| Sooner or later you are going to exit your | | | | take some planning and time.Do your own due |
| business. The question isn't whether or not | | | | diligenceSome executives of both public and |
| you will be ready. The sixty four thousand | | | | private firms get a physical check-up once a |
| dollar question is whether or not your | | | | year. Many of these same executives think |
| business will be ready.It is estimated that | | | | nothing of having their personal investments |
| seven out of ten privately held businesses | | | | reviewed at least once a year, if not more |
| have no succession plan to transfer the | | | | often. Yet, these same prudent executives |
| business to the next generation of owners. | | | | never consider giving their company an annual |
| What does that mean to you? It means that if | | | | physical, unless they are required to by |
| you do not currently have a plan in place to | | | | company rules, regulations or some other |
| transfer your business to family members, | | | | necessary reason.Anyone interested in |
| existing partners, management or employees, | | | | purchasing your business will perform "due |
| someday you will think about selling your | | | | diligence" procedures on your business before |
| business.That day might come sooner than you | | | | closing on the purchase. All too often, |
| anticipate. Don't make the mistake of | | | | sellers are surprised at the skeletons |
| thinking that just because you are not | | | | purchasers can find in the closet. These |
| currently ready to retire that you have | | | | skeletons can reduce the value of your |
| plenty of time to prepare your business for | | | | company, and in some cases, kill any chance |
| sale.As a business broker, I have been | | | | at closing a sale. What skeletons are your |
| involved in a number of transactions (and | | | | company's closets?Why not give your business |
| potential transactions) where the business | | | | a periodic physical? In essence, I am |
| owner wanted to sell, or in some instances, | | | | suggesting you would do well to treat your |
| was forced to exit the business earlier than | | | | business as if someone else owned it-and you |
| expected. In fact, retirement is NOT the | | | | were the potential purchaser. What problems |
| number one reason why businesses sell.Here is | | | | would you discover that could cause you and |
| a list of the most common reasons why owners | | | | your advisors to reduce or withdraw your |
| sell (or otherwise discontinue) their | | | | offer?Spending the time and money to discover |
| businesses:Burn-out (the number one reason | | | | and fix your company's problems now will pay |
| for selling)Health issuesPersonal | | | | huge dividends in the form of increased |
| diversificationRetirement | | | | company value-which is exactly what you want |
| semi-retirementDeathDivorce/partner | | | | when it's time to sell.Compliance with taxing |
| disputesBusiness growing too fastSecond | | | | and regulatory authoritiesMountains of |
| generation not up to the taskLoss of market | | | | regulation often seem to impede a company's |
| shareTAKE GOOD CAREThe sad truth is that many | | | | growth and profitability. Some regulations |
| business owners do not take good care of | | | | might seem rather easy to "slight" or |
| their most valuable asset: the business. | | | | ignore.Take for example one of my recent |
| They don't groom someone to continue the | | | | sellers who swore to me that the business had |
| business in their absence, and do not keep | | | | no regulatory violations of any type. I |
| the business in salable shape during the time | | | | reminded the seller that anything "hidden in |
| they operate the business.Business owners | | | | the closet" would most likely be discovered |
| tend to get too bogged down in the day to day | | | | in a buyer's due diligence (investigatory) |
| business operations to worry about--or plan | | | | process. "Nope-no problems of any kind" I |
| for an event that they perceive won't occur | | | | was assured.Well, guess what the buyer's due |
| until sometime in the distant future; selling | | | | diligence turned up? Seems the seller had a |
| the business.Unfortunately, fate sometimes | | | | couple of shipping/storage containers sitting |
| dictates circumstances beyond your control, | | | | behind the building-which the sellers KNEW |
| and tough decisions must be made. If your | | | | were in violation of local zoning ordinances. |
| business isn't ready to sell when the time | | | | How did they know? They had received four |
| comes, what are your | | | | previous "reminders" from the trustees about |
| alternatives?1. Liquidation of business | | | | the containers, and the need to remove |
| assets-may be a solution, but one that | | | | them."Why didn't you mention that to me, or |
| usually returns very little money to the | | | | disclose that fact on your disclosure |
| business owner. If the business had been an | | | | statement?" I asked. "Gee, nothing ever |
| operating business, the underlying assets | | | | happened and the township never did |
| (except for real estate) may be outdated and | | | | anything-so we just figured it was no big |
| of little use to anyone. At auction, the | | | | deal." Was the seller's reasoning.No big |
| assets will bring only what the attending | | | | deal, except when the purchaser turned up the |
| bidders are willing to pay. In some | | | | non compliance issue, it threw a few extra |
| instances, underlying assets are sold to | | | | wrinkles into the mix. In that case, the |
| liquidators (or scrap) for only pennies on | | | | issue was easily resolved (yet, much to the |
| the dollar. Liquidation of a going business | | | | additional cost and chagrin of the sellers). |
| often occurs where the owners have become ill | | | | But, sometimes known violations are not so |
| or disabled, or need to retire and have not | | | | easily remedied. In those instances, a |
| planned adequately for their exit from the | | | | seller runs the risk of blowing a good |
| business.2. Closing the business-is even less | | | | deal.What's the bottom line?Clean up any tax, |
| attractive than liquidation. That is because | | | | industry, OSHA, EPA or zoning issues with |
| many who find themselves in this situation | | | | which your company does not comply.Organize |
| have a tendency to "put off" liquidating the | | | | and keep records available. One never knows |
| underlying assets in hope that maybe someone | | | | when opportunity might knock. If and when it |
| will come along to buy this business. This | | | | does knock, will you be ready to strike while |
| almost never happens.BUILD WEALTH NOW BY | | | | the iron is hot? How many times have you |
| PLANNING FOR THE SALE OF YOUR BUSINESSOkay, | | | | heard someone say something like, "I'd sell |
| so you think you have enough to do without | | | | anything, including my business for the right |
| throwing more onto the pile. Am I right? | | | | price?"Maybe you have even said it yourself. |
| That is why I have written this article for | | | | But would you know what paperwork and |
| you. It provides a "down and dirty" overview | | | | documents a serious buyer will immediately |
| of things that you ought to begin thinking | | | | need in order to pursue the purchase? When a |
| about and planning for right now. Doing so | | | | qualified buyer is ready to begin serious due |
| will provide you with an additional safety | | | | diligence, they will need a variety of |
| net that will help safeguard your valuable | | | | company documents.Following is a partial list |
| business asset.Here are just a few of the | | | | of things a buyer will ask for:- Three to |
| benefits of planning now:A planned sale | | | | five years income tax returns |
| allows for your goals and objectives on your | | | | |
| timetableYou may begin to identify potential | | | | - Copies of one to three years quarterly |
| buyersYou may be able to create an attractive | | | | payroll reports |
| acquisition candidateYou can begin to | | | | |
| understand why a buyer may want to buyYou | | | | - Three to five years CPA prepared financial |
| might learn why buyers would not want to | | | | statements |
| buy-and be able to fix the problemsYou may | | | | |
| begin to realize the worth of your business | | | | - Current year to date financial statements |
| now, and learn how to increase the value as | | | | |
| part of your retirement planningBUSINESS | | | | - Detailed depreciation schedules listing |
| VALUE HOUSEKEEPING CHECKLISTRecord All | | | | each fixed asset owned by your company |
| SalesBusiness owners often invent remarkable | | | | |
| ways to beat the tax collector. But the | | | | - Corporate Minute Book with updated minutes |
| taxman can be a business owner's best friend | | | | |
| when it comes to selling one's business. | | | | - Recent aged accounts receivable trial |
| Income taxes are a great investment in the | | | | balance |
| years immediately preceding an anticipated | | | | |
| sale of the business.Paying income tax proves | | | | - Recent aged accounts payable trial balance |
| to the buyer AND the banker that your | | | | |
| business operations have been profitable. | | | | - Company organization chart |
| | | | |
| Nobody wants to pay more income tax. But | | | | - Copy of the Summary of Insurance Coverage |
| consider this example: Ronald Bunk | | | | (provided by your carrier) |
| systematically underreported business income | | | | |
| by an average of $20,000 per year. Assuming | | | | - Information about Employee Benefits |
| a combined tax rate of 40%, Mr. Bunk saved | | | | provided by the company |
| $8,000 in taxes per year. But, the | | | | |
| underreported income also reduced the | | | | - Information about Employee Retirement |
| company's earnings base by $20,000 per year. | | | | Plans |
| If, for example, the business could be sold | | | | |
| for a multiple of 5x the company's reported | | | | - Copies of labor contracts |
| earning base---the company would sell for | | | | |
| $100,000 less ($20,000 average earning base | | | | - Copies of other contracts to which the |
| not reported times the price multiple of 5) | | | | company is a party |
| than it is really worth!Without considering | | | | |
| the time value of money, it would take in | | | | - Copies of licenses, registrations for |
| excess of twelve years of (illegal) tax | | | | patents, copyrights, trademarks, etc.The |
| savings to make up for the loss of $100,000 | | | | foregoing list is an example of the types of |
| in business value. The lesson: In trying to | | | | records your company should have up to date |
| screw the government, business owners often | | | | and on hand at all times. These records are |
| find themselves on the short end of the | | | | extremely important to speed the sales |
| stick; often in more ways than one.Eliminate | | | | process along. Though this advice sounds |
| co-mingling of business and non business | | | | basic, I often encounter companies whose |
| assetsA common practice among closely held | | | | records are not complete and up to date. |
| companies is to co-mingle non business assets | | | | This situation can dramatically affect a |
| and expenses with business assets and | | | | potential sale.I suggest using a three ring |
| expenses. I have seen businesses owning | | | | binder to keep the basic updated records |
| motor coaches, boats and airplanes; all | | | | available at all times. This also makes |
| reported as business assets. The costs of | | | | other business needs for the documents much |
| maintaining and operating the assets were | | | | more manageable.CONCLUSIONYou can increase |
| expensed as regular business operating | | | | your wealth by knowing a few simple ground |
| expenses.It is true that those businesses | | | | rules for successfully selling your business. |
| (not audited by the IRS) are saving a certain | | | | Just like other owners of closely-held |
| amount of income tax, and providing an extra | | | | businesses, you know how to operate your |
| "fringe" benefit for the owners of the | | | | business on a day to day, month to month and |
| company.Wise business owners should endeavor | | | | year to year basis. But your experience in |
| to separate non business assets from the | | | | running the business has not prepared you to |
| business in the three to five years before a | | | | know how to sell your business.While the |
| planned sale of the company. Doing so will | | | | information I provided in this article is not |
| make it much easier to accurately measure and | | | | all inclusive, it should help you get started |
| reflect the true earning power of the | | | | in preparing your business for a successful |
| business, as it will be unfettered by the | | | | sale-no mater when the business might be |
| capital investment in non business assets and | | | | sold.Grover Rutter has over 30 years' |
| the associated costs.Buyers of your business | | | | experience advising business owners. A |
| are generally purchasing future income and | | | | sought after business broker and consultant, |
| benefit streams that will be produced by your | | | | Grover is a CPA, Accredited Business |
| business. The leaner and more productive | | | | Valuator, Certified Valuation Analyst, |
| your business is-the more it is worth. It is | | | | Business Valuator Accredited in Litigation |
| never too early to begin segregating non | | | | and an Empire Certified Business Broker. |
| business assets from your business, as it may | | | | |