will attract buyers for easier financing terms than any bank can offer, and that too if at all it offers. The seller gets a regular installment payment and reduces tax liability spread over future years.
- For cash on the table at the closing, settle the best way of allocating it on IRS Form 8594 to reduce tax liability.
- Work out covenant of a non-compete agreement for post-sale arrangements as extension of the sale price.
- If you are accepting employment from the buyer, work out your compensation plan as part of the deal to recover your sale price over the period of your employment.
Terms of sale can significantly change the pricing of the deal. Seller financing is an artistic way of showing higher ‘Rate of Return On investment’.
In a buyer’s mind, it is the cash investment to buy a business with favorable financing terms, and in the seller’s mind, it the risk of financing.