7 TRAITS OF AN ENDURING BUSINESS—AND HOW TO CREATE ONE

7 TRAITS OF AN ENDURING BUSINESS—AND HOW TO CREATE ONE Richard E. Spoon, CEO, and Jan Risher, Corporate Communications and Public Relations Creating and maintaining a business that lasts requires leaders with a particular vision, awareness and dedication—leaders who can morph and steady their organizations in keeping with the market and technology to the greatest long-term benefit. The previous decade has provided examples of several industries where leaders didn’t do a good job of the anticipating, adjusting and leading through changing of market dynamics, consumer preference and technology. The death of newspapers came the day someone said, “I know. We should take all our content—the stuff people have been paying us to produce for centuries—and put it all online for free.” When asked how they were going to monetize the giving away of their product, the newspaper brain trusts said, “We’ll figure that part out later.” And the nail in the newspaper coffin was struck. The decline of “readership” began, which of course, led to the decline of advertising, which led to the gutting of newsrooms, which led to poor products. So in a time when there is more demand for information than ever before, the primary source of information of the last century is no longer in a situation to provide it. But newspapers weren’t the only industry to suffer a digital demise. At the turn of the century, video rentals were riding high, but they didn’t do enough to keep up with technology and video on demand made their business model obsolete. Had it looked ahead, video rental companies could have retained their market. Film for cameras has gone the way of VHS videos. Like newspapers and video rental stores and companies heavily invested in film technology were content with their fat and happy existence. They forgot to continue focusing on emerging technologies and their customers’ needs and convenience in the changing digital image market. Additionally, they failed to remind their customers of the value in holding a picture in one’s hands. Digital images are here, there and gone ten times faster than it took a Polaroid picture to develop. TO BUILD AN ENDURING BUSINESS, YOU NEED TO: 1. Create a product pipeline and product lifecycle that remains relevant. Are you regularly refreshing, upgrading, improving or replacing products? Is your portfolio of products and services remaining consistently connected to its customer base? Are your products cost-effective to your customer for what they provide? Are you aware of competitive alternatives or substitutions to your product base? 2. Build a marketing and messaging machine to tell your story and communicate the benefits of your products and services. Are you staying relevant to your audience? Are you constantly refining your message to communicate the key benefits your product provides its customers? 3. Protect the goose that lays the golden eggs. What is it about your business model that gives you the advantage in the market place? Are you properly maintaining your assets and equipment? Are you protecting that advantage? (If it’s your sales company, then don’t strip out costs. If it’s about your manufacturing capabilities, then keep them up to date. Protect those core assets.) 4. Establish a never-ending secession and leadership transition planning process. All leadership transitions are difficult. Part of the challenge is anticipating potential events and planning appropriately with ready-now successors. This is a bigger issue in smaller businesses than in larger businesses. Do you have a process in place to develop your future leaders? Do you have ready-now successors in place? 5. Place strategic bets and do your homework. Narrow your focus. Don’t take the peanut butter approach on strategic bets. Too many people are afraid to place bets and spread the bets too thin. What are your top three strategic bets? Make sure you properly resource them—funding, people, materials and management support. What two or three initiatives will have the biggest impact to top and bottom line growth? If you could only do three things right next year, what three things would they be? If I wanted to change my relationship with my customers to make them stronger, what three things would I do? 6. Be comfortable with the decisions that have to be made. Make them. Track them. Stick to them. 7. Stay aware of advancements, technologies and trends directly and indirectly linked to your business. Sometimes a fad turns into a revenue model that can kill your business. Unless they’re yours, technology advancements and potential capabilities are the factors of your business that you control the least. You have to adjust to them rather than them adjusting to you. How you choose could make or break your business (think newspapers). Technology is the hardest to strategically encounter in the marketplace. It requires you to think completely differently about your business if your business is going to succeed. If you bet your farm on horse whips, and along came the automobile, you’re in trouble. Unless you figure out how your capability in producing horsewhips can serve the emerging market. RECAP: HOW TO PUT THESE TRAITS INTO ACTION? First, be aware of the big picture. Where does your awareness as a leader come from? Don’t underestimate the people and places that can open the doors of technological possibility, perspective and opportunity. Find the potential sources and people who take you to the edge—or just past it. They may be quirky, but you need them. Second, plan for disruption. Leaders of enduring companies anticipate external changes that will have an impact on their business model. In the planning processes of strategy, marketing and products, they create contingency plans for disruptions in technology and/or competition. Finally, get your team right. Building an enduring business is about people. It’s about having the right team in place—a team that has the capabilities, perspective and experience in the industry to know the business and anticipate changes.

Keys to Cash Management

Keys to Cash Management
Cash is king, and many small businesses are in danger of running out in today's slumping economy. Business owners continue to struggle to find cash flow strategies that will help them survive the recession. Recent research suggests companies both large and small are still struggling to stay financially viable. The stakes are high and decisions critical, so what can you do to keep your business afloat?
Manage Risk
Managing accounts receivables is one of the key strategies for keeping the cash flowing. What can you do to speed up customer payments? More than you might think. According to Pam Krank, president of credit risk and receivables management firm The Credit Department Inc. in West St. Paul, Minnesota, the most important step is to negotiate favorable terms up front in the sales process. Don't be afraid to ask for money up front in the form of a deposit or a retainer. Enforce your terms by immediately calling customers when invoices are past due. What should you do if a customer is experiencing cash flow problems? One option is to create formal payment notes with interest and agree to do all future business on a cash basis.
Understand Cash Needs
Cash flow projections are an important tool in understanding the cash flow needs of the business. Stacy Shaw, CPA and manager of Boyum and Barenscheer PLLP, CPAs and financial advisors in Minneapolis, Minnesota, recommends the following steps to improve cash flow management:
1. Create cash-flow projections with best-case and worst-case scenarios.
2. Focus on understanding short-term cash needs.
3. Ensure accurate estimates of income taxes.
4. Keep sufficient cash reserves in the business.
5. Understand line of credit terms and conditions including compliance ratios.
6. Establish a line of credit when you don't need it.
"Understanding your financial position is a key component in having a successful business and managing cash flow," Shaw says. Determine the company's break-even point to better understand how long you can stay in business and to proactively identify financing needs.
Conserve Cash
Conserving cash is a key strategy for weathering the recession. Many businesses are operating with a cost structure that can't be supported by soft revenues.
"Business owners need to act quickly and dramatically to adjust their cost structure to match revenue. They need to be willing to make difficult decisions, such as reducing personnel, to ensure the business remains viable," adds Shaw. Review expenses with a fine tooth comb; everything has to be on the table. Ask vendors for discounts or request an extension of terms. Lay off employees or freeze wages, if necessary, based on projections. Work with your financial advisors to help you remove emotion from the process and to be more objective when slashing expenses.
Prevention is often said to be the best medicine, and it holds true for cash flow as well. Strong financial controls, informed management of risk, decisive leadership, and open communication with financial advisors can help you to reduce the risk of cash-flow problems. Never lose sight of your cash flow. Review a statement of cash flow report monthly, if not weekly, to understand your financial position. "Don't sell your way out of this economy—cash flow your way out," advises Krank.
Cash Flow Tips:
1. Act quickly and aggressively to conserve cash by reducing expenses.
2. Shift resources to profitable areas, and discontinue unsuccessful products or services.
3. Negotiate favorable payment terms with customers before the sale.
4. Ask for money up front in the form of a retainer or deposit.
5. Research the credit history and financial health of customers before the sale.
6. Don't stock pile inventory without sales.
7. Provide timely and accurate financial reports to your bank.
8. Understand the terms and conditions of your line of credit.
9. Create cash-flow projections for best-case and worst-case scenarios.
10. Keep sufficient cash reserves in the business.
Special thanks to Wendy Kram, president of Edgestone Consulting Inc., and founder of Entrespect, an online resource for entrepreneurs.

