You will Sell your Business Successfully once you Tie Up Loose Ends!

Tip Number 10 is “Tie Up Loose Ends”, and I have personal experience with this one.

Harvest Business Advisors represented a seller who had a successful mechanical/geothermal company. The seller was planning for retirement. The prospective buyer was searching for a company that offered skills, experienced staff, and an opportunity for diversification. It was a perfect match. The buyer/seller meetings went very well with good conversations and good connection between the two parties.

Late in the game there arose a problem, however.

During the due diligence process, Harvest Business Advisors learned that only half of the sellers’ staff had signed a non-compete / non-solicitation agreement. In fairness, several of the current managers were not “key” when they started working there but over the years, they had progressed to key management levels. The seller never thought to have them sign a non-compete / non-solicitation agreement. Definitely not what the seller anticipated and not what the buyer wanted to hear.

The night before the scheduled close, we had not delivered all the executed non-compete agreements to the buyer who had been very clear — if the agreements were not delivered pre-close, the buyer had no choice but to walk from the deal.

We got the message. Emotions were high. We met with the group of managers that night not knowing if they would sign. The next morning, we met with them in one-on-one sessions and fortunately, they all signed. In one instance, the seller provided a “stay bonus” if the manager would accommodate.

The moral of the story?

There are many, many loose ends that can rear their ugly heads in a transaction. Non-compete and non-solicitation agreements tend to “not get done later”. Think about your key staff, make time to meet with them, and get these agreements signed as far in advance of a business sale as possible. Key people are the magic of most companies we work with; you need them on your side before you’re knee deep into you exit plan.

Click here to download a non-compete/non-solicitation agreement for your business.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

 

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia.
Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

Prospecting Buyers for the Sale of Your Business

In order to sell your business you must generate prospects.  Prospects are people or companies who are ready, willing, and able to buy your business.  The first step is to draw in contacts and get them to approach you by phone or email. To accomplish that, price your business properly (assuming you have a smaller business – see our posts on pricing a business for sale) and let these prospects know about the business for sale without breaching the required confidentiality of the owner.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

Fishing Story Number 2

The first time I went out on a charter fishing cruise with a professional captain and first mate I was amazed.  Of course, I am old enough that this was before radar type ‘fish finders,’ but they  not only seemed to know where the fish were but they had a strategy for catching the fish.  Multiple fishing poles were carefully baited and dropped into the water.  Different weights were placed on different lines to put them at different water levels.   All this work to find fish that we could not see.

Marketing your business is very similar.  This critical part of the process involves doing the things your experience suggests will work and, if necessary, trying different variations until you find the “fish.”  Patience is required.  And, once you hook a fish, it is very important not to lose him as many businesses have only a very few good Buyers.  Of course the good news is that just like dating, or selling a house, it only takes one.

 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

Taxation of Earn-Outs in Mergers and Acquisitions

Tax  Points – Below is a summary of the tax treatments of earn-outs.  Remember, every situation is different.  These are general guidelines and not specific advice.  Do not enter into any transaction without review of tax issues by competent tax advisors.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

  1. Income tax treatment for the seller – earn-outs are recognized by the tax rules as an “installment sale” meaning that each payment received by the seller includes two components:
    a. a portion of the “basis” is recovered (not taxed) and
    b. a portion of the “gain” is received (taxed).
    c. Some assets are excluded from the earn-out treatment, notably inventory and depreciable assets subject to depreciation recapture requirements.  For these asset classes, the gain is recognized in the year of the sale, regardless of payment terms.
  2. Earn-out Contingencies – the final purchase price for a deal that has an earn-out component is not known at time of sale; it is “contingent” on some future event(s) as defined by the earn-out agreement.  Examples of earn-out contingencies are:
    a. meeting specified, agreed upon financial targets (gross revenue, gross profit, EBITDA etc),
    b. customer retention,
    c. contract renewals.
    d. The final purchase agreement will include the formulas used to determine when the terms and conditions of the earn-out are satisfied and the seller gets paid.
  3. Final Purchase Price Determination – the final purchase price agreement will include the language regarding when the final purchase price is going to be determined.  The final price can be:
    a. Stated at a maximum price,
    b. Determined within a defined period,
    c. No maximum price and no defined period
  4. Interest on seller financing – remember that earn-outs are really a form of seller financing during the earn-out period.  Therefore, interest must be separately stated; if not, a portion of the deferred payment could be reclassified by the IRS as interest
  5. “Opt out” provision – this is a non-revocable election made by the seller meaning that if the seller has a change of mind and wishes to revoke the opt-out election, the IRS must approve it first.  The “opt-out” provision can only be elected n the year of sale.  If the election is made, then the the fair market value of the contingent payments are taxed in the year of sale, even though the cash is received in subsequent years.
  6. Depreciation and amortization – this applies to the buyer.  Depreciation and amortization begin when the payment is made, not when the deal is closed, meaning the tax benefits of depreciation and amortization are deferred until such payments are made
  7. 2013, New tax consideration – effective 2013, subject to various tax thresholds, there is a new tax of 3.8% imposed on the “net investment income”.  The definition of “net investment income” includes the disposition of interests in partnerships and s-corporations.  Point is, there is a new tax in town to consider.
Ed Davis, CPA, CVA
Harvest Business Advisors
Business Brokerage, Business Valuation, Transaction Planning
301-325-7687
www.harvestbusiness.com

