Should You Be Selling Your Company...Now?

The following is an excerpt from our Privately Held Company Newsletter.

It all depends! There are all sorts of studies, surveys and the like suggesting that with the "baby-boomers" reaching retirement age, the market will be flooded with businesses for sale. The consensus is that with these privately-held company owners nearing retirement age, the time to sell is now. In one survey, 57 percent of business owners said that their age was the motivating factor for exiting their business. In another one, 75 percent of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years. Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market.

While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell your business now - and some reasons that may compel you to hold off. First, we'll address the reasons to sell now. Under the Bush administration , the capital gains tax rate was reduced from 29 percent to 15 percent - almost cut in half. That is a pretty significant reduction. However, there is the distinct possibility that a new administration in 2009 will see fit to change this, and an increase is a real possibility. The tax issue is an important reason to consider packing it in now. Another good reason is that it just may be time to "smell the roses," as they say. After running the business for so many years, "burn-out" is a very valid reason for selling. Many business owners may have, without actually realizing it, let their business slide a bit. You lose a customer or client here and there and don't make the effort to replace them. Or, you don't make the effort to check back with the supplier who has promised to give you a better price on an important product or service. It's too easy to stick with the one you have been dealing with for years, even though you know the price is probably too high.

On the flip side, it is also easy to convince yourself that the business is down a bit this year, mostly due to the current economy, likely reducing the value of the company. Maybe waiting until things pick up a bit and values increase would be agood idea. Too many business owners feel this way, but unfortunately no one can predict the future. New competitors may enter your market. Foreign competition may move in. You may not have the energy or that "fire-in-the belly" you once had, so the business may slide even further.

You could also point your finger to the tightening of credit and ask, "How is a buyer going to finance the business?" Despite very low interest rates, borrowing money has become more difficult. People seem to be pulling back a bit, so maybe no one will want to buy the business. Thirty-five percent of business owners, in another survey, said they were going to hold off selling because they felt their business would continue to grow and therefore, hopefully, also increase in value.

There is an old saying that the time to plan your exit strategy is the day you start running your business. Business owners can't outgrow interest rates, capital gains or aging. The time to sell is when you are ready to sell. There is truly no right time, but understanding the tax implications now should play a very important role in the decision if you are considering a sale in the next two or three years. The mere fact that you have read this far may be a sign that now is the time to sell. To learn more about current market trends, what your business might sell for, and what your next step might be, contact us.

Improving Your Prospects for Selling

According to a Price Waterhouse Coopers survey of more than 300 privately held U.S. businesses that have sold or transferred, the most common steps companies take to improve their prospects for a sale, prior to taking the company to market include:

• Improving profitablilty by cutting costs
• Restructuring debt
• Limiting owners' compensation
• Fully funding the company pension plan
• Seeking the advice of a consultant or intermediary
• Improving the management team
• Upgrading computer systems/process

Qualitative Factors That Impact Price

The Following is an excerpt from Arne & Co. BTM Newsletter by Darrell Arne

So, what is Price? Webster would define Price as the amount of money needed to purchase something. In the context of a business transaction, a term closely related to Price is investment value - defined as: the value to a particular investor based on individual requirements and expectations.

The definition of Price above refers to a "particular" investor (buyer), just as there will be a particular seller. The real world of business transactions involves people. People with deeply held values, differing backgrounds and knowledge, and who are emotional - just being human. That's why people are so often unpredictable.

So when buyers and sellers look at a business to be bought and sold, the Price they see will be influenced by their particular motivations, perceptions of risk and growth of the business, and their overall knowledge of the process. Price is also affected by how it's negotiated. The adage is:

"You determine Value and negotiate Price".

The test for possible overpayment begins with an analysis of the operating cash flows of the business. EBIDTA (earnings before interest, taxes, depreciation and amortization) is often the cash flow measurement from which pricing decisions are made.

If a buyer and a seller can agree tha the business produces a certain level of EBITDA, then the Price can be tested to see if it satisfies the buyer's post-transaction claimholders to EBITDA.

Those four claimholders are:

1. Uncle Sam: The state and federal income taxes on entity profits


2. Lenders: The principal and interest repayment on acquisition loans


3. Investors: The return on and of the cash equity the buyer puts in to make the acquisition


4. Company: The working capital and capital expenditures needed for future growth

If the buyer's claimholders to cash flows are not met, then the Price may be too high and/or terms too stringent. The reverse is true as well. If after meeting the buyer's claimholders' to cash flows, there are excess post-transaction cash flows remaining, then the Price may be too low, and/or the terms are too lenient. Therefore, not giving what the seller wants - the highest Price and the best terms.

Ultimately, the objective is to demonstrate that the pricing and deal structure satisfies the buyer's post-transaction claimholders to cash flows, while also satisfying the seller's expectation of receiving the highes Price and best terms.