Selling Assets to Raise Cash

I am talking to so many business owners who are taking advantage of these slower sales times by reducing old inventory or furniture and fixtures to raise cash .. Check out the tax advantages...
Selling Assets to Raise Cash
With the recession dragging on for many businesses, there is often a need to raise cash. Selling unneeded assets can be a quick way to do so. However, there are tax considerations to keep in mind. Here are some points to consider:

If you took the Section 179 expense election on the asset in the year purchased, your basis in the asset may be zero. That means anything you receive for the asset would be taxable income. Check your tax return for the year the asset was acquired to determine the amount expensed and your remaining basis. (Most accountants expense the entire cost of an asset, if possible.) You should also be aware that converting an asset on which the Section 179 expense election was made to personal use can result in recapture (immediate income) of at least a portion of the amount expensed.
If you sell tangible personal property that you depreciated, any amount you receive in excess of your basis and up to your original cost will be “depreciation recapture” and taxed as ordinary income. For example, Madison Inc. purchased a backhoe for $60,000 some years ago. It took depreciation of $42,720 on the equipment, reducing its basis to $17,280. Madison sells the backhoe for $40,000. Madison has a gain of $22,720 ($40,000 less basis of $17,280), all depreciation recapture and all taxed as ordinary income. Now assume Madison sells the equipment for $75,000. The total gain is $57,720 ($75,000 less basis of $17,280). All the depreciation of $42,720 is recaptured and taxed as ordinary income, and the amount in excess of Madison’s original cost, $15,000, ($75,000 selling price less $60,000 cost) is taxed as long-term capital gain.
If you acquired the asset by means of a trade-in, your basis will depend on the basis of the equipment traded in as well as any additional cash put up and depreciation taken on the new equipment. This can get complicated. Check with your accountant.
An installment sale of equipment can actually backfire. You must recapture all depreciation in the year of sale, even if you’ll receive payments over time. For example, you sell a machine for $5,000, $1,000 payable up front, the rest over four years. The machine cost you $8,000, but it’s fully depreciated (i.e., your basis is zero). You’ll have $5,000 of taxable income in the year of sale. That could mean paying taxes of $2,000 (at 40%, combined federal and state), while only getting $1,000 in the first year. After taxes, your cash flow would be negative for the first year. (See below for a discussion of an asset with an outstanding liability.)
Selling off obsolete inventory can generate some cash and some tax savings. You generally can’t get a deduction for that inventory until it’s sold or scrapped. For example, you paid $100 for 8 valves. If you accounted for them correctly, you never deducted the $100. Auction them off for $20 for the lot and you’ve got $20 cash and an $80 loss you can take on your tax return. The loss could produce $32 in tax savings (depending on your bracket). If you’re doing an auction or a sale, talk it up and consider selling current goods at the same time.
Talk to your tax adviser. He or she should be able to review your situation and suggest which assets can be sold with the best tax effect.

Lowering Your Liability

Lowering Your Liability
What if you were sued for an accident on your property? Or you were found at fault in a major traffic accident? An umbrella policy could help you keep you covered.

Umbrella liability insurance is relatively affordable and can be easily coordinated with your existing insurance policies.

As far as insurance goes, an umbrella or excess liability policy goes the extra mile. If you’re looking to bolster key policies, an excess liability policy can provide you with additional coverage at reasonable rates. Excess liability basically extends the coverage of your underlying policies, which might include general liability, commercial or business Auto policies, and possibly employers liability.

Here’s how it works: Let’s say you have a $1 million business auto policy with hired and non-owned auto coverage, which protects you if you have an employee using his or her personal vehicle to run a business-related errand. In addition, you have a $1 million excess liability policy. Unfortunately, the employee has an accident on the way to the office supply store, hitting another vehicle causing injury to a third party and your business is held liable. If the injured person is awarded $1.5 million in damages for hospital and other expenses your business auto policy covers the first $1 million and the excess liability covers the remainder.*

The real value of an excess liability is that, with one policy and for a relatively small premium, you can add coverage on top of a number of underlying policies. It won’t cover more specialized policies, such as professional liability or errors and omissions policies, but it does cover those key areas of common, general liability.

There are no hard-and-fast rules regarding the pricing of excess liability coverage, but it is typically inexpensive, depending on the type of business you own. An office-based business might pay, for example, between $350 and $500 per year for each $1 million in coverage.

When you put it in perspective, an excess liability policy is really about peace of mind. Furthermore, the premium is generally low and it may be a tax-deductible business expense.

Putting the Brakes on Negative Cash Flow

Putting the Brakes on Negative Cash Flow
Once cash flow starts to turn negative, it can be hard to get back in the black. Part of the issue is being armed against a negative cash flow tide. Having the information you need can help you take strategic steps regarding cost cutting, shedding customers, salaries and holding the business together as the tide rises.

First and foremost, says Dr. Charles W. Mulford, CPA, Director of Research at research firm Cash Flow Analytics, LLC, you need knowledge, in the form of a daily flash report or other consistent combination of daily and monthly reporting systems. “While most cash flow drivers aren’t measured well on a daily basis, certain drivers can change daily,” he says. “In particular, a careful A/R and A/P aging can provide an early indication of near-term cash flow trends. For some firms, daily sales orders and pricing trends can also give clues to near-term cash generation. Key components of operating expenses, like employee counts and advertising or other key operating expense orders, might also be reviewed often during the month.”

Declining Cash Flow Red Flags

Certainly, any business should have a cash flow model in place that simulates the business and allows cash flow forecasting that highlights early identification of shortfalls while there is still time to take remedial action, Mulford says. “There are also some fairly specific ‘red flags’ that can indicate the onset of short- or long-term cash flow issues,” he adds. They might include:

an inability to clear a revolving credit line when normally it is cleared;
the sudden use of overdraft financing when it hadn’t been used in the past;
an increasing need to push on vendors for longer terms;
declining gross margin;
an unexplained stall in sales;
projected growth for a firm with a negative “growth profile” (combination of operating cushion and growth-related working capital needs that require cash infusions to accommodate growth);
planned higher and continuing capital expenditure needs, and slowing working capital turnover (especially inventory and accounts receivable); and
high deferred tax liabilities and the implication for higher income taxes for a firm with declining capital expenditures.
If you’re experiencing a number of these issues, it may be time to speak with your financial or business advisor about the tactics you can employ to turn back a negative cash flow tide. “Consider the things you can do both for the short- and long-terms,” he says. “There are ways to shore up cash flow right now, but you need to think further out, such that cash flow becomes stronger not just in the next six months, but for years to come.”

Taking Strategic Steps

Mulford offers several strategic steps that might be worth considering in the near term and for stronger cash flow over time.

In the short term:
consider seeking significant discounts for early payment that significantly offset the financing costs of those funds;
utilize A/R factoring;
cut sales/promotion costs by focusing on current customers;
look for opportunities for prepaid sales (deferred revenue); or
consider short-term cuts in advertising or R&D.
For the long-term:
invest in labor-saving equipment financed with long-term capital to boost gross margin or lower SG&A (tax benefits will serve to reduce tax payments);
consider supply chain initiatives that lower inventory needs or push more inventory onto suppliers; or
consider an R&D joint venture that may give up some top-side in return for current cost sharing.
Going forward, Mulford envisions an economy typified by “sub-par growth, and slowed by gradually rising inflation, interest rates and, likely, higher taxes. It will be a difficult operating environment, but not one that precludes success. If you refuse to relax and relentlessly focus on the drivers behind cash flow, you can fight back against a negative cash flow.” Mulford outlines the drivers as:
An operating cushion—Gross margin, SG&A and, for tech firms, R&D.
Working capital—“Not just receivables, inventory and payables,” he says, “but prepaids, accruals and deferred revenue.”
Taxes paid—Take advantage of any and all federal and state tax credits and benefits.
Capital expenditures—If other costs can’t be reduced, consider lowering cap ex.

