For What Purpose Might A Company Use Free Cash Flow What You Need to Know When Selling a Business

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What You Need to Know When Selling a Business

CHAPTER 1, PART 1 – INTRODUCTION / PREPARATION

Review

Every business eventually gets sold or closed… you can’t help but do it!

But most businesses that are put up for sale NEVER SELL!

The purpose of this column is to assist business owners in planning and executing a successful internal or external succession/transition of a business and to help buyers find and successfully purchase valuable businesses. We’ll teach you the practical “street level” nuts and bolts of how to do this, but we’re not out to make you a legal or tax expert. You’ll still need your attorney and CPA, but you’ll know how to spot key issues and know the main options available to you. This should turn into a huge advantage for you when it comes time to transfer your business.

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

Sellers

If you’re not a very willing seller, with realistic expectations of price and terms, then you’re probably just wasting your time. Know how much your business is really worth. For example, some companies are worth twice their annual revenue, but most are not. Is your company for sale, but only if you can get X times the annual gross revenue?

Know your tax situation and what to do if you find yourself in a potential tax disaster. For example, if your company is a “C” corporation (or has been within the last 10 years), then a faulty sales structure means that some sellers could owe the IRS more than half of the total sale price for the company? Do you know if you have this problem? If so, do you know how to “fix” it?

What about payment terms? They affect both taxes and risk for both parties. A buyer can afford to pay more if the risk is lower or the tax effects are better. Ultimately, “cost” is not “cost” — terms are key. What counts is the cash in your pocket after taxes that you get to KEEP after you leave!

Perhaps MOST important: Be emotionally ready. This is your child — are you really ready to part with it?

Contractually protect what you sell. Can some or all of your employees leave and take key customers with them after you sell? Can you realistically sell a company that could lose large parts of its business that way?

Make it easy for heirs to preserve what you sell. Customer retention after the sale is key. How can you help the buyer keep what you just sold?

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

First, be able to answer three questions:

1. WHO is your best customer (make a list of your best potential customers)?

2. WHY would they want to buy YOUR company?

3. Why NOW? If your business is so wonderful, why are you for sale?

Create defensible pro-forma cash flow spreadsheets that show the real benefits of ownership you have received in the past.

If you get benefits from ownership other than profit and salary, make it easy for potential buyers to see that. Provide explanations for any adjustments you need to make.

You can sometimes see this as “free cash flow,” “available cash flow,” or EBITDA (earnings before interest, taxes, depreciation, and amortization). Regardless of the terminology used, the goal is to determine the real financial benefits of ownership.

If you sell more than just customer accounts, create a pro-forma balance sheet as well.

Find out how much business you do with your top accounts and how you’ll ensure they stay with the company after you’re gone.

Know your suppliers and how they are likely to react when you retire.

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

Do your best, but don’t misrepresent or predict the future. You don’t know what the customer will be like in the future and you don’t want to do anything that “predicts” results. It can even be grounds for voiding the transaction if things don’t work out for your heirs.

Be prepared before the first meeting.

Have abbreviated material ready for discussion and/or presentation and be prepared to provide more detailed information as soon as mutual interest is established and a confidentiality agreement is signed.

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

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

One way to keep things in perspective is to keep in mind that the sale has to make financial sense for the customer or you won’t have a sale. It will have to be “penciled”.

What about the payment terms?: The terms are crucial to how the sale will be “printed”. In fact, terms are often more important than price. In addition to having a major impact on annual cash flow, the terms affect both risk and taxes for both parties.

Win/win: Most likely you don’t HAVE to sell, at least to one specific buyer. Likewise, the customer most likely does not HAVE to buy your company. This means that the sale is likely to fall apart as soon as either party realizes that the sale is a “loss”. Conditions are often key to a “win/win” result. Creative terms can even be “win/win/lose”. (The “loser” is the tax administration.)

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

The authors will give you a practical understanding of the fundamental legal, tax and financial concepts of the biggest financial events in the life of your street-level business – there’s nothing else like it.

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

From a team of experts responsible for hundreds of successful business transactions, you will learn better ways to buy, sell, merge or maintain a company internally. You don’t need to be a technical expert, but you do need to know enough to guide your attorney and CPA. This will teach you how.

Along with the fundamentals of purchase arrangements for any business, this material covers related estate planning, valuation and tax issues, shareholder purchase agreements, employment agreements and non-competition agreements, all as essential parts of a comprehensive business documentation package.

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