IAG The Advisor: Selling out: Planning to get out of business starts when you go into business

Online, December 8, 2009 (Newswire.com) - IAG would like to share our most current Newsletter. This information will be helpful to all business owners.

Selling out: Planning to get out of business starts when you go into business
The Business Journal of the Greater Triad Area - by Matt Evans Staff writer
Friday, November 6, 2009

Going into business for yourself is hard enough, but here's a question more entrepreneurs should ask themselves early on: How am I going to get out?

The dream: a public stock offering that reaps millions as Wall Street swoons. It could happen. Of course, you might also win the lottery the first time you ever play, too.

The nightmare, and sadly, it's a lot more likely than an IPO, is failure. Bankruptcy. Liquidation. "Everything must go."
There's a happy middle ground that many business owners seek and find: The sale of the business to a fellow entrepreneur. Done right, selling a small business can preserve a legacy, turn a nice profit and earn a living for the next owner.
But that doesn't just happen, says Zac Johnson of Triad Business Brokerage in Greensboro, who represents businesses for sale throughout the region. Just like running a business, selling a business takes work and strategy.

"Nobody plans to fail, but a lot of people fail to plan," Johnson says. "When you start a business you have a business plan, and it's just as important to have an exit plan."
No plan is fool proof, as many would-be business sellers have learned in the past year, Johnson says. From a record number of closings in 2008 for his firm, sales have dropped dramatically in 2009 as the weak economy has sapped all the value from many small businesses and bank financing for buyers has become scarce.

But Johnson and other brokers in the region say planning ahead can make the sale of a business go more smoothly and earn more money, even in a difficult market.

Before the deal
The time to begin thinking about how to sell your business is before you buy or start it.
Many people who do plan ahead want to buy a business in an industry that tends to sell quickly and easily, Johnson says. Unfortunately, no one or two industries stick out as consistent top sellers.

But it can pay off to look carefully for traps that will make some kinds of businesses harder to sell than others. Franchises, for example, may be easier to get started than a brand-new business, but many lesser-known brand names lose resale value quickly and contracts often include transfer fees of as much as $20,000.

"That comes into play a lot with franchise sales - who will pay the transfer fee, the buyer or the seller?" Johnson says. "It can be a big stumbling block to overcome."

Structuring a new business is an important consideration too, says Stephen Minnich, an attorney and business broker at Piedmont Business in Winston-Salem.

There are myriad legal and tax considerations in the choice between various forms of incorporation or sole proprietorship that are best worked through with an accountant and attorney.
But Minnich says "S-Corporations" (so-called for their classification under the Internal Revenue Code) are generally easier to sell than C-Corps because C-Corps more often seek to sell the actual shares of the company rather than just the assets. That means that buyers have to take the existing liabilities and debts of those shares.

"It's relatively common for that to become an issue" with C-Corp sales, Minnich says. "I've seen some sellers demand a stock sale, and that narrows the pool of potential buyers and the price they're willing to pay."

Records make the sale
Both Johnson and Minnich say the single most important thing that a business owner needs to do consistently is keep detailed records, especially of the cash flow numbers that will weigh heavily in how much most small businesses can ultimately sell for.

A big reason small business owners often think their business is worth more than it is, Johnson says, is lax record keeping that disguises how much actual income the business is generating for its owner. It's easy to dip into the cash register for $100 when it's needed, he says, but unless that $100 and everything else is documented, it won't count when it comes time to value the business for sale.

"If you don't have clean books for at least three years, you won't bring any premium," Johnson says.
There are rules of thumb for valuing various kinds of businesses - a packing and shipping store might generally sell for 30 percent of gross sales, for example - but those rules are based on fully documented accounts.
"If you can't prove it, in the buyer's mind it doesn't exist," he says.

Thorough documentation is also critical in the common scenario of a small business that employs a spouse or other family members, Minnich adds. There may not be anything legally or ethically wrong with such situation, but buyers are going to want to know what, if any, work that person does as they calculate an offer.

"It's something you'll have to explain because the buyer has to figure out if that person is actually working and if they'd need to be replaced," he says.
Keeping good records takes work but it can also avoid post-sale legal problems, Minnich says. Like home sellers, a person selling a business has to fill out detailed disclosure forms covering everything from past litigation to environmental liabilities. Sellers are allowed to say "I don't know" on most of those issues, but too many vague answers can scare off a buyer, he says.

Throughout the life of a business, Minnich says, it's smart to be thinking about leadership transition as it relates to a future sale. Not every business buyer will want to take on active day-to-day management, so a well-trained and knowledgeable staff adds value.

That means sharing information about top customers, vendors and strategies with trusted staff who will likely stay with the company after a future sale.
"You're the one who knows everything, and that can protect you in some ways," Minnich says. "But it also makes it difficult for a buyer who sees all that knowledge disappearing with the seller."

Owner financing helps
In the current economy and with bank lending tight, Johnson says business owners interested in selling should give serious consideration to offering owner financing. It makes many sellers nervous, and not without reason. But it can make the difference between sale and no sale.

There are several advantages, Johnson says. There will be a bigger pool of potential buyers, the business should sell for more and there are tax advantages for the seller. The interest and term of payments also provide a nice income stream.

The downsides are important to consider. The big one: If the business fails under its new owner and the payments stop, there may be little or nothing left of value for the seller to take back. Johnson says he always wants to see the financing agreement include regular financial reports so that the seller will be able to spot potential problems early and step in to help.

The need to keep monitoring and stay involved is another potential drawback, especially for sellers who are eager to retire. But Johnson says owner financing can still be a win-win for buyer and seller.
"If the seller is going to remain local or available and if the business is doing well in an industry that should keep thriving, there's no reason not to consider it," he says.
The ultimate decision for a business seller will be whether or not to sell for a price that is offered, and that offer may be lower - sometimes a lot lower - than expected. Johnson says at that key moment, and many more in the process, having the advice of a broker with broader knowledge of the market and a more objective eye can be extremely helpful.\

Selling a business "can be very emotional because it's like a child you've been raising for 20 years," Johnson says. "They often think it's worth a lot more - and to them it is. But on the market, it's worth what it's worth."

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