By, Kevin Freeman, CBI, Managing Partner, Stony Hill Business Brokers
As an M&A Intermediary and Business Broker, I speak to hundreds of business owners every year, and it never ceases to amaze me that 80% of them have absolutely no idea what their business is worth nor any concept of their exit plan.
“Failing to plan is planning to fail…”
Business Owners spend incredible amounts of time, resources and finances growing their business, however, in many cases have no focus on the end goal of the company. They do not plan for an eventual exit and therefore leave hundreds of thousands of dollars or more on the table because they simply did not have an exit strategy. That strategy can change over time, as life throws curveballs and personal factors come into play.
“Your company is worth what someone or another company is willing to pay for it…”
A solid exit plan begins with a business valuation. As I said, I am amazed on a daily basis how many business owners have no clue what their company is worth. They may have a few preconceived notions about multiples of revenue or profits based on another deal they heard about, but no real idea on value.
Ultimately, the final “value” of a company is what someone or another company is willing to pay for it. Understanding that value is a key element of successful business growth. Factors that we look at in determining a company’s value are: Industry trends, Industry Comps, Revenue, Cash Flow (net profit), EBITDA (earnings before interest, taxes, depreciation and amortization), customer concentration, contracts and employees amongst other things. We determine what a business will sell for and why, NOT what it is worth to the owner…this is crucial data that will help in all phases of business growth.
Contact Stony Hill Business Brokers today to begin your exit plan with a Business Valuation.
When selling your business, you have two options:
- Sell your business yourself
- Hire a business broker
While it’s possible to successfully sell your business on your own, hiring a business broker often guarantees a quick and painless sale.
Unlike many small business owners, brokers have years of experience in selling small businesses. They know what works and what doesn’t, making them extremely helpful when handling tasks such as business valuation, advertising or marketing, prospect interviews, negotiation, due diligence, and other critical aspects of the sale.
Hiring a broker also allows you, the owner, to focus on running the business and increasing its value while the broker handles the details of the complex transaction.
If and when you decide to hire a broker, make sure you properly vet your options, as having a quality broker can mean the different between a successful business exit and a long and costly sale.
Whether you are choosing a new broker or deciding if your current broker is right for your upcoming sale, here are six key areas you should address:
Should you sell your business? is a big question. It can be up there with Is she the one? or Should we have one more baby? Maybe it’s not that big, but it can certainly change the direction of your life.
The subject is too complex to be covered briefly, but this article will provide an overview of the issues a business owner needs to address when considering a sale. In particular, we will focus on how to assemble a strong team to guarantee a totally smooth process. (I’m kidding – there is no such thing as a totally smooth business sale. However, there are ways to improve the odds of a positive outcome.)
We will address the following topics, with particular emphasis on question No. 4, since working with the right people can go a long way toward successfully handling the rest:
1. Why Sell?
2. For How Much?
3. Who Is the Buyer?
4. Who Will Help You?
5. What Should You Do With the Proceeds?
6. What Do You Want to Do With the Rest of Your Life?
Statistics show that 50 percent of new businesses fail within the first year. That number jumps to as high as 95 percent within five years. Knowing this, if you’re currently running a successful business and raking in profits, it has tremendous value. And even though things might be going quite well, this is exactly why selling your business makes sense - even when things are good.
Buyers though are sometimes stumped as to why anyone would sell when business is going smoothly. It’s often viewed as suspicious and even too good to be true. Most potential buyers might agree that there aren’t enough good businesses around worthy of investing in. But when a good one does present itself, countless questions arise to the validity of that sale arise.
As a buyer, it’s important to look a littler deeper into the common reasons why people are willing to hand over a good business that’s performing well. Divorce, health issues, a family death, retirement and even sheer boredom are all valid and ordinary reasons to put a business up for sale. The latter is probably the more common than expected, as entrepreneurs tend to be adventurous, always seeking a new and exciting opportunity. For a person who has never bought or even owned a business, it can be difficult to grasp the concept of moving on to something new, especially when business is profitable.