Keeping Morale Up in a Down Economy

Keeping Morale Up in a Down Economy
According to the 2008 Management Action Programs Inc. (MAP)/Vantage Research study undertaken in late 2008, some 75% of companies saw a drop in employee morale, tied closely to the economy. “Low employee morale, regardless of its cause, is infectious, and company leaders must take proactive steps to improve their employees’ outlook,” says Lee Froschheiser, president and CEO of business consultancy, MAP. “Interestingly, the majority of the CEOs who have experienced a drop in their employees’ morale have also rated revenue growth as their number-one priority. But to support growth objectives, these business leaders need their employees to be fully aligned with the goals.”

During the time since that survey was completed, not much has changed, notes Froschheiser. “I suspect that, based on the work we’re doing with companies, as the economy has bottomed so has morale. It may not be getting worse, but employees are apprehensive and want to make sure their jobs aren’t in jeopardy, which adds to the morale problem.”

The first step in tackling this issue is acknowledging it exists, he adds. Make it clear to your people that you understand the issue and what created it. The next step is motivating the workforce, which inspires confidence and increases productivity. While business leaders can’t control the impact the economy has on their employees’ overall lives, there are steps they can take to boost confidence in their organization and inspire productivity.

Pay Attention to the “Little” Things

In many cases, paying attention to what you might think of as little or mundane things can make a big difference for employees. Froschheiser outlines a few key tactics:

Keep communicating—“If you’re having any issues, don’t keep quiet about them,” he says. “Let employees know exactly where your company stands. It’s when employees don’t know what’s going on that the rumor mill starts. The more they know, the less they’ll have to guess.”
Give recognition—Whenever possible, let employees know how their job performance is affecting the company. When they’re doing the everyday things right, it helps to point that out. “One rule of thumb that’s always worked for me,” says Froschheiser, “is that every time you tell someone something they’re doing wrong, tell them four things they’re doing right.”
Celebrate all successes, even small successes—Anything matters. You might have a deal that closed or even completed a tough inventory. “People just want to know things are going to be O.K.,” he says. “In that case, recognizing every milestone, regardless of size, can become important.”
Help employees understand priorities from a company perspective—In this economic environment, companies are asking people to do more with less. That can create anxiety and even lead to burnout. Froschheiser advises sitting down with your staff and creating “A lists” of critical tasks. If people know what matters most to the success of the organization—and understand that they’re not expected to be perfect at every task, it can reduce pressure. “You don’t want to tell anyone they shouldn’t do the absolute best job every time, he notes, “but you also need to be realistic about what people can achieve.”
Provide balance—It can be difficult for employees to separate from their responsibilities, so business owners and managers need to force the issue. You might tell someone to work at home for a day or enforce an office-wide day off. “People get wired and tired and when that happens, can make mistakes,” states Froschheiser. He advises looking for signs of burnout, like less responsiveness and enthusiasm, reduced participation, lack of engagement and increased infighting. “If you see those things, nip them in the bud by helping employees back off from work, even for a little while. It helps them put things back in perspective and recharge their batteries.”
Be calm in the storm—No matter what, employees need to see that you, as the leader, believe that the decisions you’re making are the right ones and that the company is remaining on the path to profitability. If you project stability, employees will follow your lead and feel less apprehensive.
“Money talks, especially in a hard-hit economy, but a bonus or financial incentive isn’t the only conversation on the table,” Froschheiser states. “Savvy CEOs are generating energy within their companies by being transparent about their successes and failures, and keeping the lines of communication open. They are challenging employees to set higher goals, empowering their hires, glorifying their works, and demonstrating their role in the company’s future. These tactics may seem fundamental, but these basic strategies really do work.”

Business tax planning starts now

Business Tax Planning Starts Now
Most major indicators show the national economy is in the early stages of recovery from a prolonged recession. Addressing tax-related business options now, and doing adequate planning with your tax advisor, offers many potential tax benefits and expanded opportunities.

Immediate Opportunities to Explore

Here are some specific strategies to consider that include taking advantage of recently introduced or revised tax deductions and credits.
Expanded Net Operating Loss (NOL) tax relief for business—Recent legislation, the American Recovery and Reinvestment Act of 2009 (ARRA), expanded the NOL carryback period from two to five years for smaller businesses. In November 2009, the Worker, Homeownership, Business Act became law and expanded that carryback provision to apply to larger businesses as well. Essentially, this enables your businesses to deduct recent losses from taxes paid in previous profitable years and generate significant tax refunds. (For more information, see “Tax Implications,” in this issue.)
Section 179 Expense Elections still attractive—While the Section 179 (Internal Revenue Code Section 179) expense election limit is lower for 2010 than in recent years, it still offers considerable tax savings opportunities for companies planning to purchase new equipment.
Section 179 allows a company to expense the first $134,000 of furniture and equipment placed in service by December 31, 2010. This deduction is reduced by one dollar for each dollar spent above $530,000. For more information, consult related IRS instructions.
Reduced time frame for S Corporation Built-in Gains Tax—The time period for built-in gains tax that applies to C Corporations converting to S Corporations has been reduced from 10 years to seven years. If you have considered converting your C Corporation to an S Corporation, now may be time to reexamine that option.
Increased Domestic Production Activities deduction—For 2010, the Domestic Production Activities deduction increases to 9%, up from 6% for 2009. The deduction is available to clothing, goods and food manufacturers, as well as farmers and some other businesses. The deduction is based on:
taxable income derived from qualified production activities, or
taxable income for the year (not counting the deduction).
The deduction cannot exceed 50% of W-2 wages allocable to domestic production gross receipts. For more information, consult related IRS resources.
Expanded target group for Work Opportunity Tax Credit—Workforce expansion follows early phases of economic recovery, and the Work Opportunity Tax Credit (WOTC) provides an opportunity to attain tax credits while also hiring needed employees.
As part of the ARRA, the WOTC was expanded to include unemployed veterans and disconnected youth among target groups. The credit covers targeted workers hired after Dec. 31, 2006, and before Sept. 1, 2011. The WOTC equates to about 40% of the first $6,000 paid in wages, with a credit limit, per employee, of $2,400. Consult related IRS resources for more information.
Questions to Consider

Are you aware of various “green” tax credits and benefits available? During the past several years, the federal government has introduced a variety of tax credits and incentives to promote greater energy efficiency and less reliance upon fossil fuels. Some of those credits apply to renovations of existing buildings or construction of new facilities, as well as the installation of equipment for generating alternative fuel, such as wind or solar power. Credits exist as well for purchases of hybrid vehicles or vehicles that use alternative fuels. The U.S. Department of Energy lists various credits.
Additionally, ARRA provisions include tax benefits to encourage greater use of public transportation, car-pooling, and bicycle transportation by company employees. Employers may offer mass transit passes to employees for a value up to $230 per month, without it being considered a taxable employee benefit. For car-pooling and vanpooling services, that same $230 per month credit applies, if the vehicle seats at least six people, and is used 80% of time or more for employee transportation. At least 50% of the seating capacity must be occupied for employee trips. Bicycle commuters are also eligible for a $20 per month nontaxable fringe benefit. For more information, consult this related IRS article. State and local governments may offer additional incentives too, so you might be missing opportunities with the ever expanding “green” tax benefits available, so plan to discuss with your CPA early in 2010.

Are you effectively monitoring inventory? Are the accounting methods for recording and assigning value to inventory appropriate, accurate, and consistent? Also, are you carrying inventory that is damaged or obsolete? Writing off that damaged or obsolete inventory yields tax savings.
Are you addressing bad debts? How much money is owed to your company? Ensure that you are making appropriate efforts to collect on overdue accounts. If you’re unable to collect your receivables, write off such debt as uncollectible. The IRS generally allows you to deduct such debts, provided you have documentation (telephone logs, letters, correspondence, contracts with collection agencies, etc.) to prove you tried to collect those obligations. Recordkeeping is key in substantiating bad debt deductions.
Will you need to focus on hiring and retaining employees? The need to hire more workers follows the early phases of economic recovery. Federal and state credits may help you in meeting staffing needs.
Now is a good time, too, to either implement or enhance a retirement plan as a means of attracting and retaining employees. Various qualified pension plans allow employees to defer some compensation, with a relatively small match by the employer. Existing plans can be made more appealing by either raising the employer matching percentage or the percentage of earnings an employee may contribute. Eligibility requirements can be correspondingly adjusted to require longer vesting periods. Consult a benefits advisor to determine which plan may work best for your business.

How do state and local tax laws affect your business? Tax regulations vary immensely among states and localities. Where you have a physical business presence or sell products or services presents tax questions. Where a company logo or other intangibles are used may be the basis for tax nexus, too. Being aware of state and local tax laws enables you to gauge the cost of conducting business in various localities. It also helps you recognize various incentives, credits and other opportunities. State tax laws are becoming increasingly complex. Have you had a “state and local tax check up” with your state tax advisor?
Have you thought that Research & Development Credits (R&D) are just for big businesses? R&D credits aren’t just for new product development efforts launched by large corporations; they may also apply to small business activities pertaining to a new function, performance, reliability or quality of a business component. Check them out with your tax professional to see if your company qualifies for a R&D credit. There are some complications to the law in this area so it is paramount to discuss the topic with a qualified tax or financial professional.
As you know, each year brings many complicated tax law changes and related business opportunities. Schedule a time early in the year to consult with your tax or financial advisor about the best strategies for this year and beyond.

Net Operating Loss Carryback Option Extended

Net Operating Loss Carryback Option Extended
Under a revenue procedure recently issued by the IRS, many businesses can use losses incurred during the economic downturn of 2008-09 to reduce income from prior tax years. The provision allows businesses to elect to carryback a net operating loss (NOL) for a period of three, four or five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. The procedure applies to taxpayers that incurred an NOL or a loss from operations for a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (it had previously been limited to an end date of January 2009).

A net operating loss typically occurs during a period in which a company’s allowable tax deductions are greater than its taxable income, resulting in a negative taxable income, which generally happens when a company has incurred more expenses than revenues during the period. The NOL carryback procedure can be used to recover past tax payments or reduce future tax payments.

An NOL or loss from operations carried back five years may offset no more than 50% of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year. The relief provided under the Worker, Homeownership, and Business Assistance Act of 2009 differs from similar relief issued earlier this year in that the previous relief was limited to small businesses. The current relief is applicable to any taxpayer with business losses, except those that received payments under the Troubled Asset Relief Program.

SBA Recovery Act Funding Extended

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Recent Press Releases

Dec 19 2009

SBA Recovery Act Funding Extended
Defense Appropriations Bill contains funding to extend programs thru February 2010.

WASHINGTON – With Recovery Act funding running out and with almost 1,000 small businesses on a waiting list for about $500 million in SBA-backed loans, the Senate today voted to extend funding for vital SBA Recovery Act provisions through February 2010. United States Senator Mary L. Landrieu, D-La., chair of the Senate Committee on Small Business and Entrepreneurship, who along with 12 of her colleagues, requested this extension and praised the inclusion of funds to continue vital Small Business Administration (SBA) lending programs.

“Small businesses have been left in limbo since the funding ran out in late November. Today’s action by the Senate will immediately clear the waiting list established by the SBA and will provide a lifeline to small businesses in need of credit,” Senator Landrieu said. “With these additional funds, SBA will be able to offer lenders a higher guarantee for 7(a) loans and a fee waiver on 504 loans, and reduce the cost of capital for small businesses by waiving the fees on both 7(a) and 504 loans. These changes proved very effective at jumpstarting small business lending, and the need to continue them is clear. Since funds from the Recovery Act ran out in late November, we’ve seen the volume for 7(a) and 504 loans drastically decrease. Reinstating these funds is a important to small businesses and our overall economic recovery and job-creation efforts.”

Senator Landrieu, along with 12 other Senators, sent a letter to the Senate Appropriations Committee asking for the funds to continue these provisions from the Recovery Act. Of the $479 million dollars requested from the Senators, $125 million is included in the DoD appropriations bill, with the remaining $354 million included in the jobs-creation package introduced in the House. The House jobs-creation package, which is expected to be considered by the Senate early next year, also includes the authorization to extend the authorization for the 90-guarantee on SBA loans through FY2010.

To view a copy of the Senator request for funding, please click here.

