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