Ways to Generate Qualified Prospects – Tips from a Maryland Business Broker

This post lists proven ways to generate leads for your business sale.  Each requires experience and most require quite a bit of work.  Also, several of these may breach your confidentiality if they are done by you directly.  One more reason to always use a knowledgeable business broker.

Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

Management of your Company.  We suggest that at least once a year you talk about succession planning with key employees and family members. Over many years, you can determine who in your family and organization might have an interest in your business.  It is then easier to start a conversation by saying, “Although it is still several years off, do you really have an interest…”.   Take this conversation through to preliminary financing etc. before you move up the timetable.

Trusted Advisors.  Sometimes your attorney or accountant will have a likely Buyer.  Professional advisors are a good source for referring Buyers. Talk to that Buyer.  Just recognize that if that person is not the final Buyer your attorney or accountant probably cannot perform the salesman’s role of an intermediary or broker.  If they do, then you should worry about the time they have to do your accounting and legal work!

Internet Listings.  Primarily www.BizBuySell.com , www.ibba.org , www.mergernetwork.com, and others.  This is effective for generating leads if the financial summaries fit the recommended valuation rules of thumb and it is the best source for corporate managers and corporate sales people.  You can also reach competitors who have set an automatic email for anything in their industry.    With Internet listings you need to list a little information about the business to indicate scale and industry and really focus on the numbers in order to generate calls.  The ratios must work in order for the phone to ring so this is an excellent reason not to overprice the business.  If necessary,  make aggressive adjustments in your cash flow and clearly point them out in your package in order to generate leads through this source.

Cold Calling and Direct Mail.   If a competitor, private equity group, or other business is a likely Buyer, both cold calling and direct mail can generate responses.  While the response rates are generally low, again it only takes one Buyer.  You can greatly assist your broker by providing trade association lists and contact points to help them generate an inclusive list of prospects.  Research to identify potential buyers is a very important and time consuming part of the work when this technique is appropriate.

Industry Magazines and Websites.  Some industries have trade magazines and websites where ads are occasionally posted for business acquisitions and sales.  Sometimes these can be effective.

Suppliers and Jobbers.  In some industries, suppliers and other people who work regularly with many companies may know people interested in buying businesses.  Obviously this does not work if maintaining confidentiality is important to you.  This is pervasive among liquor stores.

Once you have some interest qualification of your prospects becomes key.  Ah – the need for a future post.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

A Business Brokers Inside Tips – How to Price Your Business to Sell Quickly

If you are in a hurry to sell your business, and speed is now more important than getting maximum price – price the business at or near an average sales price based on a realistic estimate of market value. Make sure you still have some negotiating room in your asking price.  Buyers will almost always find a problem and the ability to give a little back solves many problems.  If possible, always keep a few chips in your pocket to use to solve problems all the way through settlement.

If you have the luxury of time, and are considering selling your business, Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

Under priced?

One of my first listings as a new business broker was a small daycare center.  The Seller had made her decision to sell and was now in a rush to get it done.  She had been marketing the business for the past two months herself.  She did not have a huge investment and just wanted out so, because she wanted a quick offer, she had priced the business at about 75% of the fair market value.  Her one prospect proceeded to negotiate her down to 60% of the fair market value and still chose not to close.  Prospects assumed something must be wrong with the business for it to be priced so low.  We immediately suggested raising the price to 95% of fair market value.  This was low enough to generate contacts from real prospects and gave us money with which to negotiate with.  The business was sold and settled at 85% of fair market value in 60 days.

 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokers, Business Valuations, Business Transactions
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com
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