A Retail Business For Sale

Buying A Retail Business For Sale
If you are thinking about buying a retail business, there is a lot that you must consider outside of the basic nuts and bolts of the business. There is an old saying that retail success hinges on three factors: "location, location, location." While this is true to a large extent, it’s not always the case. When looking at a retail business for sale, your number-one goal must be to determine what “drives” the customers to the store.
Location
If the business relies on its location then you’ll want to be certain:
The lease in place is transferable/assignable and is long-term. You must negotiate additional options to give yourself at least ten years of contract length.
Is there an anchor tenant that brings customers to the locale? If so, then you’ll want to know how long their lease is, and if they have any plans to relocate in the near-term. Also, be certain that this anchor tenant is solid financially - think about all the poor merchants who relied on K-Mart and General Cinema traffic. The stores surrounding these faced disastrous situations when they closed numerous locations.
Is there any planned road construction that can impact the business? Typically, major roads undergo some form of construction every ten years or so. Visit the city hall/planning office to see when the last work was done and what plans, if any, may be in place.
Above all, think about every possible situation that can impact the location and investigate it thoroughly.
If the operation is driven by its product offering you’ll want to be certain that you’re capable of continuing to identify the types of products that customers want. If this function is performed by an employee/buyer, you may want to have them own a stake in the business as well. However, if you’re not 100% comfortable with performing this function yourself, or are not the type that has an “eye” for product, you may not want to go down this road.
Marketing
For some retail businesses, it’s the marketing that brings in the customers, and location takes a back seat. These are destination locations. Furniture and specialty retailers are typical examples. They spend a fortune on advertising and promotion, and they get the people to the stores. Here again, if this is what drives the business then you’ll want to be certain that your greatest skill lies in this area.
Avoid Working 100 Hours Per Week!
The biggest issue that I discuss with clients who want to become retail merchants is for them to get a true grasp upon the actual workload that’s required in this environment. Retail hours can be hell, especially if you’re in a mall where you’re required to maintain certain hours. I meet far too many retailers who seem to work seven days a week. It does not have to be this way, as long as you set up the business to run properly without you having to be there every minute.
Hire great people! Getting good employees is an ongoing challenge. You shouldn’t be afraid to churn through employees until you get the right ones. Pay them well. Train them effectively. Put policies and procedures in place that allows them to get up to speed quickly. Work towards having a key manager in place that can relieve you of some of the daily burdens. Never, ever, tolerate stealing. Hire a mystery shopping company to do an assessment at least once a year. It’s a great way to learn what the customers are experiencing.
Implement the most effective technology you can afford. There are tremendous systems available today for point-of-sale tracking, inventory management, accounting modules, etc. Systematize everything so that you’re not beholden to being there every minute. One program that I’ve seen quite a bit of is RetailPro. It appears to be very robust and cost-effective. It’s well worth checking out. There are many others available as well.
Growing The Business
If your agenda is to make a lot of money, then it’s hard to do so with one location. Growth requires expansion. Many times, however, one successful location does not translate well into a second successful one. This usually happens because the owners cannot duplicate the business effectively. That’s why systems are crucial. It’s also why you need to have a crystal-clear view of what brings in the customers and then be able to duplicate it effectively.
The other reason why this happens is that the owner is the business and then ends up trying to be effective in two location. Guess what? It doesn’t work! Build the first one. Get the recipe in place that includes a top-notch manager. Then you can decide to either run the second one yourself or put in the manager from the existing location.
If you’re running a large-sized operation, you may want to consider opening a second one that may be a bit smaller, with an option to expand. This doesn’t always work, but should be considered.
Certainly when thinking about buying a retail operation, and growth is your objective, you have to decide if it’s even a possibility, or is it too specialized? If you buy a scuba diving store that’s on the ocean, well you cannot open up a second location in a rural area and expect similar results. The business itself may be restrictive from a growth perspective.
What’s A Retail Business Worth?
Just like any other business resale, there are no “golden rules” to establishing the value of a retail business. The main issue must always be how much the business is making. This is the key component that must dictate the purchase price. Inventory is one element that clouds many retail business purchases. You need the inventory to drive revenue. It may or may not be treated separately in the price.
Notwithstanding this, the combination of the profit and inventory acquisition cannot over-inflate the price to the point where it’s not a feasible investment. Liquor stores, for example, may sell at a reduced multiple of earnings, but inventory is priced and purchased separately. Conversely, a clothing retailer may be sold at one fixed amount and includes all of the assets.
When it comes to inventory, your investigation must conclude if the product is saleable, and in what time frame. Specialty retailers usually have a ton of obsolete or slower-selling product. If there’s old inventory it must be discounted heavily in the valuation.
Ultimately, you will find retail businesses selling around the time times range (typically) plus an optimal level of inventory to operate the business. But again,I never endorse broad-brushed or generalized valuations so take this point only as a barometer.
What To Do Next?
Lots of people have made lots of money operating retail businesses. If you’re cut out for it, you can also be successful. But, you’ll want to weigh all of the factors to be certain that this type of business fits both your strengths and the lifestyle you want.
In most regions, there are always an abundance of retail businesses listed for sale. In addition to the business-for-sale Websites, check out the local business broker sites, and keep an eye on the classifieds as many retailers attempt to sell their businesses privately. Often times, a local merchant will foolishly hire a commercial real estate agent to sell their business and so you should review the multiple listing sites, as well. While many people think that it all comes down to location, the savvy retail business buyer knows there’s far more to consider in the equation. Have a great week
Posted by Richard Parker

Key Tax Changes for 2009

Key Tax Changes for 2009
As you prepare to work through your taxes for 2009, consider the following business changes. This year’s shifts may offer an opportunity to save money, so you, your accountant and/or your tax preparer should be prepared.
Section 179—The American Recovery and Reinvestment Act makes several important changes to the equipment write-off rules, but only for 2009. First, the maximum amount that can be written off under Section 179 is $250,000 and the investment limitation is $800,000 for tax years beginning in 2009. The maximum amount of equipment placed in service in 2009 was scheduled to fall to $133,000, a $117,000 decrease from 2008, when a temporary $250,000 ceiling was in effect, but the 2008 levels have been extended.
Bonus depreciation—The 50% bonus depreciation deduction for qualifying property has been extended an additional year and applies to property placed in service before January 1, 2010 (January 1, 2011 for certain other property, including that with a longer production period).
Bonus depreciation is only available for new property and only property depreciable under MACRS with a recovery period of 20 years or less. Bonus depreciation is automatic. You can, however, elect out of it. (You might consider doing so if 2009 is a particularly bad year and you expect to be in a higher bracket in future years.)
The luxury car depreciation caps for vehicles that qualify for bonus depreciation are increased by $8,000 for vehicles placed in service before January 1, 2010. Thus, the limit on cars is $10,960; the limit on trucks and vans is $11,060.
Depreciation of restaurants and retail stores—The current 15-year depreciation period for tenant and restaurant improvements is expanded to include buildings housing restaurants, and improvements made to retail stores that are placed in service in 2009.
Payroll tax changes—The maximum amount of wages subject to Social Security tax has increased to $106,800 for 2009, up from $102,000 in 2008. That means you should stop making (and paying) Social Security for employees once they reach $106,801 in eligible earnings in 2009. The tax rate remains 7.65% on employers and employees.
Self-employment tax contribution base increased—The maximum amount of self-employment income subject to Social Security taxes increases to $106,800 in 2009, up from $102,000 in 2008. The self-employment tax rate remains 15.3%.
Estimated tax relief for small business owners—If an individual’s Adjusted Gross Income for 2008 was less than $500,000, and more than half of gross income was from a business with fewer than 500 workers, the owner’s estimated income taxes for 2009 estimated payments can be based on the lesser of 90% of tax liability for 2008 or 2009. The usual estimated tax benchmarks of 100% or 110% of tax liability do not apply.
Withholding changes—The IRS has announced changes in withholding rates for 2009 and 2010. These changes are the result of the Making Work Pay provision of the American Recovery and Reinvestment Act (ARRA), which provides a refundable tax credit of up to $400 for working individuals and $800 for married taxpayers filing joint returns. This tax credit will be calculated at a rate of 6.2% of earned income and will phase out for taxpayers with adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly. (See the new withholding tables for more information.)
Estimated tax payments for small business owners—There are several ways to avoid a penalty for failure to pay estimated taxes. Most taxpayers avoid the penalty by paying in at least as much as the liability on the prior year’s return. For example, your total tax liability for 2008 was $8,000. If you pay at least $2,000 per quarter in 2009, you’ll avoid any penalty. If your adjusted gross income on last year’s return was more than $150,000, you’ll need to pay at least 110% of last year’s liability. (If you expect your tax liability to be lower than in the prior year, you can pay estimates based on your annualized, actual income for the year. This involves more computations.)
For tax years beginning in 2009, the 100% (or 110%) requirement for a “qualified individual” is reduced to 90%. A qualified individual is one whose:
adjusted gross income shown on the individual’s prior year tax return was less than $500,000 ($250,000 for a married person filing separately), and
the individual certifies that more than 50% of the preceding year’s gross income was from a small business.
Increased retirement plan contributions—In 2009, small business owners have the opportunity to invest more tax-deductible money in their retirement savings accounts. New contribution limits are:
401(k) elective deferrals up to $16,500 (plus another $5,500 for those age 50 or older by the end of 2009). In 2008, the limits were $15,500 (plus another $5,000 for those age 50 or older by the end of 2008).
SEP and profit-sharing plan limit of $49,000 (up from $46,000).
Defined benefit (pension plan) limit of $195,000 (up from $185,000).
Increased deductions for Health Savings Accounts (HSAs)—You can contribute more in 2009 to business HSAs, with a 100% tax deduction up to a limit of $5,950 for a family, and $3,000 for an individual.
First-time buyers with home-based businesses—If you operate your small business from an office situated within a first-time home purchase, you can still qualify for additional tax incentives, if you purchased your home between April 9, 2008 and June 30, 2009.
Lower mileage rates—As expected, the IRS lowered the standard mileage rates for the business use of vehicles. Beginning on January 1, 2009, the standard mileage rate for the use of a car (also vans, pickups or panel trucks) is:
55 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
Maximum automobile value for using the cents-per-mile valuation rule—For 2009, an employer providing a passenger automobile for the personal use of an employee may determine the value of the personal use by using the vehicle cents-per-mile value rule if the vehicle’s fair market value on the date it is first made available to the employee does not exceed $15,000 for a passenger automobile other than a truck or van, or $15,200 for a truck or van.
Commuting and parking benefits for employees—Beginning in 2009, businesses can pay $230 a month in tax-free parking for employees, up $10 per month from 2008. The cap on tax-free transit passes rises to $230 a month. In addition, you can offer employees who prefer to cycle to work a new tax-free benefit of $20 per month to cover the cost of buying, maintaining and storing a bicycle for commuting purposes.
For Quick Reference
The chart below outlines a number of personal and business tax rate changes.



