07 Oct Why Your Company Needs a Physical

Many executives of both public and private firms get a physical check-up once a year. Many of these same executives think nothing of having their investments checked over at least once a year – probably more often. Yet, these same prudent executives never consider giving their company an annual physical, unless they are required to by company rules, ESOP regulations or some other necessary reason.

This entry passed through the Full-Text RSS service - if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

The answer to the question asked in the title is, “It all depends!” There are all sorts of studies, surveys and the like suggesting that as more and more “baby-boomers” reach retirement age, the market will be flooded with companies for sale. The consensus is that with these privately-held company owners reaching and nearing retirement age, the time to sell is now. In one survey, 57 percent of business owners said that their age was the motivating factor for exiting their business. In another one, 75 percent of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years. Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market.

While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell your business now – and some reasons that may compel you to hold off. One good reason for any owner to sell “now” is that it just may be time to “smell the roses,” as they say. After running the business for so many years, “burn-out” is a very valid reason for selling. Many business owners may have, without actually realizing it, let their business slide a bit. You lose a customer or client here and there and don’t make the effort to replace them. Or, you don’t make the effort to check back with the supplier who has promised to give you a better price on an important product or service. It’s too easy to stick with the one you have been dealing with for years, even though you know the price is probably too high.

On the flip side, it is also easy to convince yourself that business is down a bit this year, maybe due to the current economy or recent legislation, likely reducing the value of the company. Maybe waiting until things pick up a bit and values increase would be a good idea. Thirty-five percent of business owners, in one survey, said they were going to hold off selling because they felt their business would continue to grow and therefore, hopefully, also increase in value. Unfortunately, no one can predict the future. New competitors may enter your market. Foreign competition may move in. You may not have the energy or that “fire-in-the-belly” you once had, so the business may slide even further.

You could also point your finger to the tightening of credit and ask, “How is a buyer going to finance the business?” Despite very low interest rates, borrowing money is now more difficult.

There is an old saying that the time to plan your exit strategy is the day you start running the business.  Business owners can’t outgrow interest rates, legislative changes or aging. The time to sell is when you are ready to sell. The mere fact that you have read this far may be a sign that now is the time to sell. To learn more about current market trends, what your business might sell for, and what your next step might be, call a professional intermediary.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: slideshowmom via morgueFile

This entry passed through the Full-Text RSS service - if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

08 Jul What Serious Buyers Look For

Obviously, serious buyers want to carefully look at the financials of a company under consideration and all of the other major aspects of the company. However, there are a few other areas that the serious buyer will investigate that sellers may overlook.

The Industry – The buyer will want to take a serious look at the industry itself, the customers, the suppliers, the competition, etc. This investigation will cover the strengths, weaknesses, threats from competition, and opportunities of the potential acquisition. With the growth of the “big box” retailers, much power has shifted from the manufacturer to the retailer. A manufacturer may want to increase prices, but if Wal-Mart says no, it’s a very powerful no.

Discretionary Costs – Some sellers will reduce their expenses in discretionary areas such as advertising, public relations, research and development, thus making for a higher bottom line. However, these cuts will hurt the future bottom line, and smart buyers will take notice of this.

Obsolete Inventory – This is another area that buyers take a serious look at and that can impact the purchase price. No one wants to pay for inventory that is unusable, antiquated or unsalable.

Wages and Salaries – A company may be paying minimum wages, or offering few or low-cost benefits, a limited retirement program, etc. These cost-saving devices will make the bottom line look good, but employee turnover may create expensive problems later on. If the target company is to be absorbed by another, compensation issues could be critical.

Capital Expenditures – The serious buyer will take a very close look at machinery and equipment to make sure they are up to date and on a par with, or superior to, that of the competition. Replacing outdated equipment can modify projections and may affect an offering price.

Cash Flow – Serious buyers will take a long look at the cash flow statements and the areas that affect them. The buyer wants to know that the business will continue to generate positive cash flow after the acquisition (i.e.: after servicing the debt and after paying a reasonable salary to the owner or general manager).