A Win-Win Method in Negotiating Price

In the well know best seller on negotiation - Getting to Yes - the authors suggest this four-step negotiation methodology:

• Step 1-Separate the PEOPLE from the problem


• Step 2-Focus on INTERESTS, not positions


• Step 3-Invent OPTIONS for mutual gain


• Step 4-Insist on using objective CRITERIA

Ideally, the goal is to negotiate a Price that's a win-win for both the buyer and seller; and, leads to a wise agreement, which the authors define as: one which meets the legitimate interests of each side to the extent possible, resolves conflicting interests fairly, is durable, and takes community interests into account.

Top Ten Mistakes Made by Sellers

The Following is an excerpt from our Privately Held Company Newsletter:

1. Neglecting the day-to-day running of their business since it will sell tomorrow.
2. Starting off with too high a price since the price can always be reduced.
3. Assuming that confidentiality is a given.
4. Failing to plan ahead to sell/deciding to sell impulsively.
5. Expecting that the buyers will only want to see last year's P&L.
6. Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.
7. Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.
8. Not accepting that the structure of the deal is as important as the price.
9. Trying to win every point of contention.
10. Dragging out the deal and not accepting that time is of the essence.

Finding the Deal

The Following is as excerpt from Russell Robb's book, Buying Your Own Business 2nd Edition.

Brian Knight is the president of Country Business Inc., a thirteen-office business brokerage firm that specializes in the purchase and sale of small and mid-size companies. While Country Business sells mostly businesses with sales of less than $3 million, they are considered an excellent resource for individual buyers seeking to acquire companies in the lower end of the middle market, especially in Maine, New Hampshire, and Vermont.

Knight wrote the book Buy the Right Business - At the Right Price, however, the following information was delivered to the New York Venture Group during Knight's speech on "How to Find a Business to Buy."

The demand for small businesses far exceeds the supply. Screening telephone calls from Knight's Manchester Center, Vermont office, most inquirers are looking for small medium-tech manufacturers with a proprietary product and a proven record of increasing revenues and profits. The buyers would like to move to the Stratton, Vermont area and have a relatively short commute to the target manufacturing company. The only problem is that there are very few manufacturers in Vermont, particularly in the Straton area. What is available as businesses to buy in Vermont are hospitality and retail companies. The first lesson to be learned as a buyer is not to have unrealistic expectations.

Concurrent with the first lesson is deciding whether you should buy a company at all! Buying a company, much less finding a company to buy, does not suit everyone, nor does it assure financial success. Buyers can and will succeed if they buy an excellent book on this subject, seek professional advice, and take their time (maybe two years).
Knight emphasizes that buyers should:

• Be self-analystical of their capabilities.
• Write down their acquisition criteria.
• Carefully interview and select a buying intermediary.
• Work on interpersonal skills with a potential seller.

Country Business' mission is to find good and profitable businesses, not to represent unprofitable businesses. Knight believes that the key to success in finding the right business to buy is your ability to commit to the above items. If you can do so, success in finding the deal will be more likely.

Last Call Sale!- Likely end to 15% Federal Capital Gains Tax Rate

The Following is from the IBBA Weekly Newsletter

By:Dolliver H. Frederick
President, Frederick Capital Corporation, Newport Beach, CA

Most of us are familiar with our wives "encouraging" us to participate in "The Sale Event of the Year" as leading retailers cajole us (well, at least our better halves) into believing that the savings will make the shopping event memorable! Well, we have just that ocurrence "before our eyes" as we make our way through the balance of 2008!

What I am referring to is the LIKELY END to the 15% Federal Capital Gains Tax Rate. With "absolute certainty" we hear and see the Democrats expound on "just what rate" they would like to see in place, be that 25% on the low side, most talked about 28%, but sometimes as high as 35%. It could be expected that even with a Republican White House, the desire for appeasement (reaching across the aisle), will likely cause the Capital Gain Rate to be increased as a result of "trade offs" for other tax concessions. Couple with State (9.5% plus here in California) Capital Gain tax rates, we have a MATERIAL CHANGE on the horizon! Many state rates are a function of the Federal rate, so they merely move up "in sync" with the Federal rate.

This "highly probable" Tax Change will make a very significant difference to our clients. The business owners who are "wholly motivated" by the net proceeds after tax that our divestiture will provide them, by way of example, a $20 Million sale (with minimum tax basis) would drive a tax liability of approximately $4.9 Million. With the expected "new rates" posted January 20, 2009 (or shortly thereafter) the Tax Liability would be approximately $6.9 Million on the low side, to over $9.0 Million if the higher limits are achieved. We can see that this difference of grater than $2.0 Million tax liability will certainly make our days far more difficult. Now, what can we do about it?

Firstly, we can make certain that any one of our clients who is "on the fence", gets off that fence, and moves forward with a sale that closes before January 20, 2009, or better even, a close before year end 2008, just in case "they" cause the rate increases to be retroactive to January 1, 2009.

Now, that is good news for us for the last half of the year. Further, we can begin to educate our clients on the various finance vehicle that are within our purview, any of which could eliminate (or at least "permanently defer until death) their tax liability. For example the ESOP is a superb tool, which would allow the seller to take 1042 Election, and defer the entire proceeds (through an appropriate investement in an "allowed investment") from tax liability throughout his/her lifetime, at which time the proceeds would get a step up, and the liability would disappear. We also have the Structured Sale alternative, wherein his tax liability is deferred against an annuity and life insurance, once again providing him/her with a permanently deferred tax alternative to having to pay his tax within twelve months (or less) of the sale.