Social Security/Medicare
2008
2009
Social Security Taxable Wage Base
$102,000
$106,800
Medicare Taxable Wage Base
No limit
No limit



Individual Retirement Accounts
2008
2009
Roth IRA
Lesser of $5,000 or 100% of earned income
Lesser of $5,000 or 100% of earned income
Traditional IRA
Lesser of $5,000 or 100% of earned income
Lesser of $5,000 or 100% of earned income



Roth and traditional IRA additional annual “catch-up” contributions for account owners age 50 and older,


$1,000
$1,000



Annual Qualified Plan Limits
2008
2009



Defined contribution plan dollar limit on additions to qualified plans, 403(b) plans and SEP plans




$46,000
$49,000



Defined benefit plan limit on benefits



Lesser of $185,000 or 100% of average compensation for highest three consecutive years
Lesser of $180,000 or 100% of average compensation for highest three consecutive years



Maximum compensation used to determine contributions




$230,000
$225,000



Elective deferral limits for 401(k) plans, 403(b) plans, 457(b) plans, and SAR-SEPs Unchanged for 2008

Lesser of $15,500 or 100% participant's compensation
Lesser of $16,500 or 100% participant's compensation



Additional catch-up contributions (individuals age 50 or older) for 401(k) plans, 403(b) plans, 457(b) plans, and SAR-SEPs

$5,000
$5,500



Elective deferral limits for SIMPLE 401(k) plans and SIMPLE IRA plans

Lesser of $10,500 or 100% participant's compensation
Lesser of $11,500 or 100% participant's compensation



Additional catch-up contributions (individuals age 50 or older) for SIMPLE 401(k) plans and SIMPLE IRA plans

$2,500
$2,500



Compensation defining highly compensated employee

$105,000
$110,000



Compensation threshold used to determine a key employee in a top-heavy plan

$1 for more than 5% owners; $145,000 for officers; $150,000 for more than 1% owners
$1 for more than 5% owners; $160,000 for officers; $150,000 for more than 1% owners



Compensation triggering Simplified Employee Pension (SEP) contribution requirement

$500
$550



Driving Deductions
2008
2009
Business mileage, cents per mile
50.5 (first half)58.5 (second half )
55
Charitable mileage, cents per mile
14
14
Medical and moving mileage, cents per mile
19 (first half)27 (second half)
24



Business Equipment
2008
2009
Maximum Section 179 Expense Deduction
$250,000
$250,000
Phase-out for Section 179
$800,000
$800,000



Qualified Transportation Fringe Benefit Exclusion
2008
2009
Commuter highway vehicle and transit pass, per month

$115
$230
Qualified parking, per month
$220
$230



Standard Deductions
2008
2009
Married filing jointly or surviving spouse
$10,900
$11,400
Single (and married filing separately)
$5,450
$5,700
Heads of Household
$8,000
$8,350



Itemized Deduction Phase-Out
2008
2009
Married filing separately
$159,650
$159,950



Personal Exemption
2008
2009
Amount
$3,500
$3,650



Sources: Internal Revenue Service, Small Business Tax Center, and IRS Small Business and Self-Employed Tax Center. Thanks to Martin G. Meyer, principal at B. Meyer Bookkeeping Services, for his help with the “For Quick Reference” list.

Sellers, In the case of an audit...

What IRS Auditors Look for When Examining a Business
In the case of audit, be aware that the IRS training manual tells its auditors that they are examining you, not just your tax return. The auditor wants to see how you match up with the income reported on your return, or what the IRS terms “economic reality.” According to Frederick W. Daily, tax attorney and author of Stand Up To the IRS and Tax Savvy for Small Business, if your business is audited, the IRS is likely to investigate the following issues:
Does your lifestyle square with your reported income? “An auditor sizes you up for dress, jewelry, car and furnishings in your home or office, if given a chance to make these observations. Someone who looks like a Vegas high roller, with the tax return of a missionary, will cause any auditor to dig deeper,” Daily says.
Does your business handle a lot of cash? If your business handles a lot of cash, expect the auditor to suspect skimming, or diverting income into your own pocket, without declaring it.
Did you write off auto expenses for your only car? Personal use of your business-deducted set of wheels is so common that auditors expect to find it. That doesn’t mean they’ll accept it, however. Auditors don’t believe you use your one-and-only auto 100% for business and never to run to the grocery store or the dentist. If you operate your car for both business and pleasure and claim a high percentage of business usage, keep good records (preferably a mileage log).
Did you claim personal entertainment, meals or vacation costs as business expenses? Travel and entertainment business expenses are another area where the IRS knows it can strike gold. Document all travel and entertainment deductions. Taking buddies to the ball game and calling it business won’t fly if you can’t explain the business relationship in a credible fashion.
Did you “forget” to report all of your business sales or receipts? If you failed to report significant business income—$10,000 or more—strongly consider hiring a tax pro to handle the audit. Remove yourself from the process altogether.
If the auditor finds evidence of large amounts of unreported income, and it looks intentional, he may call in the IRS criminal investigation team.
If you have employees, are you filing payroll tax returns and making tax payments? Employment taxes are a routine part of every audit of a small enterprise.
And last but not least, if you hire people you call “independent contractors,” are they really employees? The IRS routinely conducts audits of businesses that hire independent contractors, because of the tax savings associated with hiring contractors instead of employees.
This list is by no means complete. These are just the most likely things an IRS auditor will look for, Daily notes. If your small business is being audited by the IRS, speak with your accountant, tax preparer or tax attorney about the steps you need to take to prepare.

