By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC
If you have decided that the best option for your company is to sell it to another business owner, then listed below are a few items to consider and perhaps, work on.
When one store owner buys outs another store owner, it usually means that the purchase price will be all cash in one or two years, and hopefully, you’ll be able to get a good price because the buyer already has their accounting staff, back office, and the management of their company all in place.
I realize that over the last 30 to 40 years you have worked with your accountants to make the company look as unprofitable as possible. Now that you’re ready to sell, we need to create a separate document that shows the “add-backs” pertaining to your company in order to illustrate the true “Usable Cash Flow” or EBITDA that your company can generate. You also want to make sure that all of the assets on your financial statement, such as, inventory and accounts receivable are accurate.
Step One – Indication of Value Report
Most sellers want to have a document in hand which outlines the company balance sheet with adjustments, and the true profitability of the company with all of the appropriate add-backs. Our firm, Castle Valuation Group, LLC, can help you prepare this report, if you would like an outside company to help you.
A report that shows the indication of value is different than a business valuation report. When you prepare an indication of value you are going to show all of the assets that are being sold and the assets that you will not be selling. You would also add-back some of the excess expenses, such as higher rent payments, higher salaries and other add-backs that fit your company.
During the selling process the buyer will, at some point in time, ask for your last 2 or 3 years tax returns and business financial statements. In addition to those documents you want to have prepared a separate document that shows the adjustments to the balance sheet and the true Usable Cash Flow that the company can generate. Basically, you want to provide the buyer with a true estimate of the assets and the profitability of this company now that you’re ready to sell it.
Step Two – Get Prepared
In step one above you have prepared documents that show the true potential that your company can provide to another store owner. It will also show how important your employees are and how well trained they are.
The next most important item to work on is spending time with your advisory team and discussing how you can sell your company and how much profit you will have from the sale and what the estimated taxes are that you will have to pay for this transaction.
As you talk with your advisors if you find out that the sales price is going to be low or the taxes are going to be too high then perhaps, you might put off the selling process for one or two years and work on increasing the value of the company. Many business owners start working on improving the business valuation at least 2 to 3 years before selling the company.
Before you get too far along in the selling process it is important to spend time with your attorneys on the different types of legal documents that you will need, with your accountants estimating the personal and corporate taxes that you will have to pay and your financial advisors on how to handle the sales proceeds for your future retirement security. You don’t want to be 90% finished in selling the company and then realize that the taxes are too high or the terms are not in your favor.
Have your advisors prepare two or three different scenarios on how to sell the company and what the taxes are for each of those scenarios. When you start the selling process it’s important that you be prepared for every type of question that the buyer might ask.
Step Three – Negotiating the Terms
Some business owners prefer to negotiate the sale of their own company, but most sellers would prefer to have someone else negotiating the details of the company sale. Perhaps, your attorney, accountant or financial advisor can talk to the buyer on your behalf and negotiate all of the important points of selling your company.
When the negotiations start it is important to understand what type of corporation you have, whether it be an S corp or a C corp. Is the real estate for the company in a separate entity? Is the buyer interested in the business and the real estate, or does the buyer want to buy the business and rent the real estate? Do we need to protect key employees or children with possibly a separate employment contract for one or two years? Do you have any unique aspects to your company or your location that needs to be part of the negotiations?
What will the timing be for this transaction? Do you want it completed in the next 2 or 3 months, or should we wait until December 31, or January 1 of next year?
Step Four – Retirement Security
We often work with business owners to make sure that there is plenty of retirement income security when the business is sold. Many business owners do not realize how much cash will be left after paying taxes on the sale. When that cash is invested along with their other assets that make up their net worth will there be enough income for the future? Will there be enough assets left for the children and grandchildren? Should wills and trusts or other documents be update to provide more security for the family?
Once you have decided to start looking for a buyer for your company, it would be good to put together an advisor team to help you review all of the possibilities. The selling of your business is an important step and hopefully you only do it once. You will need a business attorney to help you review all of the contracts necessary to sell the assets of your company. Your accountant will need to calculate any possible taxes that the corporation would pay and taxes that you would pay. Your financial advisor should be involved in reviewing all of the documents and helping you negotiate the best terms for the sale. This financial advisor should also help you review the allocation of your net worth and make sure that your assets are protected for your future income and for your family.
These advisors will also help you better understand the timeline for this transaction and how long it will take to finish the sale, once you and the buyer have agreed upon the terms.
Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .