What Do You Need to Do to Get Your Business Ready to Sell?
In his recent article in Smart Business entitled, “How to get your business, and yourself, ready for sale,” author Adam Burroughs explores the key points of getting your business ready to sell. Burroughs points to the truism that, at some point, almost every business owner must sell his or her business. For this reason, it is critical to think about what it takes to get your business ready to sell. Simply stated, it is best to explore and plan for selling your business long before you actually need to place your business on the market. Let’s explore some key points for selling your business.
Broadening Your Options
Burroughs interviews Scott McRill at Clark Schaefer Hackett. McRill notes, “The sooner you think about your exit, the more options you’ll have for yourself and the business when the time comes.” A savvy business owner will always want to give himself or herself as many options as possible. McRill wisely points out that early planning is key, and a failure to engage in early planning could lead to a lower selling price. If you want to get the best price for your business, then planning for the eventual sale as far in advance as possible is a good move.
Planning in Advance
According to Burroughs, business owners should start planning to sell their business at least 2 to 3 years before they actually plan to sell. Part of the reason for this is so that business owners will have enough time to make operational improvements designed to maximize the business’s overall value.
A Financial Review
At the top of every business owners “preparing to sell” list is to have a third-party review the business’s financial situation. This is excellent advice for, as frequent readers of this blog know, any serious prospective buyer will look long and hard at your business’s financials. Getting your business’s financial house in order means that you should turn to an accounting firm for help. You’ll want to review financial statements for at least the previous 2 to 3 years.
Burroughs points out that when it comes to selling a business, there are many variables that business owners often overlook. At the top of the list is the management team.
Your Management Team
Prospective buyers can get very nervous about the stability of the management team once ownership has changed hands. Often, the new buyer may only sign on the dotted line if the owner agrees to stay on after the sale during a transition period. Having a competent and proven team in place, one that is dedicated to staying with the company will help you get your business ready to sell.
There are a lot of variables involved in preparing to sell a business. The sooner that you get experts involved in the process, the better off you will be. A business broker can serve as a guide – one that can point you in the right direction. Find a broker with an abundance of experience, and you’ll have an invaluable ally who can help you navigate the process. It can take a lot of time and effort to sell a business. Working with a business broker can keep you from reinventing the wheel at every step of the process.
Selling Your Business, Taxes & Tax Structures
It is never too early to start thinking about what tax structure you should use when it comes time to sell your business. A simple, but undeniable, rule of life is that taxes matter and they can’t be overlooked. Author Tim Fries at The Tokenist has written an excellent and quite detailed overview article on what tax issues business owners need to consider before selling their business. His article, “What Tax Structure Should You Use When Selling Your Business?” explores many aspects of a topic that many business owners fail to invest enough time in, namely taxes.
As Fries astutely points out, the taxes involving the sale of a business can be complex and are usually unknown to those selling a business for the first time. Your tax structure can influence how much money you receive at the closing of your deal, so it’s a very good idea to pay attention to all aspects of taxation and your business. It is key to remember, “When you are selling your business – as far as taxes are concerned – you’re ultimately selling a collection of assets.”
Fries points out that taxes and selling a business are no small matter. It is possible that up to 50% of the sale of a business can go to taxes. Don’t worry if you are learning this for the first time and feel more than a little shocked. However, this fact does a good job of illuminating the importance of setting up the right tax structure for your business. While you might not be able to get around taxes altogether by investing the time and effort to set up the right structure for your business, you can keep from paying more taxes than is necessary.
There are a lot of variables that go into how much you will ultimately have to pay in taxes. Let’s take a look at some of the key questions Fries raises in his article.
- Is your sale considered ordinary income or is the sale considered capital gains?
- Are you operating as an LLC, a sole proprietorship, a partnership or are you operating as a corporation?
- What portion of the sale price goes to tangible assets as compared to intangible assets?
- Is there a difference between your tax basis and the proceeds from your sale?
- What does your depreciation look like?
- Don’t expect that the buyer will instantly agree to your terms.
- Realize that the decisions you make during negotiations with a buyer will have tax implications.
- Is an installment sale right for your business?
- With C corporations, sellers usually want a stock sale whereas buyers generally prefer an asset sale.
- Cashing out immediately, where you receive all your funds at once, will increase your tax liability.
- Have you considered switching to an S corporation?
- Have you consulted with experts to decide which tax structure is best for you?