You Have to Want to BUY a Business to get a deal done

Do You Really Need To Buy A Business Or Just Want To?
I tend to get a lot of blog comments in the fourth quarter each year from dejected buyers who had started the year off hoping to buy a business, and find themselves on the cusp of giving up. And so, I want to take some preemptive action and provide a business buyer’s attitude check-up, which I know will help you as you search for the right business for sale.
A series of events happened since last Monday the 14th that triggered this week’s comments so please allow me to give you a roundabout explanation.
I am not really a sports nut, but I am fanatical about two specific teams. Although I follow each with insane dedication, once they are out of the playoff picture, I lose much of my overall interest in the game.
First, I have been a die-hard Buffalo Bills fan since I started watching NFL football in the thirty plus years ago. No doubt, a few of you will point to four consecutive Super Bowl appearances in the 1990’s without a championship (at least they got to the big show), or most recently, last Monday’s last-minute loss to the Patriots (I thought they played brilliantly and way above what anyone anticipated). No problem; I, like most Buffalo Bills fans, have skin as thick as a Buick (we need it). Regardless of their dismal performance since those great years in the 90’s, my faith in them has never waivered. In fact, it has gotten stronger.
Second, coming from Canada where hockey is pretty much a religion, I have followed the Montreal Canadiens (yes, spelled with an “e”), since I was born. I watch sixty-plus games a year, and with them as well, I shall forever remain a loyal fan.
So why am I telling you this and what the heck does it have to do with buying a business?
Actually, it has a ton to do with it…..
I have always been bothered by the awful statistics in this industry, and namely that less than ten percent of the people who look to buy a business ever complete a transaction. It blows my mind that so many people could actually abandon a dream-like project once they hit a roadblock or two, because that is the only possible explanation. Of course, they hit hurdles because they don’t know what they are doing, and most buyers do not have the common sense to educate themselves first, even if they have zero experience buying businesses.
Simply giving up on buying a business because of a few hurdles would be similar to The Bills burning all their equipment and folding the team because they lost a game, or a Super Bowl, or four, or whatever.
That is not what successful people do.
I look at The Bills loss last week the same way every business buyer has to look at any hurdles, challenges or setbacks they encounter while looking for the right business for sale.
The team’s prior loss was history; it’s what they would do next that counts.
To me, a win in week two, after such a tough defeat, would actually build more character than a win over The Patriots would have provided. Sure enough they came out flying in their game on Sunday and won convincingly. That shows their true core.
Similarly, if you are not making progress buying a business, or a deal dies, or a seller’s numbers are off, you don’t just give up. You hit the ground ever harder.
Your loyalty to this project has to mirror that of a dedicated sports fan who never gives up on their team. If your team loses, you don’t jump on another team’s bandwagon. That’s not a fan.
When a deal collapses (and they will), or brokers don’t call you back, or you cannot come to terms with a seller, or you uncover huge problems during due diligence, you don’t just toss in the towel and start looking for a job (even if there were any of those available). You have to file the experience. You learn from it, and you move on to finding the next and hopefully better opportunity.
Buying a business can be a time-consuming and very frustrating process. You can always find reasons not to buy a particular business, or blame your lack of progress to external forces, or kowtow to people’s opinions that now is not the time to buy a business. These same people would tell you the exact same thing if the economy was booming.
The anguish doesn’t end there. There will be businesses you like that are snapped up by other buyers before you can make an offer. You could go into due diligence on numerous businesses only to be forced to walk from the deal.
You will encounter situations where you can easily justify abandoning the project. That is probably why so many do. However, the one common trait every successful business buyer has is a core belief in what they are doing. They do not approach buying a business with the attitude that if a good opportunity surfaces they will investigate it. That is what “lookers” do; not buyers.
A true prospective business buyer fundamentally know that they MUST become a business owner because they are no longer willing to keep doing whatever it is that they have been up to this point.
Successful business buyers don’t just want to buy a business; they NEED to buy one.
If you do not have a burning need to buy a business, let me save you a lot of time – start filling out job applications because you don’t have the mindset to buy a business.
When you truly “need” something, you keep forging ahead until you get it. That is what defines success.
If you are going to attack this project in any meaningful way, you will have setbacks; it is inevitable, but you need to stay focused on the goal line.
Just like The Bills, who no matter what happens, no matter what anyone else says, no matter how many times they get knocked down, they show up to play every Sunday. So too must you get into the game, take some hits, but you have to fight until you get to the end zone.
To read some very helpful articles about buying a business visit www.diomo.com
Have a great week.

by Richard Parker, the President and Founder of Diomo Corporation

UnderstandingThe marketing side of a business for sale

Understanding The Marketing Side Of Any Business For Sale
One of the most common mistakes people make when buying a business is in their analysis of the marketing activities, strengths and weaknesses of any business for sale they are considering.
It doesn’t matter whether you are thinking of buying a business for $100,000 or ten million dollars, understanding its marketing practices is crucial. However, the mistake made most often by buyers is they spend their time targeting all of the so-called wonderful things they are going to do to improve the business after they take over instead of effectively analyzing what the company is doing presently, or has done in the past.
Often times, this thinking overshadows the reality of the business, and can result in a buyer lulling themselves into believing they can implement certain changes, that may not necessarily materialize as they had envisioned.
Obviously, it is important to identify growth opportunities in any business being considered. But, too much focus on the upside can often derail a deal. If a buyer becomes too consumed with areas to grow the business, they will typically run into obstacles during their investigation that may upend their plans. If this happens too frequently, they may sour on the deal altogether, and decide against buying the business., when in fact they may be walking from a good business.When evaluating marketing opportunities, the main consideration must always be whether or not you are starting from a solid platform. That is why buying a business that has all the fundamentals in place to assure its stability after the purchase, is more important than fantasizing about the things one can do to make the business better in the future.
Buyers are frequently surprised to learn that a business for sale doesn’t have a marketing plan. Instead of a concrete plan, it has simply evolved into doing to same old thing year after year, with similar results, and the owners do not seem to mind the monotony. Unfortunately, in today’s business environment, businesses that cease to look for ways to grow generally are poised for a decline.
Conversely, the actual marketing plan may simply be in the owner’s gut. They understand the business intimately, and know what initiatives they should jump on, and which they should avoid. In businesses where the owner has run the marketing with a “gut feel”, you need to determine whether or not that instinct can transition to you as the new buyer. Better yet, can you translate that “know-how” to a written plan?
You will want to learn about the past marketing initiatives that the company undertook, and what were the results. You may be shocked to discover that marketing is just an afterthought for the business. I find this to be quite common in retail businesses, and especially those that rely heavily on its location. It is almost as though the owners just sit there waiting for traffic to come by. In these cases, you need to determine what, if anything can be done to get more people through the door. If in fact the business is helpless in this regard, do not fool yourself into believing you will have any more success.
As you look at any business, avoid trying to visualize for grandiose schemes to build the business. Instead, look for fundamentals that can ultimately be leveraged into growth.
For example, the simplest way to grow a business is to generate more revenue with the existing client base. It is always easier and less expensive to get customers who know you to buy more, than it is to acquire new customers. No matter what the business may be, there are always additional products or services that you can offer.
Look for competitive advantages. Why do customers buy from the business versus the competition? If you cannot identify a very clear reason, this can be a very worrisome sign. The business landscape is more competitive than ever right now, and it will not ease up anytime soon. Unless the business offers something that cannot be readily purchased elsewhere, rest assured that customers will shop around.
Does the company compete mainly on price, quality or service? It is impossible to be do all three. Whatever it is, what else can you do to exploit it?
Can the business be expanded geographically? Does it make sense to open up a second location? If that seems obvious, why hasn’t the seller done so? Or, maybe they have and it failed. If so, why? If additional locations would seem to be a logical path to grow, spend the time to determine how much it will cost to do so. Can the existing cash flow support expansion? If not, how will you access the funds needed?
Are there mechanisms in place to test and measure new marketing projects? This is the single most important aspect to marketing, and so if none exists, you will want to be certain you set them into action.
Has the company tested new price points? How did they arrive at the current pricing schemes? How often can, or do they raise prices? Clearly, if they operate in a highly competitive marketplace, this may not be feasible.
Marketing is not a big mystery. In fact, it is quite simple. It is strictly the ability to determine who is your prospect, what that they want, how much will they pay, and how can you get it to them. That's it. However, it does take some work. Most often, you really need to get immersed into the business so that you too can get a true “gut feel” for the business.
Once you marry off that instinctual understanding with an actionable plan, you can grow any business. So until that time, while looking at any business to buy, focus on its core elements to be certain you have a rock-solid platform from which to grow. After all, it is always easy to deal with the upside, but you need to be certain there will not be any downside once you get the keys to the business.

