Selling your business

What’s your long term plan?

The email came on Friday morning with ‘urgent’ in the subject line. Knowing who the retailer was, I was most anxious to read what was happening in their business. The retailer wanted to visit by phone some time during that day. Something ‘out of the blue’ had come up and they wanted some input so they could discuss this surprise over the weekend.

When we got to the phone conversation, the surprise was that another retailer in the area had asked to meet them for a morning cup of coffee. During the face to face visit, the other retailer said, “I would like to buy both of your locations. Would you be interested in selling?”

The offer took my friend by surprise. The retailer making the offer asked my friend to give it consideration, and if they were interested in selling to put together a price they would want for the two businesses. It was also asked that my friend would give a response within 30 days, and if appropriate, the price and terms they would want.

With the call I received, the wife and husband were both on the call to discuss this surprising turn of events. What was surprising to me was the comment they made.

“We have never thought about selling our business. What should we do?”

The surprise to me was in the first sentence of their response. It is my observation that owning a business is a lot like playing a game.  In my observation, you have to look at the business you should do so from several perspectives. You are the owner of the team, the manager or coach, and a player. In the small business with employees, you do not wear all of the hats but you do wear most of the important hats.

To play the game, and win, you have to decide where you are going to play, who is going to be on your team, how you are going to keep score, the plays you are going to run, and what to do when the game is over, or when you decide you are through playing.

Their comment implied they had not given any thought to how the game was to be completed. Like many business owners the thought was there would be plenty of time for this at some point later in life.

A recent article in USA Today said this situation is true for most small businesses. The article stated that small businesses in the start up or early growth phase often reinvest money into the business as compared to putting money in retirement funds for the owner. It also stated the obvious; that when a business is in a challenging economy and struggling to exist, any retirement planning is often set to the side.

Of course the article that many small business owners do not consider retirement. It said, ‘they love what they are doing and don’t see the point of retiring’.

The last point was that small business owners solely plan on continued revenue from the business or the proceeds from selling the firm to sustain them later in life.

While any of this may be true for any reader of this column, it is the last point that is important; not only to my friends but to any small business owner.

How can you operate the business without any idea of how you are going to get out at a time of your choosing? Planning to get out requires a lot of forethought and a plan that is set into action well before the decision is made to sell.

As you operate your business, the accountant should be working with you to have the business work for you as much as possible. I have stated many times that an accountant has two tasks with regard to your business. Those two tasks are to have your business pay as little taxes as legally possible and to delay paying those taxes for as many years as legally possible.

Examples would include my friends who own the business together. They decide to hold a stockholder’s meeting. Who is to say they have to simply have the accountant fill out the necessary form in the corporate by-laws book? What if they were to decide to go out for a real nice dinner to discuss their business? Is that a stockholder’s meeting? Ask your accountant.

What about the children of my friends? Do the parents give them an allowance which is not deductible on their personal income tax return? Or, do these parents have their children working in the business so that they can give the children a paycheck which can be a legitimate business expense? Ask your accountant.

I would cite the example of a friend whose accountant has two offices. One is in the town in which my friend lives; the other office is in Las Vegas. My friend and his wife, as officers of the corporation that owns their business, make an occasional visit to Las Vegas to visit the accountant to discuss tax implications of actions they take in their business. Can they claim this trip as a business expense? Ask your accountant.

Imagine being able to do many things like this within your business. Of course, expenses like this diminish the profitability of your business. However these expenses could be considered as advantageous to you, individually.

At some point in time, the decision is made to sell the business. It should not be a decision that the business is for sale starting today. Instead, it should be a decision that says the business is going to be for sale five years from now.

Now the strategy of expenses should be changed. Instead of utilizing the examples described above, the business owner would want to have the business be as profitable as possible. Why?

Because when you have a perspective buyer, that buyer is going to want to see as much as your last five years of income statements. The buyer is likely to offer to purchase your inventory at ‘landed cost’.

Landed cost is the cost of the inventory sitting on the shelf in your business. Obviously this cost is higher than the cost of inventory according to the vendor because there is freight and labor to have the inventory ready for the customer to purchase.

The buyer will likely to be paying you for the fixtures, equipment, leasehold improvements, land, building, and several other items – tangible and intangible - that you have determined to have value. As an example of intangible, you may have a long term assignable lease that is at a very attractive rate. This could be something you would sell to the buyer.

Then we look at the profitability of your business over the last three to five years. You have shown your business to be a worthwhile endeavor and the buyer should pay additional money for an ongoing business. The dollar amount for the ongoing aspect of your business is often considered to be that three to five years of profitability. Ask your accountant.

Once you get to the point that the dollar amount has been agreed on, the structuring of the sale becomes a point to be determined. Of course, there are taxes to be paid by somebody – you or the buyer – at some point for this transaction.

If you are selling fixtures and equipment for more than what your balance sheet says they are worth, the government is likely looking to you for taxes on the difference in the sale price and ‘book value’. That three to five years of profitability, often referred to as ‘good will’ or ‘blue sky’ is also an item to be taxed.

There are more complications than can be described in this article. This is where the accountant earns their pay. Structuring the sales so that you are paying the least amount of taxes and delaying those taxes for as many years as possible again comes into play.

Perhaps you take that profit and roll it into another investment or business. You might not take all of that money at once from the buyer by becoming an ‘advisor’ or ‘consultant’ with an annual pay from the new owner of your business. Items such as this should be taken into consideration.

When an offer comes from ‘out of the blue’ as my friends received, there is little that can be done to change what has already happened in the business. However, if you are thinking about some day in the future that you will want to sell your business, it does take a plan.

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