It is my belief that we, as Business Brokers/Investment Bankers have a distinct responsibility to ensure that our clients are receiving the most contemporary of approach alternatives, to ensure that they are making "an informed decision" at all times. We are starting to touch on some of these areas at our Conferences, as I am certain we will expand on these "teachings" as their necessity becomes compelling and the courses become available.

These are very exciting days. The paradigm is shifting, and shifting quickly, as we are expected to be "fast on our feet" to provide answers, compelling answers to business owners who have worked their entire life to now realize upon their life's work. And we are expected to provide the optimum advice (or assist them in identifying practitioners) to ensure that their course of action is best for them.

We find it imperative to work with Financial Advisory firms who will act as a "go to" for the Business Owner, the people with whom he will trust his proceeds and provide him/her with the "right" level of risk/reward to their proceeds. The sooner the business owner "engages" with the fund's manager, the sooner he/she will be focused on "life after" the deal closes, and the more inclined they will be to embrace an early close. Also, to take advantage of the current BARGAIN Capital Gain Tax Rates, which "we" will probably never see agin in our lifetimes!

As Tim Russert said so often, and with gusto..."go get them. Tiger", and occasionally "go Bills" too!

Advantages to Small Business Ownership

The Following is an excerpt from the book: Buy The Right Business- At The Right Price by Brian Knight

One of the most interesting discoveries we have made as consultants and agents in small business acquisitions is that the advantages of small business ownership are not widely understood. For example, it comes as a great surprise to some, that Congress has blessed the small business owner with a great deal of tax shelter in various forms.

For those who are constitutionally suited to small business ownership, the freedom and independence involved are even greater rewards that anticipated.

Because so few people understand how important the advantages of small business ownership can be when an acquisition is properly designed, this outline will be a helpful starting point.

1. Those who value their independence will find plenty of it in small business. They will have no one to answer but themselves. They will be completely responsible for workin ghours and conditions and for the success of failure of the enterprise.The small business owner has virtually unlimited freedom of choice to grow or stay small, change businesses, determine hours, products, services and organization, etc. Those who are well-suited to small business ownership often consider this the most important reward it offers.
2. The business owner will experience a much broader degree of business and management activities than it is possible to find in most careers. He or she will not be confined to a single management or job activity. This can lead to a far more complete understanding and knowledge of business processes.
3. The rewards will be directly tied to performance. A business owner will not be competing wiht others in the same organization or be required to work for someone else's goals.
4. One can earn an unlimited amount of money if sufficiently capable and committed. Conversely, one can lose everything of not up to the challenge involved.
5. A small business can offer an unlimited opportunity for creative talents of the owners. Small business ownership can be an ideal existence for people with talent and creative abilities.
6. It is possible to make a small business a family operation for those who wish to be clsoer tot heir families. Under good circumstances it can be an ideal learning and working environment for young people who are given the opportunity to participate. Conversely, those who do not wish continuous associations in work in addition to home life are well-advised to avoid the pressures a small business can create.
7. A small business is probably the best legal tax shelter in existence. Extensive benefits and tax write-offs can be built into a small business operation, particularly when the real estate is owned. Small business owners rarely have to pay substantial taxes until they are earning a substantial amount of money and enjoying an abundant life-style. Special benefits can include subsidized living expenses and shelter, transportation, entertainment, company insurance, medical benefits and many others.
8. A small business with real estate assets and responsive management can be virtually inflation-proof.
9. A well-run small business can be an even better estate builder than residential or income real estate. With the demand for small business growing and a scarcity of attractive, profitable ones, many owners find themselves with a much greater net worth than they would have had in traditional careers.
10. A great deal of assistance (far more than most people realize) is available for those wanting to consider small business ownership. A wealth of outstanding information, manuals, industry data, management assistance, courses and helpful organizations make the risk far lower and the rewards far higher than most people believe it will be.
11. Small business ownership has an increasing status as the institutional structure of society faces change and challenge. Even small businesses that were once considered routine or unexciting are now commanding great respect as the attractions of small business ownership become more widely recognized.
12. It appears that the small business sector of our country is now growing far more rapidly than big business.
13. Those with good basic management training will usually find a major competitive advantage over most competitors. Trained corporate managers often find that their planning, marketing, operating and/or organizational skills give them a major competitive edge. The required skills can be learned and developed by anyone with determination and normal intelligence.
14. Many families are able to get a large amount of equity to buy a business as a result of the steep inflation in residential housing in the last twenty years. This equity earns nothing intil it is liquidated; by investing it in the earning assets of a small business, a substantial earning power can often be generated.
15. One is free to choose, within limits, the environment and area that is most pleasing and healthy, entirely according to one's own value system. Those who find their present area of work a problem will have no such restrictions in choosing a small business. Similarly, the small business owner is free to conduct his or her business activities entirely according to personal ethics and values.