It’s important for buyers to focus on more pressing matters than why a business is being sold. Revenues, profits, growth potential and ease of transition all weigh more heavily than that one factor. As long as records and documentation confirm that the business is in fact in good health, everything else is more likely to fall into place.
Are you thinking about buying or selling a business? Take the first steps by downloading one or both of our free reports: 7 Questions to Ask Before Buying a Business and 7 Questions to Ask Before Selling Your Business.
I first met Kevin Freeman in 2008. I owned 2 small businesses and I was interested in purchasing a third. I was looking for an existing business that already had a strong support team in place and also had room to grow. Kevin found a business for sale that met all of my requirements, Westway Electric Supply. We went ahead with the purchase and Kevin was instrumental throughout the process and even helped me locate a bank willing to finance the deal. The process went very smoothly.
After a few years I was able to grow the business through a new website, www.WestwayElectricSupply.com, and I no longer had time to manage my other two business. I went back to Kevin and asked him if he could sell them quickly. Kevin went to work and soon had a number of potential buyers for each business. He helped me sort through the offers and determine who were legitimate buyers. He continued to advise me throughout the selling process and we got both businesses sold within our target price range and before our target date. I will definitely continue to use Kevin's services in my future dealings.
President, Westway Electric Supply
We are pleased to announce that our Managing Partner, Kevin Freeman, was featured in Smart CEO magazine. Please see the article below and as always please feel free to reach out to Stony Hill for all your exit planning and business acquisition needs.http://viewer.zmags.com/publication/9d7e8af8?page=16&nocache=1358367227031#/9d7e8af8/16
When you are ready to sell a business what type of assistance will you need to do so successfully? If the thought of selling a business on your own seems like a good idea, you may want to rethink that approach. In theory, taking it upon yourself to wheel-and-deal a business sale can seem like an invaluable learning opportunity. However, in reality, a DIY effort is better left to home improvement projects — not the prospect of selling a company.
Here is what you risk losing when you choose to sell business without professional help.
Figuring out how to sell a business can be a time-consuming endeavor. During the daily operations of successfully running and maintaining a business, is there enough free time for you to act as your own selling agent? Probably not. Professional help can drum up buyer prospects while you keep the company up and running.
Time is not the only thing you need to keep a business afloat when considering selling it. You need focus, too. Business services and costs still need your full attention, especially during a business sale. A large part of successfully selling a business involves scrutinizing the numeric bottom lines. A professional business broker company can help with those final details while you manage the finer details of your daily costs.
Information leaks of a potential business sale can send current and prospective clients and vendors scrambling for a protective exit zone. Hiring professionals to help sell your business helps to keep a lid on pending transactions and keep your clientele intact. Without customers and suppliers, your business could lose the fortitude it needs to appear an attractive package for potential buyers.
Need more pointers on how to get started with selling your business? Download our free guide now!
So, you are going to realize some or all of your investment in your business… now what?
Rarely in life do you come to a true, unmistakable fork in the road. Marriage and parenthood come to mind. A business exit can be similarly monumental.
Hopefully you go through the exit process with a surplus of good advice. Business brokers, attorneys, accountants, and bankers can all be sources of guidance (ideally your various advisors work in concert to provide a cohesive and coordinated framework of advice). As Wealth Managers, our role is to help coordinate the big picture that exists somewhat apart from the transaction itself. In particular we help answer two key questions:
1) How much money do you need to meet your goals?
2) What is the best way to position your assets to maximize your chances of success?
Just as your advisors should coordinate their input during the business exit or recap, an ideal wealth management process involves ongoing collaboration between multiple providers such as your CPA, estate attorney, insurance broker, and others. Our task as Wealth Managers is to help organize the many disparate but related areas of your financial life (some of which may have been neglected while you were focusing on the business).
Some important areas of consideration:
1) Estate planning - The estate tax rules have been in flux, and the sale of a business means your personal situation may have changed dramatically. It is time to revisit your trust and estate documents. The sooner you begin your planning ahead of the exit, the more options you may have in terms of keeping assets in the family.
