Accounting 10 Companies Can Use Free Cash Flow To What You Need to Know When Selling a Business

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What You Need to Know When Selling a Business

Chapter 1, Part 1 – Introduction / Getting Ready

Review

Every business is eventually sold or closed…you don’t get a chance not to!

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 succession/transition of a business, and to help buyers find and successfully purchase profitable businesses. We’ll teach the practical “street level” nuts and bolts of how to do this, but we don’t intend to turn you into a legal or tax expert. You’ll still need your attorney and CPA, but you’ll know how to spot key issues and know the key options available to you. This should translate into a major advantage for you when it comes time to switch your business.

Prepare first. We’ll provide more details in future articles, but here’s an overview.

Sellers

If you’re not a truly willing seller with realistic price and terms expectations, you’re probably wasting your time. Know what your business is really about. For example some companies double annual revenue, but most do not. Is your company for sale, but only if you get X times the annual gross revenue?

Know your tax situation and what to do if you’re sitting on a potential tax disaster. For example, if your company is a “C” corporation (or has been for the past 10 years), could an improper sales structure mean that some sellers may owe the IRS more than half of the company’s total sales price? Do you know if this is a problem? If so, do you know how to “fix” it?

What about payment terms? They affect both taxes and risks for both sides. A buyer may pay more if the risk is lower or the tax consequences are better. After all, “cost” is not “cost” — the terms matter. How important is the after-tax cash-in-pocket you get to keep after you leave!

Perhaps most important: Be emotionally prepared. This is your baby — are you really ready to part with it?

Contractually protect what you are selling. Can some or all of your employees leave after you sell and take over key accounts? Can you realistically sell to a company that could lose large blocks of your business this way?

Make it easy for heirs to preserve what you’re selling. Customer retention is important after the sale. How can you help a buyer keep the item they just sold?

Make the buying decision easier for your successors. Start by creating a brief summary of your business as follows:

First, be able to answer three questions:

1. Who is your ideal buyer (make a list of top prospects)?

2. Why should they want to buy your business?

3. Why now? If your business is so great, why are you for sale?

Create defensible pro-forma cash flow spreadsheets that show the true benefits of ownership you’ve received in the past.

If you get benefits of ownership other than just profit and salary, make it easy for potential buyers to see that. Explain all the adjustments you need.

You are sometimes referred to as “free cash flow”, “available cash flow” or EBITDA (earnings before interest, taxes, depreciation and amortization). Regardless of the terminology used, the objective is to determine the true economic benefits of ownership.

If you sell only customer accounts, also prepare a pro-forma balance sheet.

Know how much business you do with your top accounts and how you’re going to make sure they stay with the company after you’re gone.

Know your vendors and how they will react when you retire.

Be prepared with all these answers in advance, write most of them down — maybe even prepare a presentation book.

Put your best foot forward, but don’t misrepresent and predict the future. You don’t know how the buyer will do in the future, and you don’t want to do anything that will “guess” the outcome. Doing so can also be grounds for voiding the transaction if things don’t work out for your successor.

Be prepared before your first meeting.

Have brief material ready to discuss and/or show, and be prepared to provide more detailed information once mutual interest is established and a confidentiality agreement is signed.

This is probably the biggest sale of your life — you owe it to yourself to be prepared.

What about “price”?: “Price” deserves special attention, in part because it is often an emotional issue. “Price” can be more than just money to the seller. It can even subconsciously be seen as a measure of the value of a person’s life’s work.

One way to put things into perspective is to remember that a sale will either make financial sense to the buyer or you won’t. He has to “pencil out”.

What about payment terms?: Terms are critical to how the sale will “pencil out.” In fact, terms are more important than price. In addition to having a major impact on annual cash flow, terms affect both risk and taxes for both sides.

Win/Win Negotiation: You probably don’t have to sell, at least to a specific buyer. Likewise, the buyer probably doesn’t need to buy your business. This means that the sale is likely to be broken as soon as either party deems the sale to be a “loss”. Conditions are often the key to a “win/win” outcome. Creative terms can also be “win/victory/lose”. (“Loser” means the IRS.)

Editor’s note: This is the first installment in a series of columns on buy/sell arrangements, valuation and tax issues for any company, buy/sell agreements among shareholders, related estate planning, employment agreements and non-competes.

The authors will give you a practical understanding of the basic legal, tax and financial concepts you need to know in relation to the biggest financial events in your business life — nothing else like it.

Since many business owners are buyers, and every business is eventually sold or closed, this is essential for anyone who owns, plans to buy, or will eventually sell a business.

You’ll learn the best ways to buy, sell, merge or retain a company internally from a team of experts responsible for hundreds of successful business transactions. You don’t need to be a technical expert, but you should know enough to guide your attorney and CPA.

In addition to the essential foundation on buy/sell arrangements for any company, this material includes relevant estate planning, valuation and tax issues, shareholder purchase/sale agreements, employment agreements and non-competitions, all essential parts of a comprehensive business package. documentation.

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