Other areas that sellers overlook, but that the serious buyer does not are: internal controls/systems, financial agreements with lenders, governmental controls, anti-trust issues, legal matters and environmental concerns.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: doctor_bob via morgueFile

This entry passed through the Full-Text RSS service - if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

24 Jun How Does Your Business Compare?

When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look?

The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition.

As part of your overall exit strategy, what can you do to improve your company? Speak with a Certified Business Broker to learn more. 

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: kconnors via morgueFile

This entry passed through the Full-Text RSS service - if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look?

The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition.
As part of your overall exit strategy, what can you do to improve your company?

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: kconnors via morgueFile

Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.

Here are some issues that must be considered when arriving at a value for the business:

Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.

Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.

Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.

Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.

ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.

Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.

Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: DuBoix via morgueFile

Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.

Here are some issues that must be considered when arriving at a value for the business:

Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.

Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.

Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.

Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.

ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.

Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.

Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: DuBoix via morgueFile

22 Apr Build It to Sell: Staging Your Business to Attain Maximum Value and Price®

How many times have you been somewhere, maybe with your wife, and there, just twenty feet away, is the 80-year old owner of a big business located in your area; someone to whom you have been sending targeted client prospecting letters for the past eight years. Since you are a “real” business broker, you are always ready to strike up a conversation and pitch yourself.  So, you introduce yourself and he says “Yeah, I know who you are; I get your letters all the time.” So you say “Are you thinking of selling?” He says “Not yet.”  You want to say “Well when would you be ready?” But it would be too soon to say that, and put him “on the spot,” in the setting you’re in.  Well that has happened to me over and over during the last 15 years; and I got sick of it.  Obviously he is going to sell; it’s just a matter of time. But how am I going to be there just at the right time, when he is ready to sell? The answer is that you need to find a way to get in front of that business owner, stay in front of him, and become so trusted that it is foregone conclusion that you will get the listing.  But how?

Three years ago I figured out a good way to accomplish this. It is pretty easy to convince a business owner that they seldom sell their business too soon, but they often wait too long.  As Darrel Arne, a great mentor or mine, says “They don’t want to wait until they are in the “Dismal D’s: Declining Sales, Divorce, Declining Health, Death, and Dissolution.”  Because, then it will be too late to optimize the owner’s after-tax proceeds from the sale. Once you have their ear, you tell them that “It takes a while to buff the business up, so the business is ready to sell; why not start now?”

I developed a 5-step program called “Build It to Sell:  Staging Your Business to Attain Maximum Value and Price®.” Attached is the tri-fold brochure, which outlines these steps. This isn’t for every business broker, but I can tell you that, with a little heavy lifting, I have been able to generate numerous very large listings and fees. The idea is to have several businesses in this program all the time and keep your pipeline full.  Additionally, because you become intimately familiar with the business owner and his business, and you have prepped it properly, it is much easier get the listing and to sell the business for a top price.

The first step in this program is a very detailed assessment of the business owner and his business. My 8-page assessment list is constantly evolving, as I hear of, or think of, additional items that might be good to discuss.

I start with the business owner.  Specifically, as each one of you do, I ask why he is thinking of selling and what he plans to do once he sells his business. Let’s say he plans to retire or he needs the money to invest in another business venture. The next thing I ask is “How much does your after-tax proceeds from the sale need to be to attain that goal?”  If he says, “I don’t know.”  I ask him “Do you have a financial advisor?”  If he says “No,” I say “We need more team on our team. Here’s list of the three best financial advisors in town. Please interview them and get one onboard.”

Once he has a net dollar figure, after taxes and after our brokerage fee, I complete a reverse valuation; that is, I compute how much his business’s SDE and annual gross sales need to be to attain his target price in today’s market. Let’s say that is 12% more than he has ever attained; he is likely to say “Hey, if I could do that kind of gross and cash flow, don’t you think I would?” That’s when you step in and say “The easiest way to achieve that SDE is to increase sales and decrease costs and expenses, simultaneously.  That’s what you and I are going to accomplish (with my Build It to Sell:  Staging Your Business to Achieve Maximum Value and Price® program).

