Business Owner Year End Tax Planning

Business Owner Year End Tax Planning

Business Owner Year End Tax Planning

A common comment we hear from business owners who contact Sunbelt Texas about selling a business is “I didn’t know a year (or 2 or 3) ago I would be selling my business so soon.”

Before you file your 2017 taxes, keep in mind that a buyer and the buyer’s lenders will look very closely at the financials of a business for 3 full years. That means that if you sell your business in 2020 or sooner, the 2017 Tax Return you’re about to file could have a significant impact on the value of your business.

Do your business tax returns clearly and accurately reflect the earnings of the business?

Tax Planning for a Future Sale

Here are 4 areas that we often see need significant improvements to obtain the highest value in the sale of a business. Talk to your CPA about how you can move ahead to increase the value of your business.


  • Do you have an accurate inventory count and value booked into your financials?
  • Is all of your inventory in “good and saleable” condition?
  • Do you actually know what your inventory value is?
  • Have you written off the old and obsolete inventory?

Accounts Receivables

  • Are all your receivables good and collectible?
  • Have you written off the A/R you know your odds of collecting are remote?
  • Do you have customer deposits intermingled with the accounts receivables?
  • Do your receivables reflect what is actually owed to you by the customer? (We see companies that when they get a customer deposit for a job, they book the whole job as a sale and book the deposit as a partial payment even though they haven’t actually earned the sale yet)


  • Are your employees classified correctly 1099 vs W-2? Are your 1099 contractors really employees who should be classified as W-2 employees. (This is a very big issue and the government has an active program to crackdown on this….and the penalties can be severe).
  • If your 1099’s are really 1099’s, do they have an entity (i.e., LLC, S Corp, etc) you pay?
  • Do you have a properly written and valid independent contractor agreement with them?
  • Are your W-2 employees correctly categorized as hourly vs salaried and paid accordingly? You don’t want to lose a claim where, after years the employee claims you owe them thousands of hours of back overtime pay.

Owner Benefits and Compensation –
This is VERY important and can dramatically affect the value of your business:

  • Are the compensation and benefits received by the owners easily identified and properly booked on the financial statements and tax returns?
  • Do you have significant expenses that are not directly related to the business, expensed through the business that are buried in the company expenses?
    • Travel?
    • Entertainment?
    • Expenses run thru company credit cards?
    • Personal vehicles?

Tax Planning Action Item:

If your objective is to sell your business one day then you should get your financials in condition for easy due diligence and maximum value. “Burying” personal expenses in the business financials will reduce the business earnings and reduce the value to a buyer.

Our advice is for business owners to take any compensations as salary, bonuses and draws. Running non-business expenses through the business financials creates problems for proving the earnings in due diligence and raises the risks associated with potential tax liabilities


The most important element of business value is clarity of the business earnings and reduction of the risks associated with all aspects of the business. A buyer will only pay for the earnings that can be proven and the risks a buyer sees drives the multiple buyers will pay for a business.

A business with the lowest perceived risks will command the highest price multiples when being sold.

A Practical Guide to Seller Financing

A Practical Guide to Seller Financing

Selling a business is one thing, getting paid on the sale is another.  The options available for financing the deal are dependent on the business and the buyer. Here are some things to be aware of if you find yourself with a chance to sell your business.

Seller Financing:  The good, the bad and the uh oh

Seller Financing as the ONLY Financing

The Good:

  1. Seller provided financing opens the sale up to a wider range of buyers (though not necessarily higher quality buyers).
  2. Without a 3rd party lender (SBA, Bank, etc) the deal can likely get to closing faster than if bank financed
  3. Buyer usually isn’t as price sensitive since there usually isn’t a 3rd party valuation
  4. You may be able to cross-collateralize or obtain cross default agreements to tie up assets.
  5. If you get a personal guaranty from buyer you may have better chance to get paid.

