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July 2012
SURVIVAL TRAINING: Are You Ready to Sell Your Business?
By Gary Smith

     In January of 2008, an article in The Wall Street Journal indicated that seven of 10 mid-size companies would be sold or transferred to new owners over the next 10 years, and that 90 percent would be “ill prepared” to maximize value upon sale or transfer.

     In February of 2011, an article in The New York Times noted that nine million of America’s 15 million business owners were born in or before 1964, and one business owner turns 65 every 57 seconds.

     In May of 2012, the Four Rivers Business Journal reported the vast majority of boomer business owners want to sell their businesses and retire in the next 15 years, resulting in more businesses for sale than buyers to buy them. Consequently, they forecast that 75 percent of boomer business exits will result in the closure of millions of businesses, resulting in trillions of dollars in losses—all due to the failure to plan.

     According to a March 2012 survey by Deloitte LLP of mid-market companies, approximately 42 percent thought they would be buying other businesses in 2012 (compared with 35 percent in 2011); and approximately 19 percent thought they would be selling in 2012 (compared with 14 percent in 2011).

 

What does this information mean for a business owner today?

     For Bob Businessman, this information means that if you intend to or have to exit your business in the next five to 10 years through a sale, you need to be ready for a lot of competition. It also means that most of this competition won’t be ready to sell.

     Keep in mind that these “sales” referred to above include sales to third parties; or sales to “insiders” (employees or family members) involving cash obtained from another source (like a bank or private equity group).

     There are different strategies Bob Businessman should consider depending on whether he has one, two, five or 10 years to plan his exit. The less time, the more focus on the major things that will yield value; there’s not time to waste or make mistakes on things that don’t really matter. The more time, the more focus more on details and ability to recover from any mistakes made.

     At a minimum, every business owner should consider the following to maximize value and enable “exit” no matter what type of exit occurs:

 

1. Get the best management and key employees in place and make it very hard for them to leave the company. This is possible through incentive compensation and “stay bonuses” as well as restrictive covenants. Without an “offer they can’t refuse” to keep employees around after a sale, you could be held hostage at closing by your best employees who want a piece of the price in exchange for staying or agreeing to that “covenant not to compete” the buyer is requiring them to sign.

2. Get that proven track record of profitability in order to convince a buyer that the earnings of the company will continue for the buyer after you leave. Recurring revenue is much more valuable that project-based revenue. Sell once and collect often instead of selling often and collecting once!

3. Be certain all legal and organizational documents are in place and properly filed (properly incorporated, qualified to do business, good standing, annual reports, merger documents, stock books, etc.) so that you have a company that can be sold. You don’t want to find out later you don’t really own the business or some of its key assets or that you get to pay twice as much tax as you should have.

4. Correctly file all tax returns (independent contractor versus employee issues, overtime, sales tax, etc.). Don’t give your buyer reasons to lower the price, and don’t give the IRS or state department of revenue reasons to audit you!

5. Have reliable internal financial reports and have reviewed or audited annual financial statements. Make certain your financial reports are timely. You cannot operate your business if your monthly financial reports take six months to finish.

6. Have financial information that shows the true profitability of the company. Don’t have the company paying for expenses that the owner should really be paying. Think about what you would pay someone to do your job and what benefits would you give that person.

7. Protect your intellectual property and confidential information!!

8. Live by your strategic plan and update it continuously. Have a goal, and make decisions that get you closer to that goal.

9. Understand what taxes you have to pay on a sale or transfer and what you can do now to lower them.

10. Don’t think you can do all of this by yourself!! You need people with experience in accounting, management, operations, legal, marketing, sales and every other type of matter affecting your business. Learn from other people’s mistakes, not just your own.

 

 

 

Gary Smith is an attorney at Wishart, Norris, Henninger, P.A.
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