4 Steps to Selling Your Business – Part 1
There is saying that 20% of business owners are thinking about selling their business at any given period of time. If it so happens that you fall in that 20% it will be your responsibility to make sure that you are fully prepared before you make that huge step. This article is not end all be all but it will give you a simple guide of the 4 steps you need to take to sell your business.
I highly recommend that you seek the trusted advice of a member of your professional team, as the decision to sell your business is one of the most important decisions you will make in your entrepreneurial career. Your Attorney, CPA and Financial Adviser should be able to assist you with the sale of your company or at least refer you to a qualified Business Broker or M&A Advisor that can walk you through the process step by step. An experienced business broker is a key player on your team of advisers. Business Brokers sometimes called Business Intermediaries have the necessary knowledge of the business sale process. They will be able to bridge the gap between you the seller and potential buyers and also protect you from any breaches in confidentiality (more on this in another article). Selling a business is a fine art that must be guided by professionals so use them.
Step 1 – Do you know what your business is worth?
Get a Business Value Assessment or even better a Business Valuation
Now is the perfect time to find out what the market value of your company. When you decide to put your business on the market it is very important to have your business priced correctly on the onset. A price to high will scare away potential buyers, while a low price may not satisfy your current exit strategy.
A Business Value Assessment shows what your business is worth and can sell for at this moment. A Business Intermediary can do a complete value assessment valuation for you. Valuations are based on multiple factors including actual cash flow and hard assets. Your Business Intermediary will apply an industry specific formula to determine your market value. This report will not only provide you with the actual market value but will also provide alternative pricing methods for comparison purposes.
Who needs a Business Value Assessment?
- A Business Owner interested in selling in the next 12 months
- A Business Owner already selling without a business valuation
- A Business Owner considering expansion financing
- A Business Owner who just wants to know what his or her business is worth
- A Business Buyer interested in a business for sale but wants a real valuation
A business value assessment is the first step in the process of determining the health of your company. Upon completing the valuation, adjustments can be made to improve business profitability and maximize its selling price. Your business intermediary should be able to refer you to a Business Consultant who can assist you improving the value of your company if you don’t already know one.
Another consideration is to have a limited formal valuation done by a certified business appraiser. This type of valuations is usually intended for business with sales between $2,000,000 and $10,000,000. The report is intended for “asset sale, financial buyers” and provides a detailed review of all aspects of the business that will determine valuation of your company.
Performing a business valuation is sometimes considered more of an art than a science. Valuing a business is typically influenced by many various factors including timing, the state of the economy, the specific industry, the banking environment and even the stock market. The valuation expert will produce a price range for the seller in order to prepare for negotiations. The prices will be calculated using a multiple of earnings, comparables or other similar companies & cost of capital to cash flow comparison.
Some companies order business valuations up to five years prior to going to market. This practice provides time to improve the health of the business to optimize the market value. Upon completing your valuation you will know what your business is worth. Having this information prior to going to market drastically enhances your chances of selling at the best possible time and price.
Stay tuned for Step 2 — Preparing Your Business For Sale
Adding Value to Your Business
If you are considering selling your business, remember that there are positive factors that influence value and those that detract from it. Looking at your business from a buyer’s perspective is important since a prudent buyer will be adding and subtracting these various factors when arriving at an asking price. It is perhaps more important to recognize when the buyer arrives at a price at which he or she will leave the negotiations. Buyers naturally try to buy the business at the lowest possible price possible, however most also have a top price over which they are probably not willing to go. Here are some of the “high value” indicators as well as some of the “low value” indicators to consider when evaluating your business.
Indications of High Value
- High sustainable cash flow
- Room for the business to grow
- Anticipated industry growth
- Competitive advantage – location, area, etc.
- Business niche
- History and reputation
- Low failure rate in industry
- Modern, well maintained facility
Indications of Low Value
- Customer concentration on a few major customers/clients
- Reliance on owner
- Poor financials
- Distressed circumstances
- Few assets
- Product or service sensitivity
- Poor outlook for industry – regulations, foreign competition, price cutting, discount stores, etc.
Considering the above factors and how to address them can help a seller look at the business through the eyes of a potential buyer. A professional business broker can help the business owner sort through the many areas that buyers consider when looking at a business and trying to arrive at an initial offering price.
Reuters: Some small business owners see ’12 as year to sell
By Deborah L. Cohen
(Reuters) – Jim Angleton did not plan on selling his small financial services business this year, but when a foreign buyer approached with the right offer he went ahead without regrets.
“There’s uncertainty moving forward,” said Angleton, 56, who sold a unit of his Miami-based company, AEGIS FinServ Corp, which issues debit and credit cards to U.S. government employees working abroad. “Tax rules are constantly changing and they don’t make sense. This time next year I’ll probably be thankful I did this.”
Like many small business owners, Angleton cited jitters about the future of U.S. tax policy and an uncertain regulatory environment that could affect his company – specifically, the Dodd-Frank Wall Street Reform and Consumer Protection Act which entails tighter controls over banks and financial services providers.