The Bad:

  1. If the buyer defaults on the note it can be expensive to try to collect
  2. If you worry as much about the note payment as you did about the business are you any better off?
  3. Unless done properly there can be all kinds of tax issues

The Uh, Oh:

  1. If the buyer has a lease on facility you may need a landlord subordination agreement or you won’t be able to get to the collateral or worse, you might have to pay the back rent in order to get to your collateral.


  1. Get the landlord subordination agreement at the time of the sale.
  2. If you can, cross default the lease and note so that if buyer is in default on either they are in default on both.
  3. Make certain to file a UCC1 on the collateral assets so the whole world knows your note needs to be paid before the assets can be sold.
  4. Try to get a really high default interest rate on the note so that the financial pain of default is high.
  5. Consider a sub-lease to the buyer rather than buyer getting a new lease. That way you retain control of the facility and can act faster if you need to intervene.
  6. Try to get collateral other than business assets. Does buyer have a vacation home? Other assets?
  7. Guarantors – get as many guarantors as possible also make sure spouse signs guaranty if required in your state.
  8. Require buyer to provide financial statements and tax returns to you for as long as the buyer owes you money so you can keep an eye on the business health.

Seller Financing with Other Types of Financing

SBA Loans with subordinated Seller note:

The Good:

  1. The Bank is likely to screen the buyer more thoroughly than most sellers
  2. The seller note is likely to be less than 10% of the total selling price.

The Bad:

  1. The bank will look very carefully at the business cash flow (several years), seller financials need to be in good order.
  2. Bank will require a 3rd party valuation to make sure the price the buyer and seller agreed to is fair.
  3. SBA limits any “after the sale” arrangements between buyer and seller.
  4. The seller note will likely have a period (usually 2 years) whereby the seller gets NO payments and only interest accrues.
  5. If buyer defaults on seller note the Bank will limit what actions the seller can take to get paid.

The Uh, Oh:

  1. Because of the restrictions in the bank subordination agreement the seller note is usually the first obligation that goes unpaid.
  2. If the seller stops paying you it’s usually a sign of other significant problems with the business.
  3. If the buyer stops paying the note the seller recourse is basically limited to enforcing the personal guaranty.

Revolvers (also known as Asset Based Loans) – with associated seller note

Definitions: a “revolver” is a bank loan or financing company loan that gets adjusted every month (or week or even day). These revolvers are tied to accounts receivable (a/r) and/or inventory and are a % of those items. For example a common revolver term is a bank loans the business up to 70% of current accounts receivables and/or 20% of good inventory at cost.  (The a/r % is high because a/r is highly liquid and can be collected quickly. Inventory is much more difficult to liquidate and has high costs associated with liquidation i.e., warehousing, transportation, auction costs etc.)

The Good:

  1. A revolver is flexible in that if funds cashflow when the business is growing.
  2. A revolver usually has fewer covenants.
  3. The “credit worthiness” of the business is less stringent than normal bank standards

The Bad:

  1. The seller note will lose a/r and inventory as collateral.
  2. The revolver lender usually can “pull the plug” at any moment
  3. The cost to the borrower can be significantly more expensive than an SBA term loan.

The Uh, oh:

  1. Revolver loans normally have many fees and opportunities for lender to squeeze a few more dollars out of borrower
  2. Revolvers are famous for high cancellation fees if you want out of the deal.

Credit Card Loans Against Receipts – along with seller financing

Description – With these loans a lender “forecasts” your credit card receipts and lends you money in advance, then when the customer credit cards are process for the business sales then the money is redirected to lender to pay off the loan they advanced. Generally speaking these loans are used for retail stores, restaurants, etc with high % of credit cards sales and highly predictable and regular sales. Take the time to calculate the real costs of this kind of financincing, it can get expensive quickly.

The Good:

  1. If you have high volume of regular credit card sales these loans are not difficult to obtain
  2. The cashflow is steady

The Bad:

  1. These loans can be very expensive
  2. The CC lender gets paid before the seller note by taking their money out of the sales revenue.