- Have you consulted with a business broker?
Selling a business is obviously complicated. Finding a seasoned business broker can help you demystify many aspects of buying and selling a business. Ultimately, having the best deal structure and finding the right buyer can be a labyrinthian process. Having the very best professional help in your corner is simply a must.
Understanding Corporate Social Responsibility (CSR)
If you don’t exactly understand what corporate social responsibility (CSR) means, don’t worry. We’ll cover the main points you need to know. CSR is increasingly seen as something that companies of all sizes need to be aware of, so let’s take a closer look at a few of the finer points.
There are 4 basic pillars in CSR: the community, the environment, the marketplace and the workplace. The community pillar of CSR refers to your company’s contribution to the local community; this contribution can take a variety of forms ranging from financial support to personal involvement.
The second pillar of CSR is the environment. The simple fact is that people around the world are becoming much more environmentally aware. You can be quite certain that a percentage of your customers and/or clients have environmental concerns.
Increasingly, consumers want to know that the companies that they are purchasing from have good environmental practices. There are many ways that businesses can show that they are environmentally aware. They range from recycling and using low-emission and high-mileage vehicles whenever possible to adopting packaging and containers that are environmentally friendly.
The third pillar of CSR is the marketplace. Proper corporate social responsibility includes the responsible utilization of advertising, public relations, and ethical business conduct. Another key element in the marketplace pillar is adopting fair treatment policies towards suppliers and vendors, contractors and shareholders. In other words, the marketplace aspect of CSR means rejecting exploitative business practices in favor of fairer and more equitable business practices.
The final pillar of CSR concerns the workplace. In the workplace pillar, CSR encourages the implementation of fair and equitable treatment of employees, as well as observing workplace safety protocols and embracing equal opportunity employment and labor standards.
Adopting CSR practices in today’s business climate is a prudent decision, as it serves to increase both shareholder and investor interest, while simultaneously encouraging a company’s value. Likewise, embracing CSR practices can make it easier to attract a buyer and that party may be willing to pay a higher selling price.
Typically, buyers want a business that has many of the attributes supported by the four pillars of CSR. Buyers want businesses that enjoy a high level of customer loyalty and have good overall relations with the local community. Additionally, buyers want businesses that have quality relationships with their suppliers and vendors as well as loyal and dependable employees.
Sellers must realize that buyers want products, goods and services that are in line with the current trends of the marketplace and have an eye towards future trends. Finally, buyers want as little “baggage” as possible. You can be certain that buyers don’t want to find any skeletons lurking about in the company closet. The proper utilization of CSR can address all of these concerns and, in the process, make your business more attractive to a potential buyer.
Understanding M&A Purchasing Agreements
M&A purchasing agreements can have a lot of moving parts. A recent article from Meghan Daniels entitled, “The Makings of the M&A Purchase Agreement” serves to outline a range of facts including that every M&A deal is different. The article, which serves as a general overview, raises a range of good points.
Components of the Deal
It should come as no surprise that M&A purchase agreements have various components. Everything from definitions and executive provisions to representatives, warranties and schedules, indemnifications and interim and post-closing covenants are all covered in these purchase agreements. Other key factors included in M&A purchase agreements are closing conditions and break-up fees.
Advice for Sellers
In her article, Daniels includes a range of tips for sellers. She correctly points out that negotiating a purchase agreement (as well as the different stages involved in finalizing that agreement) can be both time consuming and stressful.
As any good business broker will tell you, business owners have to be careful not to let their businesses suffer while they are going through the complex process of selling. Selling a business is hard work, and this fact underscores the importance of working with a proven broker.
Likewise, Daniels observes that any serious buyer is likely to look quite closely at your business’s financials, which is yet another reason to work with key professionals during the process. Additionally, you don’t want to wait until the last moment to get your “financial house in order.”
You can be completely certain that prospective buyers will want to examine your finances closely before making an offer. The sooner you begin working on getting your finances together, the better off you’ll be.
Use Trusted Pros
Another key point Daniels makes is that there will be tension, as every party is looking to protect their own best interests. Having an experienced negotiator in your corner is a must. Make sure your negotiator has bought and sold businesses in the past, and he or she will understand what pitfalls and potential problems may be lurking on the horizon. Daniel’s view is that the sale price isn’t the only variable of importance. Factors such as the terms of the deal must be taken into consideration.
The bottom line is that there are many reasons to work with a business broker. A business broker understands the diverse complexities of an M&A purchase agreement. They also have experience helping business owners organize their financial information and can prove invaluable during negotiations. For most business owners, selling their business is the single most important business decision they will ever make. Find someone who understands the process and can act as a guide through the process.
Copyright: Business Brokerage Press, Inc.
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Key Mistakes that Could Impact Your Sale
The old saying, “an ounce of prevention is worth a pound of cure,” most definitely applies to any business owner that believes he or she will someday want to sell his or her business. The bottom line is that every business owner has to transition out of ownership at some point. In a recent Inc. article, “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Salability,” author Bob House explores 4 mistakes that could spell trouble for business owners looking to sell.
No doubt House explores some excellent points in his article, such as that you should always have what he calls, “a selling mindset.” The reason this mindset is potentially invaluable for a business owner is that when operating in this way, sellers are essentially forced to stay on their toes.
Or as House writes, “a selling mindset encourages continual innovation, growth, and investment, helping your business stay ahead of the competition and at the top of its potential.” Having a “selling mindset” means that business owners have no choice but to perform periodic reality checks and access the strengths and weaknesses of their businesses.
Mistake #1 Poor Record Keeping
For House, poor record-keeping tops the list of big mistakes that business owners need to address. As House points out, both potential buyers and brokers will want to examine your books for the last few years. The odds are excellent that before anyone buys your business, they will look very closely at every aspect of your financials, ranging from your sales history to your operating costs.
Mistake #2 Failure to Innovate
The next potential mistake that business owners need to avoid is a failure to innovate. House notes that a lack of tech-savviness could make your business less attractive to prospective buyers. The simple fact is that virtually every business is now impacted in some way by its online presence, whether it is the quality of that presence or lack of it altogether.
For House, a failure to maintain an active online presence could be associated with a failure to innovate. Even if your company is innovative, if you do not maintain a coherent and robust online presence, this could portray your company in a negative light.
Mistake #3 Unstable Workforce
House also feels that having an unstable workforce could spell trouble for your business’s value and negatively impact its salability. Most prospective buyers will not be very eager to buy a business that they know has a lot of employee turnover. In general, new business owners crave stability. Attracting and keeping great employees could make all the difference when it comes time to sell your business.
Mistake #4 Delayed Investments
The final factor that House notes as a potential issue for those looking to sell their business is delaying investments and improvements. House states that it is important for owners to continue to invest even if they know they are going to sell. Investing in your business can help it expand, grow and showcase its potential future growth.
Another excellent way to prevent making mistakes that could interfere with your ability to sell your business is to begin working with a business broker. A top-notch broker knows what mistakes you should avoid. This experience will not only save you countless headaches but also help you preserve the value of your business.
Copyright: Business Brokerage Press, Inc.
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Exploring the Offering Memorandum
Are you a business owner who is interested in selling? If so, there are some strategies you should undoubtedly use. At the top of the list is the all-important offering memorandum. The offering memorandum, often referred to as a selling memorandum, is a straightforward but highly effective way to help you obtain the highest possible selling price.
Shaping the Executive Summary
The offering memorandum must be factual. However, at the same time, this memorandum allows for a bit of business promotion and selling, which can be included in the executive summary portion of the document. After all, potential buyers will want to know more about your business and why buying it would be a savvy decision.
In short, the executive summary section of the offering memorandum goes over the highlights of your company. It should include an outline of several key factors. Everything from an outline of the ownership and management structure, description of the business and financial highlights to a general review of your company’s products and/or services should all be covered. Additional points to include would be variables, such as information about your market, and the reason that the business is for sale.
Your executive summary, simply stated, is extremely important. A coherent and compelling executive summary will motivate prospective buyers to learn more. In short, you want the executive summary of your offering memorandum to shine. It should capture the attention and the imagination of anyone that reads it.
Other Essential Elements to Include
Some elements are absolutely a must to have in your offering memorandum. An overview of your company and its history as well as its markets and products are all good places to begin your offering memorandum. Other key elements ranging from distribution, customers or clients and the competition should also be included.
Factors such as management, financials and growth strategies should not be overlooked, as many prospective investors may flip to those sections first. Finally, be sure to include any competitive advantages you may have as well as a well-written conclusion and exhibits. The more polished and professional your offering memorandum, the better off you’ll be.
