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

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.

IT Due Diligence when you Buy a Business

IT Due Diligence when you Buy a Business

Intellectual Property Due Diligence (this includes information technology I.T.) when you buy a business is critical and often overlooked, along with the Intellectual Property element of Due Diligence.

I.T. and Intellectual Property (IP) Due diligence are closely related and both are often done at the same time. This process can be very technical and often involves complex federal law. If your attorney is not familiar with intellectual property law you might, dependinging on the value you assign to the intellectual property, want to seek an attorney or  Intellectual Property Due Diligence expert who specializes in these somewhat arcane issues.

I.T. & IP due diligence have some common elements and one of the most important is to make certain who actually owns the IP often associated with I.T. value in a business.

Note: To mitigate risk, “involve IT professionals as part of the deal team to help assess a broad overview of the IT landscape of the target firm and identify any substantive issues that may exist early in the deal making process.” John Beauford, director of IT at Doctors in Training.

The law related to ownership of Intellectual Property can be confusing. A common question is, when the business had it’s website developed does the business have written confirmation that the intellectual property (i.e., the website content and design) is owned and is the legal property of the business? Just because an employee did the work it doesn’t necessarily mean the business owns the IP. This is something to think about as a business owner regarless of if you are considering buying or selling a business.

Another area is IP related to Trademarks, Patents and Pending Patents all of these usually require third party confirmation or transfer.

If the IP and I.T. of a business is a significant part of the value of the business you are buying it’s probably a good idea to put in the time to investigate the issues and engage some legal expertise to make sure that you will own or have the rights to the IT/IP after you purchase the business.

Diversify Your Business

Diversify Your Business

4 Ways to Eliminate Customer Concentration and Build Confidence with Prospective Buyers

It’s value suicide. A company with more than 15 percent of its revenue with one customer is at high risk of having the rug pulled out from under them.

As the owner of such company, it’s going to add difficulty when it comes time to sell.  And for any potential buyer, the risk is higher unless you can prove growth potential by finding more like customers, and fast.

If you are preparing your business for sale, you need to start to think like a buyer. If you have customer concentration issues, stop looking at the business as the operator and start looking at it from an opportunity and sustainability stand point—especially under new ownership. Remove yourself, your history and past knowledge from the business, because that is exactly what a buyer is going to get.

There’s no doubt that you worked hard at building long lasting customer relationships, especially with a major client. But in selling your business, it’s a red flag.  It’s risky. That client could leave shortly after you are gone. The buyer will always be fully aware of such risk and there’s no hiding it.

Here are some ideas on how to minimize that risk for the potential buyer and better position your business for a premium value:

Remove the Client Trap

You aren’t alone, a lot of business owners fall into this trap. It’s easier to please and upsell existing clients than it is to look for new business.  Start looking for “like clients”.  Every good client is a profile for another new client. Same size, same problems or same needs, figure out the key component and start looking for a new client that mimics your cash cow.

Ask for Referrals

Happy clients are also happy to refer you to others.  It’s the entire basis of the Net Promoter Score and why so many companies are using it not only to improve customer service but to prove viability of the business.  If you don’t ask for referrals, you won’t get them.  Stop by or give your best customer a courtesy call, let them know you are looking to grow your business and ask if they know of any other business that could utilize your services. If not now, ask them to keep you in mind.  In some cases, businesses offer a referral fee. This may or may not work for you, but it’s another option to reward the referring party.

Seal the Deal in Writing

When you have a customer or client who is a significant portion of revenue, get the deal in writing including the duration of the agreement. Although contracts can be nullified post-transaction, at least the contract minimizes the risk of them leaving and gives the new owner some peace of mind.

Remove Sole Dependency

Many times in key accounts like this, the customer has become dependent on you. They want to only work with you or negotiate with you.  Start to transition this responsibility with another team member now, even if you aren’t looking to sell right away. The customer needs to transfer their confidence from you, to the business. This will add even more assurance to the prospective buyer.

Minimizing risk is the number one thing you can do before listing your business on the market. The less risk there is, you can sell for more and sell faster. Customer concentration is just one area to reduce that risk. Keep reading our blog as we go through other areas to increase the salability of your company.

Business Valuation as it relates to Business Sale Price Calculation and Working Capital

Business Valuation as it relates to Business Sale Price Calculation and Working Capital

Deciphering a Business Valuation may take an experienced analyst.

General definition Current assets – current liabilities = Net Working Capital

In most cases the valuation of a business does not include the net working capital of the business at the time of the valuation. Working capital is often excluded from valuations so that business values can be compared to other similar businesses without the need to adjust for working capital. If 2 businesses are identical except one has $1,000,000 in excess cash it won’t affect the valuation comparison because the excess cash is not in the valuation price for the businesses.

