Thestrategist.media – 10 April 2015 – Every entrepreneur might dream about selling their business after achieving a certain level of success and retiring to a peaceful leisurely life, as Cheryl Conner quotes:
“at least until the siren call of angel investing or another startup lures you in once again”.
However, according to sidesale expert Rick Krebs, who has been helping entrepreneurs sell their business “to achieve a successful transaction.” Krebs suggests that the decision to sell the business should not be an emotional one, besides one should always consider whether the business will “survive without you” or not.
The entrepreneur should be able to detach himself from the company and sell it for an adequate value worth investing in. Furthermore, before signing the agreement, the owner should spend time assessing his employees and suspend the workers who might prove to be “dead weight” for the company and reduce its selling price.
Lastly, one should way the selling price against “any outstanding debt” as the final amount is going to affect the negotiation. Krebs recommends that one should pay special attention to debts as sometimes “many transactions produce little cash for the owner after the accompanying debts are retired”. After being clear on above mentioned points, if an individual still wants to sell the business then, he needs to cast an eye on the check list mentioned below, says Krebs.
Pay attention to exclusivity:
The sale-side advisors will mostly want exclusivity as they survey the market for a suitable buyer. However, it is better to get into a contract agreement with the advisor stating that if the owner can find a suitable buyer himself then the advisor’s pay will be subsidised.
Keep the tax angle in mind:
Make sure that you get “all advice possible on strategies for minimizing and deferring income tax” prior to getting into a selling contract. If you chose your advisor wisely, the latter can even get a hundred percent defer on tax. Approaching a good advisor before structuring the sale is a crucial thing to do.
Conner writes about an example, saying:
“Consider the implications of selling stock versus selling assets. As a general rule, asset sales are more favorable to a Buyer and stock sales are more favorable to the seller because asset sales create a higher income tax burden on the seller (they create ordinary income versus revenue that can be taxed as a capital gain)”.
Go for “Pricing Strategy”:
Weigh out “implications of a cash sale versus a leveraged buyout” because presently buyouts have leverage over cash deals. In Krebs’ words:
“This is wise counsel—in my own business sale the deal was entirely leveraged and as with many sales, the seller defaulted and negotiated a settlement long before the purchase was done.”
Involve in SBA purchase:
While dealing in SBA purchase, a seller requires “to carry 10-25% of the note” but this point is seldom communicated to him. In case of any leasing situation make sure to extend it to minimum ten years. In such scenario, the buyer would pay for the business appraisal.
Nevertheless, a seller can only be involved with the business work, only for a year from the day of sale yet he would hold “a note receivable from the business” for the next four years. The SBA sanctions a loan upto $5 Million whereas other banks have smaller margins.
Choose deals wisely:
There are two kinds of deals: a seller note and a seller carry. The former bears “a high level of risk” whereas the latter allows a two-year period of operational right to the seller before the payments are settled. Moreover, the risk-element of a deal will vary as per the nature of the business.
Seek specialised legal advice:
Krebs suggests not to use the first “CPA and Attorney” as the final one. According to him it is better to seek special advice to have a safe and sound legal ground and to avoid the Tax complications. He adds:
“Think of successful business sale like open heart surgery.” You wouldn’t dream of having a general practitioner do an open heart surgery.”