An easy way to improve the overall quality of your offering memorandum is to work with a seasoned business broker. A professional business broker knows what information should be included in your offering memorandum. He or she will also know what not to include. Remember that your offering memorandum may be the first point of contact between you and many prospective buyers. You’ll only get one chance to make a first impression.
Copyright: Business Brokerage Press, Inc.
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Effectively Utilizing Confidentiality Agreements
Every year countless great deals, deals that would have otherwise gone through, are undone due to a failure to properly utilize and follow confidentiality agreements. A failure to adhere to this essential contract can lead to a myriad of problems. These issues range from employees discovering that a business is going to be sold and quitting to key customers learning of the potential sale and taking their business elsewhere. Needless to say, issues such as these can stand in the way of a sale successfully going through. Maintaining confidentiality throughout the sales process is of paramount importance.
Utilizing a confidentiality agreement, often referred to as a non-disclosure agreement, is a common practice and one that you should fully embrace. There are many and diverse benefits to working with a business broker; one of those benefits is that business brokers know how to properly use confidentiality agreements and what should be contained within them.
By using a confidentiality agreement, the seller gains protection from a prospective buyer disclosing confidential information during the sales process. Originally, confidentiality agreements were utilized to prevent prospective buyers from letting the world at large know that a business was for sale.
Today, these contracts have evolved and now cover an array of potential seller concerns. A good confidentiality agreement will help to ensure that a prospective buyer doesn’t disclose proprietary information, trade secrets or key information learned about the business during the sales process.
Creating a solid confidentiality agreement is serious business and should not be rushed into. They should include, first and foremost, what areas are to be covered by the agreement, or in other words what is, and is not confidential. Additional areas of concern, such as how confidential information will be shared and marked, the remedy for breaches of confidentiality and the terms of the agreement, for example, how long the agreement is to remain enforced, should also be addressed.
A key area that should not be overlooked when creating a confidentiality agreement is that the prospective buyer will not hire any key people away from the selling company. Every business and every situation is different. As a result, confidentiality agreements must be tailored to each business and each situation.
When it comes to selling a business, few factors are as critical as establishing and maintaining confidentiality. The last thing any business wants is for its confidential information to land in the hands of a key competitor. Business brokers understand the value of maintaining confidentiality and know what steps to take to ensure that it is maintained throughout the sales process.
The Hidden Benefits of Planning Your Succession Strategy
Succession planning is something that many business owners fail to think about; however, it turns out there are benefits to succession planning that might not be immediately obvious upon first glance. In this article, we’ll explore a recent Accountancy Daily article, “Succession Planning for Business Owners,” which details the wisdom and benefits of succession planning.
Accountancy Daily polled 500 SME owners and uncovered a variety of interesting facts. At the top of the list is that one-third of owners felt more confident about the future of their businesses when they had a coherent succession strategy.
In what can only be deemed a surprising finding, the poll discovered that 17% of respondents noted that succession planning actually brought them closer to their families. In short, the Accountancy Daily poll found that succession planning came with a variety of unexpected benefits. In other words, it is about more than preparing to hand one’s business over to a new party.
Author Glen Foster makes the point that business owners frequently underestimate the level of effort and time needed to sell a business. The fact is that selling a business is usually a layered process that can even take years to complete. Importantly, business owners must understand that in the time it takes to sell, the market may have changed or their own financial or personal situations may have changed as well. Additionally, selling can be an emotional and stressful process which further complicates the entire matter.
For most business owners, selling a business represents the single greatest financial move of their lives. As such, it is often accompanied with significant stress and anxiety. It is essential not to underestimate the emotional and psychological side of the sales equation. Properly planning years in advance for the sale of a business will help business owners prepare for the emotional and psychological stress that can result from both the sales process and the eventual sale itself.
A key part of the stress of selling a business is that business owners are often left wondering “what comes next?” after selling. Developing a succession strategy is a way to think through such issues well in advance.
Another key aspect of succession planning is to take the steps necessary to make sure that your business is ready to be sold. As Foster points out, you wouldn’t put a home on the market with significant problems, and the same holds true for your business. If you want to receive the optimal price for your business, then your business should be in tip-top shape. This means diving into your books and records and getting everything in order. Working with an accountant or an experienced business broker can be invaluable in this process.
Copyright: Business Brokerage Press, Inc.