Some businesses can be buffed up quickly; some can’t.  For example, if the owner is an integral part of the business, and he is leaving the business after a period of orderly-turnover, then a large amount of time will need to be spent recruiting and training a management team and documenting all the standard operating procedures use in the business (i.e. to get all of the procedures and company secrets out of the business owner’s head and into documentation the new owner can use after the owner is gone).  Not all tasks require equal time, capital, and human resources.  For example, one line item is to ensure that all the corporate records are current. What’s that take to complete? One Day, maybe?

The purpose of this article is not to review the 8-page assessment list.  However, for each line item on the list, here’s what we do:

1. The business owner and I decide if the task has already been completed. If so, it is off the list.
2. If not, we determine the “priority” of the item? I break these into 1^st, 2^nd, and 3^rd  Obviously, we try to accomplish the 1^st priority items before the others.
3. We decide if the task is coincidental or sequential; that is, do we need to complete one item before another, or can both be accomplished at the same time.
4. Then we decide if the task can be accomplished “in-house,” or be better delegated to an “outside consultant.” For example, should we use an expert to write all the operating and policy manuals the company needs, or assign that to someone inside the business? Or, if we determine that we need to expand the sales department, should we use an outside professional to recruit additional salesmen?
5. The final task is to estimate a timeline and capital budget for each of the items on the list.

The balance of the 5 steps is the implementation of the process to maximize the results and attractiveness of the business. When the goals have been achieved, then it is “show time;” that is, we are ready to roll it out to the market.  The business broker remains the quarterback of this process from inception to completion.  Other than the reverse valuation (to set the financial goal), I do not get involved in actually completing any of the tasks.  I delegate them to “outside consultants” or “in-house” personnel.  Periodically, I touch base with everyone, I prepare a status report for the business owner, and meet with him to discuss anything that might need to be tweaked.

I know, I know, this is “business coaching,” not business brokerage. Yes, but a very specialized and focused coaching.  The result is:

• A business that is easy to sell,
• an owner who is more than “on board” with you, and
• a high probability of a great brokerage fee.

I estimate that I have generated well over $800,000 in fees from this program, to date.

Because Nevada is a “licensed” state, we are not permitted to engage the business owner in a listing agreement without a specific expiration date, and we are required to have the price and terms stated in the listing agreement.  So, I do not use a “listing agreement” to engage the business owner. I do this program for “free!”  Well, not exactly… the business owner pays me nothing up front. I enter into a five-year consulting agreement with the business owner; the fee is $50,000. One of three things happen to the fee:

1. If the owner decides not to put the business on the market within the 5 years, then the fee goes away, and “chalk it up” to an investment of my time that didn’t work out.
2. If he lists with another broker (which would be crazy, because, by that time, I know everything about the business), then he owes me the $50,000 fee.
3. If he lists with me, then the $50,000 is credited toward the success fee (brokerage commission).

Is this “business coaching”? I believe that it is a client incubation program; a very intense form of seller prospecting. I do not advertise this program on the web. I offer it, selectively, to business owners with whom I would like to work and who have businesses I believe I could sell.  Generally these are businesses which will sell for $3 million, or more.

This entry passed through the Full-Text RSS service - if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

He started small, and is now finishing big. Business journalist and Inc. magazine Editor-at-Large, Bo Burlingham, first tackled the problem of business owners handling the pressure of trying to grow in Small Giants. His new book, Finish Big: How Great Entrepreneurs Exit their Companies on Top, addresses how and when business owners should start preparing for their exit.

The tale of business sales is not always one with a happy ending. A U.S. Chamber of Commerce study found that only 20 percent of companies put up for sale are actually sold. Armed with more than 75 interviews of current and former business owners across various industries, Burlingham has written a book that could serve as a guide, for entrepreneurs, to achieving a happy final chapter.

Burlingham took the time to answer some questions for BusinessesForSale.com about his new book and how to exit a business well:

Q: Selling a business is a very emotional process. In your interviews with entrepreneurs, what was the best advice you came across for business owners who may have unrealistic expectations?

A: You’re right. It’s very difficult for owners to be objective about the value of their businesses, particularly companies that they’ve built from scratch. Their pride and their personal attachments to the people inevitably get in the way. As a result, most owners tend to think their businesses are worth much more than any buyer in the real world will pay, which can lead to disappointment and even tragedy when it comes time to sell.

