The Top 10 Business Sale Considerations

  1. PLAN AHEAD
  • Is the business owner ready to sell?

Emotionally?

Financially?

  • Is there a management succession plan?
  • Does the owner need to sell?
  • What will the owner do with his or her free time after the sale?
  1. BUILD A TEAM
  • A variety of advisors, specialists and professionals are required to successfully complete a business sale transaction.
  • An investment banker or business broker may be required in order to locate potential buyers.
  • Additional resources required include:

Attorney                                  Financial Advisor

CPA (Audit and Tax)            Insurance Professional

Banker                                     Employee Benefits Advisor

Senior Management            CFO/Controller

  1. TIMING IS EVERYTHING
  • When financial performance is strong, values go up, but an owner often doesn’t want to sell as they want to reap the rewards of the strong financial performance.
  • Inversely, when financial performance is weak, values go down, but owners often are ready to sell instead of waiting for the next up cycle or working through financial challenges.
  • Rapid change in the industry, due to technology or regulatory changes, can also affect timing.
  • Other influences on timing are changes in interest rates and income tax rates.
  1. UNDERSTAND VALUE
  • Owner valuation expectations need to be managed.
  • Many transactions are driven by EBITDA multiples or some form of discounted cash flow analysis.
  • Key value drives in most business typically include:

Competitive positioning

Product or service quality

Workforce stability

Management quality

Customer profile (concentrated versus disperse)

Growth and profitability trends

  1. CLEAN BOOKS AND RECORDS ARE KEY
  • Reviewed or audited financials from a reputable CPA firm almost always expedite the sale process.
  • Regularly reconciled general ledger accounts are important and make an interim date sale easier.
  • Stable and size-appropriate accounting and information systems provide reliability.
  • Quality budgeting and forecasting will aid in establishing business value and the corresponding purchase price.
  • Comprehensive and complete business documents – particularly contracts – will accelerate the closing process.
  1. TRANSACTION STRUCTURE MATTERS
  • The business owner needs to understand the difference between:

Sales of shares and sales of assets

Financial buyers and strategic buyers

  • The owner will also need to be to understand and be prepared to negotiate typical transaction sale terms including:

Purchase price components     Escrows and holdbacks

Post-transaction earn out         Transition services agreement

Working capital provision         Key employee retention provisions

  • In certain circumstances, an employee buy-out may be the most logical form of business sale.
  1. TAX CONSIDERATIONS CAN BE COMPLEX
  • Evaluation of tax issues should go beyond just Federal Income tax.
  • Additional tax areas include:

State and local taxes

Property taxes

Estate taxes

  • The buyer will typically want an asset purchase for step-up in asset basis.
  • Sellers usually prefer a stock sale in order to provide the most efficient tax structure.
  • Entity structure is important – C corporation can lead to double taxation.
  • How does the transaction fit into an estate plan?
  • Personal versus business goodwill must be understood and evaluated.
  • Charitable contribution considerations also arise as the transaction may provide gifting opportunities.
  1. DON’T UNDERESTIMATE THE RESOURCE COMMITMENT
  • Selling a business takes time and money.
  • Continuing smooth operations while engaged in a transaction is often difficult.
  • Understand and be prepared for the due diligence process.
  1. FINANCING CONSIDERATIONS ARE OFTEN CRITICAL
  • Financial buyers often borrow a portion of the purchase price.
  • Is the deal bankable?
  • Is the owner willing to consider seller financing?
  1. BE PREPARED TO STICK AROUND
  • Post-transaction owner involvement is often required.
  • Owners may desire (or may be encouraged by the buyer) to retain a financial interest in the business after the sale.
  • Owner employment contract and noncompete provisions should be understood and negotiated.

Authored by:

Jim Ramborger

Owner

Hagen, Kurth, Perman & Co., P.S.

james.ramborger@hkpseattle.com

(206) 682-9200

 and

Dave Saporta

Partner

CFO Selections LLC

dave@cfoselections.com

(206) 920-6639

 

Info@hkpseattle.com