2) Insurance coverage - With more wealth comes more liability exposure. We recommend a full review of all forms of insurance in order to reveal potential areas of exposure, and to maximize your level of coverage per dollar spent.
3) Qualified and non-qualified retirement plans – Evaluate rollover and distribution options with an eye toward tax efficiency.
4) Investment of sale proceeds - Given low interest rates, high government debt, and varied geopolitical risks, this is a difficult environment for investing. We recommend hyper-diversification and a thorough examination of issues such as costs, tax impact, and cash flow timing.
If you are realizing a successful exit from a business chances are you understand the importance of planning and preparation. Apply those concepts to your wealth management process to increase your chances of long-term success.
By Patrick M. Foley, CFP®, QPFC
Robert W. Baird & Co.
If you are considering selling your business, tax rates, including the capital gains rate, need to be a consideration for you. To minimize your tax payment you will want to plan for the best date to complete the transaction. And before any further explanation, you will want to talk to your accountant or lawyer or both. The potential issues are way more complex than this short post.
What portion of your sale becomes subject to capital gains tax or regular income tax depends on several variables:
The Legal Structure
If your business is a C Corporation, then the sale of the business may be retained within the corporation without impact on your personal 1040. As long as the company does not pay a dividend back to the shareholders equal to the amount of the sale, there will be only the corporate tax rates to pay. When money is distributed it becomes personally taxable.
If your business is an S corporation, an LLC or other limited liability entity, or is a proprietorship, the proceeds of your sale will be passed on to the individual owners at the rates then in force.
What are you selling?
Are you selling the company as a whole or are you selling the assets of the company.
If you are selling your C Corporation and transferring stock ownership, the rules of capital gains for individuals apply. This is primarily how long you have owned the stock. If you are selling the assets, as is commonly the case, the corporation will report the sale with some items as capital gains and other as normal income.
If you are selling the assets of a pass through entity, a proprietorship or partnership, the proceeds from the sale are taxable on the personal returns of the owners with some assets taxed at capital gains rate and others at personal rates.
Future tax Rates
Capital Gains Tax Considerations for Selling a Business in 2012 are more favorable. Both income and capital gains tax rates are scheduled to increase in 2013. While there have been a number of proclamations from the political world that rates should not go up, basing your plan on what is in today’s law would suggest that doing it before the end of 2012 is a good idea,
Any business owner must consider the implications of selling a business at some future point. And it is best to be completely prepared. Even if you do not expect to sell your business, you should create a plan for that possibility. And you should also know what proceeds you could expect to generate were you to decide to sell your business right now. That plan will give you all the information that you as an entrepreneur need to evaluate all of your options.
Why do you need a succession plan?
For most businesses, there comes a time when the business should be sold. Estate issues, inheritance taxes, no heir to run the business, an illness or a wide variety of other issues can make selling a business the wisest or only thing to do. When that happens, you need to be prepared. You should start the planning now.
What do you need to do to prepare?
Prepare your financials to be completely accurate and “bullet-proof”. Is your CPA adequate to the task of preparing statements that will meet the scrutiny of a potential buyer? Do you need a full audit, or are write-ups adequate?
Make certain that all operational details are functional. Critically evaluate all staff, space, inventories and other working parts of your business to see what holes need to be filled. Create a plan to correct any shortcomings that you see.
Inventory all of your assets. Do an inventory of your fixed assets as well as products for sale or in process. Make certain that the figures synch up with the figures you are carrying on the books. The value and condition of assets can make a difference when you are selling a business.
What are your next steps?
Download a guide to selling a business to give you a little guidance on preparing.
Finally, it is wise to look for competent advice. Selling a business can be a once-in-a-lifetime event. Seeking the advice of a firm that buys and sells businesses every day will help you maximize the value of your sale.
Whether you want to sell today, or just plan for an eventuality, call the experts at http://www.stonyhillbusinessbrokers.com.