Such worries may be one reason why business brokers say they are fielding more calls this year from the owners of small companies who say they want to sell.
“A lot of people are nervous about the tax situation,” said Michael Butler, CEO of Seattle-based Cascadia Capital, a privately owned investment bank that handles sales of small companies with earnings of up to $150 million, from sectors as varied as manufacturing and high-tech.
“We’re also seeing a lot of businesses that really went through a tough time in the recession and have now kind of bounced back as survivors,” he said. “People are saying, ‘Hey, the risk-reward is skewed such that I think I had better just try to sell now than go through another cycle.'”
At the same time, interest among buyers appears to be on the upswing, particularly for solid-performing businesses in recession-proof niches such as home healthcare and educational services, brokers said.
“There is more optimism on the buyers’ side,” said Steven Rosen, a Philadelphia-area broker with Sunbelt Business Advisors, noting low interest rates that make financing appealing. “Businesses are getting better; banks are opening up a little bit in terms of what they’ll loan on,” he said.
TAXMAGEDDON?
Among the factors pushing small businesses to the block: the set expiration of a low capital gains rate, the threat of additional Medicare taxes and healthcare costs, and potential changes to favorable gift and estate tax rules, said Barbara Weltman, a tax attorney specializing in small business issues.
“All of the Bush-era tax cuts expire,” said Weltman, who jokes darkly of next year as “Taxmaggedon.” “There’s just so much going on that people may want to get out now.”
If allowed to expire at the end of the year, the current 15 percent capital gains rate could revert to its prior level of 20 percent. Depending on the results of the 2012 presidential election and the overall economy, Congress might push it higher, she said. A 5 percent increase would result in $50,000 more in federal income tax on each $1 million in profit.
The Supreme Court on Thursday handed down a ruling that upheld the centerpiece of President Barack Obama’s signature healthcare overhaul law requiring that most Americans buy insurance by 2014 or pay a financial penalty.
Provisions of the law stipulate that starting in 2014, businesses with 50 or more employees will be required to provide health coverage to their workers, an expense Weltman notes could depress a company’s selling price.
Meanwhile, the existing $5 million federal gift tax exclusion, which can be used to gift profit from the sale of an owner’s small business tax-free to family members, may also end. Waiting until next year to sell means one has to factor in an additional Medicare tax on unearned income as well.
“It’s hard to imagine what it’s going to be like,” Weltman said, adding that other unfavorable changes include the expiration of payroll cuts for employees and self-employed individuals and a more modest dependent care credit. “Dozens more provisions, besides the tax rules, disappear.”
SELLING INTEREST RISES
Business-for-sale transactions among mom-and-pop shops have been picking up. Almost 4 percent more businesses were sold in the first quarter of 2012 than the year earlier, reaching their highest level since the fourth quarter of 2008, according to data from Web-based marketplace BizBuySell.com.
“It continues a trend of slow but steady improvement,” said Curtis Kroeker, general manager of the San Francisco-based BizBuySell.com, whose sellers include independent restaurants, barbershops, laundromats and the like. “Financing has been improving, but it’s still definitely harder to get financing now than it was back in ’07,” he said.
Small business performance has also been better and sellers are becoming more realistic about what it takes to prepare a business for sale, Kroeker said.
Revenue for privately held businesses was up 8.1 percent across all industries on average year-to-date through May, according to Sageworks Inc, which tracks metrics for small companies. In 2011, sales for these businesses rose 8.3 percent. Net profit margins through May were 7.2 percent higher compared with a full-year 2011 increase of 5.8 percent.
“Private businesses have returned to and exceeded pre-recessionary levels of profitability,” said Robb Granado, a Sageworks analyst, pointing in part to operational efficiencies honed during the recession.
Even so, there are headwinds facing small business sales, including owners with unrealistic valuations as well as higher levels of due diligence on the part of skittish buyers who do not want to bet on unreliable performers in the unpredictable economy.
“Nine out of ten times the seller is being unrealistic,” said Craig Phinn, an Atlanta-based small business strategist and broker. “That, I would say, is one of the primary challenges.”
Brokers say many sellers wind up providing their own financing for buyers in order to seal the deal.
“I am financing quite a bit of it,” said Melissa Townsend, a 60-year-old entrepreneur who sold her Reno, Nevada-based coffeehouse in late February for about $125,000 – roughly $10,000 less than her asking price. “Credit is really tight,” she said.
Despite such hassles, 2012 stands as the year to seize any opportunity to sell for business owners.
Angleton, the Miami businessman, said: “It’s very expensive to operate a company in the United States. It’s very difficult to have a future pro forma for your company.”
(Editing by Chelsea Emery and Matthew Lewis)
Source: Reuters
Capital Gains Tax and how it affects buying or selling a business
The capital gains tax rate is set to increase to 20% starting January 1st2013. Many business owners who have contemplated selling their business may be thinking about moving the process along a bit quicker in the months to come. If you are one of these business owners, however, it is vital to ensure you have thought about an appropriate exit strategy. Be sure to consult your tax advisor for expert advice.