The Uh, oh:

  1. Because these loans have a claim on all revenue it is very unlikely any other 3rd parties would provide financing.
  2. The process of payment takes control of cashflow out of biz owners hands (which could be a good thing in some cases)

If you are selling a business you’ll need to risk adjust the price depending on the financing structure that the buyer and seller agree to. Also, make sure to get good legal and accounting advice to understand what the net value is. And finally, look closely at the risks associated with any financing arrangements.

5 Tips to Sell a Manufacturing Business

5 Tips to Sell a Manufacturing Business

Congratulations!  You’ve decided to sell a manufacturing business but before you jump in with both feet, we suggest you settle in to take stock of your business, systems and current processes. While it may seem like a simple route to just list your manufacturing business for sale in Texas, there are far more complexities at stake. All industries, including manufacturing, have unique characteristics that need to be considered as you prepare for the eventual sale.

Some of these items take a significant amount of time to implement so a business owner would be wise to begin working on these elements well in advance of attempting to sell their company. Your due diligence and careful review of your business NOW will help to secure the opportunity for higher valuation.

  1. Work-in-Process Accounting: Work-in-Process can involve substantial assets and liabilities. In addition, these numbers are moving nearly every day. Labor goes into the project, more materials, customer progress payments, etc. Buyers won’t go for the “eyeball” estimate for the money. Implement industry standard work-in-process systems and have the discipline to accurate accounting.
  2. Proper Management of Customer Payments: This is associated with #1. Far too often we see customer deposits or progress payments just booked straight into accounts receivables. We’ve even seen progress payments booked as revenue. Part of a business sale often involves working capital adjustments, if you are mixing a/r and sales that should be in the work-in-process calculation the problems multiply.
  3. Safety: Make sure your safety processes and procedures are up-to-date. Many buyer will conduct a due diligence “OSHA Style” audit to make certain there are no hidden liabilities. Also, for obvious reasons, take meticulous care to document and track any and all job injuries and accidents.
  4. Contracts with Customers:  Whenever possible have your contracts with customers written so that they are assignable. Also, look to limit “change of control” clauses that create risks when buyers take over the contracts in progress. Get a review by a good contracts attorney.
  5. Environmental:  If you haven’t had a Phase 1 Environmental Survey done on your property in the last 10 years it might be a good idea to make sure no issues have inadvertently crept into your operations.

Preparing for these 5 items will not only significantly reduce the time and friction involved in due diligence but will increase the odds that your deal of your life will make it to the closing table.

Sunbelt Texas has 20 years experience, the decision to sell a manufacturing business will create value for the business owner if done properly.

For more information about Preparing Your Business For Sale feel free to contact us. Email

Investigate these 7 Points When Buying a Business

Investigate these 7 Points When Buying a Business

Buying a business can be a great move but it takes a lot of due diligence investigation. Due diligence is often thought of as “finding the bad stuff” but it is also important so that you understand what it will take to operate the business after you own it. OJT (on the job training) is helpful but preparation is even better.

Buying a Business

Know what to research

Keep in mind that these magnificent 7 aren’t the only things you need to investigate but they are 7 that are often overlooked or short-changed when buying a business.