The best advice I heard was to learn how private equity investors evaluate companies. They are the most objective buyers in the world because their livelihoods depend on making good investment decisions, and they get evaluated quarterly by their own investors who care only about one thing: maximizing their return on investment. I’m not saying you should sell to private equity fund. That’s a whole different discussion. But no matter whom you wind up selling to, you’ll get the best price—and the buyer will get the best value—if you’ve built a company that a private equity investor would pay top dollar for.

I should add that there are also tools available from many organizations—I name several in Finish Big—that can help you to evaluate your business objectively. Some of these tools you don’t even have to pay for, and they will give you great information about the areas of your business that you need to focus on if your goal is to maximize its value, which should, in fact, be your goal.

Q: The book stresses that business owners need to start preparing for their exit earlier than most people might expect. What kind of timeline do you present in the book for this type of planning and what do you recommend as the first steps for a business owner?

A: As I note in the book, there are actually four stages to the exit process: (1) exploratory; (2) strategic; (3) execution; and (4) transition. You can’t start too soon on the first stage—that is, figuring out the nature of the journey you are on (or planning to embark on) and how you would like it to end.

The second (strategic) stage begins as soon as you start building the business, whether you realize it or not. It’s about making sure your company has the qualities that will allow you to have the exit options you want when the time comes.

Starting at the third (execution) stage is extremely dangerous, although that’s what most owners do. They decide it’s time to sell and contact a broker or investment banker without having traversed stages one and two. That can lead to a lot of heartbreak.

The final stage, transition, requires the most preparation, and yet it’s also the stage that’s hardest to prepare for. How well you do in the transition stage will depend a great deal on what you’ve done in stages one through three.

As for a timeline, you should be aware that the entire process will take years, maybe even decades, if you want to have a good exit. The earlier you start thinking about your exit, the better off you’ll be. The vast majority of bad exits happen to owners who have tried to cram the process into a few months and to skip the first two stages. One person in Finish Big rushed it and exited his company in a few months—and then spent 15 years in anguish before he was able to move on.

 Q: Who did you write this book for?

A: I wrote this book for anyone who owns a business or plans to start a business. If you have a business, you absolutely need to be aware of this stuff. That said, I think the experiences I write about are relevant to anyone who is coming to grips with the challenge of “moving on.”

Q: What has been the reaction to your book?

A: The reaction from readers and reviewers has been overwhelmingly positive. I’ve also heard from lots of people who say they wish they’d had it years ago. People don’t realize that leaving a business is much harder than starting one, and the stakes are much higher. After all, if your startup fails, you can always do another one—and many entrepreneurs do just that. But if you’ve spent 10, 20, 30 years building a business and then have a terrible exit, the consequences can be truly tragic.

Q: Apparently, there aren’t a lot of resources for people looking to learn about good exit strategy out there. How did you find this gap in advisory material, and how does Finish Big fill it?

A: I stumbled across the gap. I got interested in the exit process by watching a friend go through it. When I looked to see what had been written on it, I was shocked to find so little available compared to any other aspect of business. What’s more, almost all the books and articles on exiting a business have to do with the financial aspects of the process, that is, getting the most money for the company. That’s important, but the emotional challenges are far greater and far more difficult to deal with. I went out and started interviewing dozens and dozens of people who had sold businesses. I quickly discovered that a large percentage of them—half or more—were acutely unhappy. Some I’d describe as miserable. I asked myself, “What’s the difference between the people who are happy at the end of the process and those who are unhappy? What did the happy people do that the unhappy people didn’t do, and vice versa?” That’s how I came up with the seven (and a half) factors around which I structure the book.

This article was contributed by BusinessesForSale.com, the market-leading directory of business opportunities from online media group Dynamis.

This entry passed through the Full-Text RSS service - if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

09 Apr 10 Tips to Prepare Your Business for Sale

Number 1. Make sure you really “want” to sell. Ask yourself if you are bored, burned out, ill, have a new child, have aging parents that need your assistance, etc. Or are you simply unhappy with how much money you are making? If this is the case, you do not “need” to sell. All you need is some guidance getting back on the right track.

