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Selling Your Small Business

So, the business you started 20 years ago believe that he has to make some
has been successful, and now you're investment in the company, itself, after
thinking about moving on to the next purchasing it. If this is the case, his
phase of your life. If you're "lucky," total investment is higher and he'll want
the next generation in your family has to pay you less, so that he can still
been groomed to take over and your only recover his total investment in 5 years.
real issue is to find the most tax These are obviously negotiating points;
advantageous way to pass it down. just be aware when you sell that the
Remember, before you do, though, buyer is probably taking them into
statistics show only about 1/3 of family consideration.The best thing you can do
businesses make it through the 2nd for yourself is to think about and
generation and then only 1/3 of those prepare for the sale long before you are
make it through the 3rd generation.If ready to do it. You understand your
selling is the option you're looking at, company's future better than the buyer,
you're about to enter a different world - but the buyer knows that and he'll need
and, unfortunately, one that you probably to be reassured that things are as good
don't know much about. For most small as you represent. The more information
business owners, selling their company is you've collected, tracked, and have
something they only do once. The buyer, available to give to the buyer, the
on the other hand, is more likely to have easier this will be. In other words, the
previously acquired a company than you better your business looks on paper, the
are to have previously sold one. And, more leverage you have in getting a price
even if he is a first time buyer, the closer to what you want. You can create a
odds are that he has looked at other real advantage for yourself, when you
companies before yours and has gone capture as much detailed information
through the analysis, pricing scenarios about your company as possible, by having
and possibly the negotiating process. In the ability to "prove" to the buyer that
other words you're quite possibly facing your company is what you say it
someone who has "been around the block" a is.Another important thing to understand
few more times than you have.Relative is that the buyer and the seller can have
experience aside, the best place to start very different perspectives about the
when selling your company is to put ultimate deal structure and the tax
yourself in the buyer's shoes. After all, implications of the transaction; in fact
when he buys your company, he's making an individual elements of the deal structure
investment and, if you can figure out how favor either the buyer, or the seller,
to satisfy the buyer's investment and but not both. The seller wants to
operational requirements, you've gone a maximize his capital gains income (taxed
long way toward facilitating the sale at a lower rate); the buyer wants to
and, hopefully, have put yourself in a structure the deal in any way that allows
stronger negotiating position.In general, him to expense the purchase price through
there are two ways to look at how much the company he is buying as much as
your company is worth - valuing the possible. For example, it's an advantage
assets you are selling and valuing the to the buyer to pay for the acquisition
Free Cash Flow (FCF) of the company (and partly through a consulting contract, or
the ultimate sales price may be some a covenant not to compete, because his
combination of the two). The market value company can then deduct those as
of your company's assets really operating expenses; the seller, on the
represents a floor on the value of the other hand, is receiving ordinary income,
company, because you could always close rather than capital gains income.Finally,
the company down, sell the assets for the seller is best served by selling the
what they're worth, and pay off the stock of the company, because any legal
company's liabilities, with the balance liability created by the company goes
going to you.Your business' FCF, on the with it, rather the staying with him. The
other hand, is a reflection of the value buyer, on the other hand, would normally
of your company as an operating entity. prefer to buy the assets of the company,
It's the amount of income that your because they don't carry the same legal
company can consistently generate, after liability as buying the stock and he can
compensating the owner(s) at a market write-up the value of the assets and gain
rate. Because a potential buyer is making a future tax advantage by doing it.The
an investment, he should be willing to bottom line - start thinking about the
pay you some multiple (or number of sale of your company early! By early, I
years) of this FCF, as long as he can mean years prior to the time you think
expect to get his investment back in a you might want to sell. It's obvious that
reasonable period of time. As a rule of you'll need good advice from an
thumb, I think it's reasonable for the accountant, an attorney, and even a
buyer to pay an amount that he can earn broker. But, these experts tend to be
back in 5 years. In other words, the brought in toward the end of the process.
buyer should expect that the earnings of You'll gain the biggest advantage by
the company over the next 5 years will taking a strategic approach to selling,
cover a market salary for him and then thinking about it long before you want to
throw off enough cash to allow him to pull the trigger, and structuring the
recover his investment in 5 years. If he company and collecting supporting
pays less than this, he may have gotten a information that will let you present it
great deal; if he pays more, he may have to a buyer in the most attractive way.Jim
paid too much.There are other things Deyo is the President of Business Advisor
related to pricing that the buyer is Online, an internet based service that
going to be thinking about. First, which provides small businesses with the ideas
5 years should he consider? If earnings they need to grow and the resources they
are a lot higher in the most recent year require to make the right decisions. As a
before the sale, he will not consider former Sr. Vice President with a major
this a sufficient trend to pay for. He'll banking institution, Jim worked
want to average earnings for the past 2, extensively with small and medium sized
or 3 years and lower the FCF that he's companies and has over 30 years
paying for. As a seller, though, you'll experience in commercial and consumer
want to maximize FCF and include the next lending, accounting, finance, marketing,
couple of years, if you expect earnings and strategic planning.
to keep going up. Second, the buyer may




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