However, the working capital can affect the actual selling price of a particular business if the working capital is included in the sale.

Example:

Let’s say Business A is valued at $5,000,000 and business B is valued at $5,000,000, both without working capital. If business A has $700,000 in net working capital and business B has $1,500,000 in net working capital, and the buyer wants to buy the working capital with the business, then business A will sell for $5,700,000 and business B will sell for $6,500,000 even though both were valued at $5,000,000.

Many buyers want to buy a business with adequate or normal working capital. By doing this the buyer has a set amount of capital to raise that allows them to purchase the business. This capital to buy the businesses is likely long term capital. By including working capital in the purchase, after the sale, the business can operate on the purchased working capital.

The larger the transaction the more likely that working capital will be included in the business sale. The working capital target number (i.e., the amount specified in the LOI to be included in the purchase price) is an important negotiated element of a deal. In the LOI it might be a dollar amount or often an agreed to formula (since the working capital moves virtually every day the business is open) to use to get to a working capital number at closing. Make sure all elements of the working capital calculation is defined and understood.

Common Working Capital Elements

(with notes on the tricky ones);

Assets

  • Cash and cash equivalents
  • Accounts receivables
  • Inventory
  • Deposits – Deposits business has at vendors or other i.e., tax deposits, lease deposits, etc)
  • Work-in-Progress – Does your accounting system account for this properly? WIP can also be a liability depending on billing practices.

Liabilities

  • Accounts payable
  • Accrued payroll
  • Vacation owed employees
  • Gift certificates Does your accounting system track?
  • Warrantys Outstanding for products or services
  • Prepaid service or maintenance agreements
  • Deposits from customers
Selling a Business: The C Corp to S Corp Dilemma?

Selling a Business: The C Corp to S Corp Dilemma?

Selling a business set up as a C corporation can have some very painful tax consequences.

The following is not legal or tax advice. Consult with your CPA and/or attorney before taking any action

Is your business a C Corporation?

If yes, PLEASE READ THIS!

Do you want to pay 50% or more in taxes when you sell your business?

I didn’t think so. If you want to avoid that potential calamity? Read on.

But first, let’s talk a minute about the characteristics of a C corp. A C corp is a legal entity in which a business is operated. An S Corp and LLC are also entities used frequently to operate a business.

The primary difference from a tax perspective is the C Corp profits are subject to “Double Taxation”. Meaning the corporate entity is taxed and then the shareholders are taxed when what’s left is taken out of the C corp by the shareholders.

S Corps and LLCs are often set-up as “pass through” entities meaning there is only taxation at the shareholder or member level (we’ll use shareholder and member interchangeably but there are some differences). There are circumstances where LLCs are taxed as C Corps. Check with your CPA when you establish your LLC to make certain it’s set-up correctly.

Double taxation can be painful

Many business owners have been advised by their accountants over the years to switch from a C corp to an S corp but the business owners have ignored this advise too often. Timing the conversion can have an effect on the impact felt by the C to S conversion. If it comes time to sell your C Corp almost all buyers prefer an asset sale as opposed to buying the stock of your C corp. Therein lies the value trap caused by the double taxation at the C corp level.

Why is important to advisors like us (Mergers & Acquisition advisors and business brokers) who sell businesses for business owners? Because the same “double taxation” on your profits could be a problem upon sale of the business. How would you feel if you spent decades building a business and then when you sell it you get the privilege of paying 50% or more in taxes on the selling price?

How Long does it take to get the S Corp tax treatment after you convert?

There is a look back period in the tax law that is designed so that you can’t just convert your C corp to an S corp at the time of sale and reap the lower tax windfall. The IRS is way too smart for that trick.

The tax code “look back” period has varied in recent years from 10 years to 5 years to 7 years to the current 5 years. Who knows what it might be in the future?

Here are the pitfalls and options:
1) If you don’t plan to sell your business for at least 5 years consider converting from C to S now

2) If you do plan to sell your business in the next 5 years, seriously consider converting from a C to S now

Yes, the advice is the same. Why? Because the look back window starts when you make the conversion and the sooner the clock starts, the sooner you are out from under the C Corp tax burden if/when you sell your business.

Selling a business is more about how much you end up with, not how much you sold it for

What are the steps to convert?

An important first step recommended by most CPAs is to get a Business Valuation done for the C Corp. This valuation captures and locks in the potential C Corp tax burden. Then the value gained above that valuation will not be subject to C Corp taxes in the future. That 10 year or 5 year or 7 year window or whatever other look back period the IRS decides to impose on you.

At the very least talk to your CPA now about converting from your C Corp to an S Corp, I promise, you’ll be glad you did. This tax burden has negatively impacted many business owners because they didn’t act before the issue arose.