Business Owners Can’t Always Sell When They Wish
A recent article in Forbes called , “Study Shows Why Many Business Owners Can’t Sell When They Want To” written by Mary Ellen Biery, provides some thought-provoking ideas. The article takes a look at an Exit Planning Institute (EPI) study that outlined shows that many business owners are not able to control when they can sell their businesses. Most business owners believe they can sell whenever they like, but the reality is that selling is often easier said than done.
In the article, Christopher Snider, the President & CEO of the Exit Planning Institute, noted that a large percentage of business owners have no exit plan in place. This fact is made all the more striking when you note that most owners have up to 90% of their personal assets tied up in their businesses. EPI’s study indicates that most business owners are interested in selling within the next 10 to 15 years, but most are unprepared to do so. According to the EPI only 20% to 30% of businesses that go on the market will actually sell. The reason for this is that most businesses have not been groomed and prepared for sale.
As of 2016, Baby Boomer business owners, who were expected to begin selling in record numbers, are waiting to sell. As stated in the Fortune article, “Baby Boomers don’t really want to leave their businesses, and they’re not going to move the business until they have to, which is probably when they are in their early 70s.”
The EPI survey of 200+ San Diego business owners found that 53% had paid little or no attention to developing an exit plan, 88% had no written transition plan in the event they were “hit by a bus”, and a whopping 80% had never consulted their lawyer, CPA or financial advisor about how and when to exit their business. Further, only 58% of surveyed business owners had done any type of formal estate planning.
The biggest concern according to the studey is that most surveyed business owners don’t know the value of their business. Viewed another way, most business owners don’t have a clear idea of how much their business is worth and if it will be adequate to fund their needs during retirement.
The survey suggests that many business owners are not “maximizing the transferable value of their business,” and are not “in a position to successfully sell their businesses so they can harvest the wealth locked in their business.”
All business owners should be thinking about the day when they will have to sell their business. Now is the time to begin working with a broker to formulate your strategy so as to maximize your business’s value.
In the interest of full disclosure, Richard Jackim, the managing partner at Sports Club Advisors, Inc. is the founder of the Exit Planning Institute and created the Certified Exit Planning Advisor (CEPA) program and designation. He sold EPI to Chris Snider in 2012.
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The 3 Pillars of Value for a Fitness Club or Business
How do you maximize the value of your fitness club or business? What’s the difference between a club worth $150,000 and $1,500,000? Health, fitness and sports clubs and related fitness businesses typically sell for between 3 times and 6 times their cash flow. That’s a big range, but where you fall in that range is up to you.
In order to maximize the value of your club or business, remember that there are three basic categories of factors affect the value of a fitness club or business: return on investment, risk profile, and growth prospects.
Return on Investment
Buyers look to the cash flow of your business or your Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to see what kind of pay back they will get on their investment. As a result, if a buyer offers you 4 times EBITDA for your club, they are basically saying that it will take them 4 years before they will recouped the purchase price and begin seeing a return on that investment. As a result, doing whatever you can to improve your cash flow or profitability will have a multiplier effect when you sell your club or business.
Risk Profile
The risk profile of your club club or business is largely subjective and based on the buyer’s impressions. Their impression of risk directly affects how long they are willing to wait before they see a return on their investment. So, if your club has a higher than average risk profile, buyers may only be willing to pay you 3 times EBITDA, because they are concerned about the long-term prospects of your business.
Here is a list of some of the factors that buyers look at to determine the risk of a particular business:
- Are the long-term and short-term trends in revenues and earnings positive or negative?
- Is total membership stable?
- Are financial statements complete and accurate ?
- Is operating data presented in a clear and concise way?
- Does the business have an experienced management team willing to stay on after the sale?
- Are margins at least equal to industry averages?
Growth Prospects
Buyers are basically buying the future performance of your fitness club or business. As a result, to maximize their return on investment they want it to be bigger and more valuable when they decide to sell it years in the future. As a result, buyers will try to project how they could grow your business once they own it. Help them see the growth possibilities by understanding the following:
- What are the prospects for increasing overall membership?
- How successful would we be in introducing new programs?
- What other sources of revenue could this club or business generate?
- Could we grow by acquiring other clubs in the area?
- How much would it cost to expand or enhance the club’s current facilities?
Small changes you make today can have a huge impact when you decide to sell. Contact Us if you would like to learn more about how you can maximize the value of your sports club or business.
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