Key note to consider-
Could underselling your business prior to 2013 be a bigger financial risk than paying capital gains tax?
Bizfilings.com – The end of 2012 may mark the end of many special opportunities to save on your tax liability. If Congress doesn’t act, the following changes will hit hard if you buy or sell assets after the 2013 New Year Countdown ball touches down:
- Buying capital assets:
- Bonus depreciation (currently 50 percent) will vanish entirely
- Expensing election maximum allowance will drop from $139,000 to $25,000
- Selling capital assets:
- Capital gains tax will increase to 20 percent for most non-corporate taxpayers
- A new 3.8 percent tax will be imposed on investment income, including most capital gains (making the effective capital gains tax 23.8 percent)
- Individual tax brackets will increase by three to five percent depending upon the bracket (e.g., the current 33 percent bracket will increase to 36 percent)
There is no need for panic, but there is a need for careful consideration of what your plans are to acquire or dispose of major assets within the next twelve months. Remember, however, the tax-tail should never wag the business-dog. Your primary consideration must always be: “What makes sound business sense?”
When evaluating your plans for the coming year, consider:
- Are you planning to grow your business in a way that will require purchasing additional capital assets? Would it help to be able to deduct more than one-half of the cost of that asset from your tax return? If so, then you need to put plans in motion to acquire the asset and place it in service before the end of the year.
- Are you considering selling any capital assets? For example, will you be liquidating any stocks and bonds to get access to cash or do you plan on disposing of any business property. If so, you will want to work with an accountant or other tax professional to ensure that you receive the income by December 31.
- Do you have significant appreciation in stocks and bonds? Should you consider “harvesting” by selling them in 2012 (when the capital gains rates are lower) and repurchasing the same (or similar) stock. Discuss this strategy with a qualified financial advisor to fully understand the trade-offs involved: The length of time you plan to hold the stock after the second purchase is critical in deciding if harvesting gains make sense.
By assessing your personal and business plans for the next year well before year’s end, you have time to make shrewd, tax-advantaged decisions that can help lower your taxes and grow your wealth
BizFilings Business Owner’s Toolkit’s small business total know-how is based on the publishing assets of CT Corporation and CCH, Incorporated, both Wolters Kluwer businesses. Since 1913, America’s lawyers, accountants, business consultants and regulatory advisers have relied upon the research libraries and software solutions of the country’s #1 legal, tax and business publisher to run their professional practices. Now, Toolkit has taken these powerful resources and produced a web site of useful advice and tools geared specifically to the small business owner.
Today’s Business Buyer
For a business to sell, there has to be a seller – and a buyer. The buyer of today is a bit different than the one of yesterday. Today’s buyer is not a risk-taker, is concerned about the financials, and seems to be overly concerned about price. Unfortunately, buyers have to understand that they cannot buy someone else’s financial statements. The statements might be a good indication of what a new buyer can do with the business, but everyone does things differently. It is these differences that ultimately determine how the business will do. The price may not be the right question for the buyer to ask. What is usually the most important question is how much cash is required to buy it.
Today’s buyer is finicky, due certainly in part to the fact that, he or she is not a risk taker. Quite a few buyers enter the business buying process and, at the last minute, cannot make the leap of faith that is necessary to conclude the sale. The primary reason that buyers actually buy is not for the reason one might think. Money or income is about third, maybe even fourth on the list.
Buyers buy because they are tired of working for someone else. They want to control their own lives. In some cases, they have lost their job, or are being transferred to a place that they don’t want to move to, or are very unhappy in their job. Surveys indicate that about half of the people in the county are unhappy in their jobs. People buy a business to change their lifestyle. A recent newspaper article quoted a very successful business woman, who left her job and bought a book store because she was “looking for a change, a way to be more rooted and be at home more.”
The make-up of a typical buyer
The typical small business buyer usually has many of the following traits:
- 90 percent are first-time buyers. In other words, they have never been in business before.
- Almost all of them are looking to replace a job. Business brokers primarily sell income substitution.
- Most buyers will have about $50,000 to $100,000 in liquid funds to use as a down payment.
- Most buyers are looking at businesses priced at about $100,000 to $250,000.
- Most buyers will not have sufficient funds to pay cash for a business.
Obviously, many other types of people go through the process of looking for a business. However, those buyers who will eventually purchase a business have most of the characteristics outlined above. Going a step further, the serious prospective buyer usually possesses the attributes described below:
Who is a serious buyer?
- Has the necessary funds and they are readily available
- Can make their own decisions
- Is flexible in the type and location of a business he or she will consider
- Has a realistic and sincere need to buy
- Has a reasonably urgent (within three to four months) need to buy a business
- Is cooperative and willing to listen
Sellers should take a second look at those who express interest in their business. If the prospect has very few of the above traits, perhaps the seller should move on to the next potential buyer. On the other hand, if you are a buyer, or think you are, take a second look at the traits of the serious buyer. If you don’t have many of them, you may not be as serious as you think. You might want to rethink the reasons for owning a business and be sure that this is the right decision for you.