  1. Cash Cycle – understand the cash cycle from when you incur cost to when you collect cash. 10 days? 30 days? 60 days?  Think through the stages, when do you spend money? When do you collect money? Every business has a cash cycle, dissect the steps to make sure you understand when cash is expensed and when you receive cash. If you have 10% profit you have 90% you owe other people. You’ll need to fill the “cash gap” with financing or cash injections from other sources.
  2. Hidden Costs – know the “hidden” costs in the system, warranty, call backs, inventory losses, un-billable hours, and uncollected AR. Most business owners only think about these things at year end when the CPA does the business taxes but this effects your cash every day.
  3. Specialized Knowledge – know the specialized knowledge of the current owner. Technical knowledge? Craft knowledge? Relationship knowledge? Supply source knowledge? The employees will judge you beginning day 1. Make sure you know what they expect you to know.
  4. Cash Needs -know your cash per sales growth requirements; don’t grow yourself into poverty. For every dollar in sales you’ll need to have some dollars available to fund expenses and products until you collect the cash from the customer.
  5. Pricing – understand how the current owner prices products and services.  Markup? GM? Guesses? Competitive comparison?  Is there room for improvement? Does current pricing have anything to do with the market? Who has special deals?
  6. Insurance – understand the current insurance coverages and make sure your coverages reflect your risk tolerance levels. Get an insurance audit. Make sure you review every aspect of insurance you need. Often we find sellers are under insured. Getting proper insurance could effect the biz earnings and the amount you might be willing to pay to buy the business.
  7. Licenses – make sure you research the licenses, permits and compliance requirements needed to operate the business. Don’t assume the seller knows everything. Buying a business not in compliance with current requirements is risky business.

While you may be itching to simply sign on the dotted line..

Thinking about what businesses might be for sale?

STOP:  your preparation and due diligence will save you a great deal of  hassle and surprise. Buying a business takes time, thought and research. As an entrepreneur, this is just your first step in creating a successful business.

So You have a Deal to Buy a Business, now what?

So You have a Deal to Buy a Business, now what?

Congratulations but don’t pop the champagne yet. Now is when the real work begins in your quest to buy a business.

Essentially, there are 3 fundamental phases to orchestrate before your final takeover of the company. Keep in mind that each business or industry may have several variations of the progression. Here are some general guidelines but you and your advisers may have other steps or systems to add to this buying chain.

Please keep in mind your agreement to purchase likely has important dates identified. Keep track of those dates and take the action necessary to comply with those.

Phase 1 – Initial Due Diligence and Lender Commitment

This phase is mostly about the financials of the business and your personal financial situation.

Basically your lender will want to make sure that the likely cash-flow of the business fits your overall financial situation. Get with your lender immediately and begin the financial due diligence. Your lender will provide you with a list of items they need. The goal here is to do enough due diligence to get your loan commitment as quickly as possible. Get your advisors (typically at least an attorney and CPA) lined up quickly so they can help on the tricky items

Phase 2 – Full Due Diligence

This is where you and your advisers come up with a list of everything you want to know about the business. It’s important to have the loan commitment in hand when you get to this stage because sellers want to make sure they have a qualified buyer with the funding lined up before they release very highly confidential business information.

This due diligence takes a lot of time.

You need to commit to move thru it quickly, in a very organized manner. Remember, this stage is where you personally and along with your advisors, review, confirm, and challenge all aspects of the information. When conducting due diligence, forget about what the broker or seller or your buddy has said, it’s your job to review and confirm things yourself.

Remember, due diligence is about you, the buyer, managing your risk by knowing the facts.

Put in the work, it’s important.

Phase 3 – Closing Process

This begins after you have completed Phase 1 & 2. At this stage you’ll likely be asked to release or waive the contingencies in your offer and authorize the closing company to begin preparing closing documents.

At the same time you’re working thru the closing documents, you’ll also need to be focused on what’s involved in taking over the business and all of the details.

  • Is your insurance in place?
  • Do you have required licenses and inspections?
  • Is your merchant services account ready to go?
  • How will you introduce yourself to the staff? Is your payroll service set up and ready to go?
  • Have you formed your new entity or LLC?
  • Do you have your sales tax #?
  • Do you have your Fed ID #?

Make sure you’ve created a complete inventory beginning with the above suggestions. While it seems like an endless list, knock them off 1 at a time to create an even stronger foundation for the success of your new business venture.

After Phase 1, 2 & 3 you’ll be a new business owner.

Working thru these 3 phases can be exhausting and frustrating for both the buyer and seller but we’ve had 100s of people make it thru.

Keep a good attitude, try to avoid ultimatums, stay on good terms with the seller and realize there are lots of 3rd parties (banks, landlords, inspectors, etc) who often move at their own pace.