An experienced business broker can help you refocus and see the forest for the trees. You might find out that once you start making enough money, you do not want to sell after all. But if you conclude that selling is what you want to do regardless of how much money you are making, then you need to proceed to the next step.

Number 2. After you are 100% sure that you want to sell your business, I suggest that you drive up to your business and determine the following if they apply to you. Are there any holes in your parking lot? If so, fix them before a buyer shows up. Is any of the shrubbery dead or out of control? If so, replace the dead with live shrubbery and make sure that all of them are properly trimmed.

Are the windows clean? If not, get them washed. Is the building exterior clean? If not, get it pressure washed. Does the roof look old or damaged? If so, either get a new roof or replace the bad shingles. Does the building need to be painted? If so, do it. In brief, make sure the “curb appeal” of your business has no obvious and easily correctible issues.

Number 3. After you have fixed the exterior issues, it is now time to examine the interior of your business from top to bottom. Start with the ceilings. Are there any water stains from roof leaks? If so, fix the leaks and replace the tiles. Are there any light bulbs that need to be replaced? If so, get on a ladder and put in new and shiny bulbs. Does any of the furniture look ratty? If so, either repair it or replace it.

Are there scrape marks on the walls. If so, have them repainted. How about your employees’ desks? Do they look organized or out of control? Insist that your employees maintain neat and orderly working areas. How about the rest rooms? Are they an embarrassment? If so, clean them up and keep them clean. Are they handicap accessible? If not, make arrangements to bring them up to code. Look at your office with a keen eye. Remember that when the buyer tours your business, you want them to visualize becoming the owner and being proud to do so.

Number 4. After you have fixed the interior “physical” issues, it is now time to look at job descriptions, policies and procedures. First and foremost, you need to draft your own job description that covers what you do daily, weekly, monthly, quarterly, semi-annually and annually. It should be very detailed, and I recommend that you dictate it to a secretary or temporary employee who can take shorthand and type well. Make certain you have someone proof read the job description and correct any grammar or spelling errors.

After you are satisfied with your job description, ask all your employees to do the same. This process has several benefits. First, your employees will see how much they actually do. Second, it will give you a chance to see if they are doing what you think they are doing. Third, it will tell you whether they are doing what they should be doing. When all the job descriptions are complete and typed, you will place them in a 3-hole binder labeled “Job Descriptions.” Then you will move on to policies and procedures.

Number 5. Now that you know what you do and what all your employees do, it’s time for policies, procedures and controls. With regard to employees, you need to cover hiring, evaluations, probations, vacation, sick days, holidays, etc. If your company has positions where employees must have background checks, drug tests, reference checks, etc., you need to speak with a labor attorney to dot all your i’s and cross all your t’s.

When asking a prospective employee to complete an application, it is best to stay away from questions that deal with pregnancy, military status, race, national origin, etc. If you decide to hire an employee, make sure they complete a W-4 form, an I-9 form and the appropriate state form. Should your labor pool have a large number of Hispanics, you will need to consult with a labor attorney to insure you do not hire illegal immigrants. Severe penalties can result. With regard to vacations and sick pay, it is best to let them accrue a day or less for each month worked. More policies and procedures will be discussed in Tip Number 6.

Number 6. It is very important to stay current with all employee evaluations. Employee morale can be devastated if reviews are delayed or not given at all. Plus, it is grossly unfair to ask a new owner to review employees with whom he or she has never interacted. A prospective owner will most certainly ask about employee turnover and employee tenure. But one question that is rarely or ever asked is whether you have any “problem” employees.

That brings up the issue of probation. Probation can be a way to successfully rehabilitate a wayward employee, or it can be the final process to document a termination in such a manner that a legal challenge to the termination will not prevail. When an employee is put on probation, the leash should be very short. The employee must know exactly what behavior will be tolerated and what behavior will lead to immediate termination. Interestingly enough, putting a person on probation sometimes leads to an outstanding employee.

Number 7. Nothing frustrates a prospective purchaser more than asking for current financial statements and tax returns and being told that they are not available. Worse yet is being told that a date cannot given for when they will become available. Talk about red flags. How can you run a business without current and accurate financial statements? The short answer is that you cannot do so. As a business owner, you must anticipate the purchaser’s questions regarding all financial matters and have current statements to defend your answers.

When I say financial statements, most people think of a profit and loss statement (also called the income statement.) But the balance sheet is equally important. The combination of these statements tells you whether a business is losing money and gives you a picture of the company’s financial health. There are certain subtleties to keep in mind. For instance, a high level of inventory can indicate several different things. Maybe much of it is obsolete or slow moving. It can be a purchasing mistake that will hurt a business or a brilliant purchase at a great cost. Only with thorough investigation will you determine the true answer.

Number 8. Have you filed all your tax returns? Specifically, I mean monthly sales tax, monthly state withholding, quarterly payroll taxes, quarterly state unemployment insurance, annual unemployment insurance, annual ad valorem, annual corporate tax, annual state tax and any local, county, city or other special taxes. It is absolutely critical that you are current with all these returns to instill confidence in the prospective purchaser. But when it comes to sales tax, if you have not filed and paid all returns, there are very negative consequences. The penalties and interest are exorbitant, but in addition, unpaid sales taxes become the responsibility of the new owner. I was once at the closing table waiting for the checks to be written when the Georgia Department of Revenue called and told the closing attorney that the seller had not paid sales tax for the last 3 years. Upon hearing this, the buyer stood up and left the closing. Needless to say, the company was not sold and eventually shut its doors.

While we are on the subject of taxes, you need to have a heart to heart talk with your CPA regarding taxes when you sell your business. Should the sale be an asset sale? Should the sale be a stock sale? There are bonafide reasons for each type sale. An asset sale limits your exposure for past liabilities, errors and omissions. An example would be a product liability claim for a structure or machine that becomes faulty. A stock sale allows for ease of transferring contracts presently in force. A stock sale is also critical in the medical industry when a Medicare number might be involved. But there is another angle. The stock sale allows for the company to be sold for less money while still letting the owner realize the same or greater after tax position.

Number 9. What is due diligence and how do you prepare for it? Due diligence is the process where the buyer tries to validate everything you have represented both verbally and in writing. The buyer will scrutinize your financial records, your legal records, your employment records, etc. With financial records the process starts with the tax returns, goes backwards to the financial statements, goes backwards to the general ledger, goes backwards to all source documents that include bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc.

To prepare for the financial side of due diligence you should assemble tax returns, financial statements, general ledgers, bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc. for the last 3 years. Tax returns, financial statements and related items should be in date order from the most current to the oldest. Vendor invoices and client/customer statements should be in alphabetical order first and then in date order for each vendor or client/customer. Employment records should be filed alphabetically, but you better make sure you have a W-4 form, an I-9 form and a state form (G-4 for Georgia) for every employee.

Number 10. There is a legal side to the due diligence process as well. Are you a valid legal entity such as a partnership, corporation or LLC? Is your annual filing of officers and registered agent current? Have you maintained your Corporate Minutes and held annual Board of Directors and Shareholders meetings? Do you have outstanding liens for debts that have been paid off? If so, you need to contact the creditor and ask them to remove them. If this is not done, the closing attorney will have to withhold funds in escrow until the actual status can be determined.

Have you paid all payroll taxes? If not, you may have undermined a possible sale. Have you paid all sales tax that is due? If not, I can tell you from personal experience that this can demolish a probable sale. Is there any outstanding litigation that affects you as either a plaintiff or a defendant? Are all your employees legal, and do you have proof? Are there any patents, trademarks or service marks that need to be protected? If real estate is involved, do you have a deed to prove ownership? Do you have a plat that clearly shows boundaries of the property? Do you have any contracts with vendors or clients/customers? Is your company minority owned, and if so, how would a change in ownership affect your business?
We have covered quite a lot of ground in these 10 tips. I wish you well when you pursue an exit strategy.

This post was by Loren Marc Schmerler, CPC, APC the founder and president of Bottom Line Management. If you’re looking to buy, sell or value your business contact Bottom Line Management via their website http://www.botline.com/ or call them (770) 977-7334.

This entry passed through the Full-Text RSS service - if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.