A Simple Cash Flow Model

A Simple Cash Flow Model
The true measure of the health of any business is cash flow. Long-term planning matters and revenue is critical, but if you have no cash, you have no business. Period. And knowing what your cash position is at any given time is your best reality check. What’s the optimal way to keep your fingers on the cash flow pulse? A solid model.
Your business happens on a daily basis, and staying on top of cash flow can help you when you have those sudden needs—you get a project requiring additional resources, a vendor (or you) decides to change terms, you have a brief window to get an inventory deal, etc. In that case, a “back-of-the-envelope” model can keep you constantly up-to-date regarding your cash on hand.
“A cash flow model doesn’t have to be complex,” says Jennifer Mailhes, CPA, the Consulting Department Partner at CPA and advisory services firm T.R. Moore & Company. “Most business owners are non-accountants, so having an easy system helps. Think of your cash flow model as a ‘cash-in, cash-out’ measurement. You’re thinking about the timing of when cash comes in and when it goes out. Use an Excel spreadsheet to set up half of the equation: your billing to your customers. Just be realistic about it. If your customers typically pay you in 45 days, make sure your spreadsheet reflects that. Segment it into weeks that show when cash will actually be coming in. The second half of the model is your payables or cash out—payroll, utilities, rent, vendor payments, etc. These will be easy to track, as you tend to pay them on a regular schedule during any given month. It’s really just those two numbers. Subtract that cash out from the cash in for each cycle and that gives you a quick, practical look at cash flow.”
Essentially, the model is designed to quickly show you where any gaps might occur in the short term—daily, weekly or monthly. “Having this gauge in place is a great way to keep regular tabs on cash flow,” adds Mailhes. “But if you’re getting into longer-term issues that extend further than 12 to 18 months, like inventory control, you’ll probably need more professional help. But a simple system like this is more about understanding your cash position at any given time than it is about forecasting.”
The review process you implement depends on your business cycle. Mailhes points to one client who has a small staffing service, noting that it pays contractors twice a month, resulting in what she calls “day-driven” cycles. Once you’ve had the model in place and have been using it for a few months, check it against earlier versions so that you can confirm your earlier assumptions and learn where you might have been off. However, once you’ve been using your model and are comfortable with what it’s telling you, says Mailhes, you won’t have to review it against the history.
“Keep it simple and have a cash focus,” she advises. “You may feel that sales mean cash coming in, but it’s more about collections. You need to know what your cash position is when you’re hitting a time of growth. If you’re growing and you have big deals coming in, that’s exactly when you need the cash to support it—not just the potential of the sales you’ve made. A cash gap can be a real problem, and that’s what most people aren’t prepared for. That’s the true value of this simple type of model.”
Once you’ve developed your model, Mailhes adds, it’s a good idea to run it by your accountant or financial advisor to ensure you’re getting off on the right foot and staying on top of your cash flow

Budgeting for small business owners

Basic Budgeting as a Management Tool
“Think of a budget as your roadmap,” says Pam Newman, President of small business consulting firm RPPC, Inc., and author of Out of the Red: Management Accounting Concepts to Keep Small Businesses Out of the Red. “If you’re planning for the upcoming year, the budget will help you set expectations and account for potential shortfalls and the impacts of unexpected opportunities. Once you’ve created your budget, it shouldn’t be written in stone, but updated on a regular basis so that you can make the most of it.” A basic budget is just that; a simple document that outlines three key areas of your business: sales, expenses and profit.
On the sales side, it’s all the revenues you generate through the sales of your product or services.
Expenses are twofold, encompassing direct costs and indirect costs, or overhead. “Direct costs are those that include the materials and labor needed to create your product,” Newman says. “If you’re a shoe-maker, for example, it’s the leather, laces and people that put the shoes together. The indirect costs are your rent, marketing, insurance, utilities or any other expenses not directly related to manufacturing or creation of your products and services.”
Profit is broken down into two buckets as well. Gross profits are your sales minus your direct costs, which gives you what you need to cover overhead. What’s left after you take the indirect costs out is your net profit or loss.
Regarding the last point, Newman adds that, “It’s critical that you consistently measure the difference between your gross and net profits. If, for example, your gross is positive and your net is negative, it may mean that you’re not managing overhead well or that you’re not marking up your products and services appropriately. It’s not unusual for business owners to set prices using direct costs, but you can lose sight of those indirect costs. A couple hundred dollars a month here or there really adds up and depletes profits, which is why consistent budget review makes such a difference. It helps you spot those patterns and make changes to correct your course.”
As far as review is concerned, Newman recommends that the budget be assessed at least once a month, calling it a “living document.” In addition, columns should be created for your projected numbers vs. actuals each month. If you’re not on target, you need to know why. The budget allows you to develop a history for your business, and can also help you understand where you need to make changes going forward. If your sales are double what you expected in a given month, it may indicate that your business is growing faster than you may have thought. That may be a signal that you need to think about putting more resources into product development, adding more space, hiring or other areas, which then affects those related budget areas.
The budget is also an excellent expense-management tool. “In general, you know where your expenses are, but often, you have the opportunity to do something that makes a difference for your business, like a spot inventory purchase or in marketing through a special advertising buy,” says Newman. “The budget can show you where you can make moves to support that unexpected expense—where you might put off an expected purchase to account for this opportunity.”
Newman acknowledges that creating and monitoring a budget can be daunting for anyone without a finance or accounting background. “You may want to sit down with an accountant, financial manager or bookkeeper to set up your initial budget,” she notes. “Once you feel comfortable with the process, take it over yourself. After you’ve created and worked with your budget, you’ll find you have a document that can help you succeed throughout the life of your business.”

Preparing for an SBA Loan

Preparing for an SBA Loan
The U.S. Small Business Administration (SBA) grants millions in loans each year for small businesses.
The SBA’s loan program is in the spotlight right now because the stimulus package expanded the program in a number of ways. First, there is now a guaranteed fee waiver, which can save small businesses thousands of dollars. In addition, the 75% guarantee has also been raised to 90%, which makes it more appealing for lenders to make loans. Lastly, America’s Recovery Capital (ARC) program helps stabilize small businesses at risk by providing cash to businesses that need assistance paying down existing debt.
These recent changes ultimately mean there are more funds available and greater eligibility for small businesses, including the SBA’s largest vehicle, the 7(a) loan program.
Depending on the loan in which you’re interested, requirements will vary. According to the SBA, common documentation requirements include: purpose of the loan; history of the business; financial statements for three years (for existing businesses); schedule of term debts (existing businesses); accounts receivable and payable aging; projected opening-day balance sheet (for new businesses); lease details; amount of investment in the business by the owner(s); income projections: expenses and cash flow: signed personal financial statements and tax returns: and personal resume(s).
Other necessary documentation may include:
Business profile—A description of the type of business, annual sales, number of employees, length of time in business and ownership.
Loan request—An explanation of purpose, amount and type of loan you’re after.
Collateral—The collateral being used to secure the loan, including business equity, borrowed funds and available cash.
In addition to documentation and other requirements, the SBA wants prospective loan candidates to understand some basic credit factors and the ways in which they influence the loan process:
Equity investment—You should be able to demonstrate a level of equity invested into your business, coupled with a manageable amount of debt. Any loan will involve an examination of your debt-to-worth ratio to correlate the loan amount with the owner’s net worth.
Earnings requirements—This is about cash management and the ability to meet all your debt payments, not just your loan(s). You’ll need to supply a sound cash flow projection, broken down on a monthly basis, and covering the first annual period after the loan is received. All SBA loans must be able to reasonably demonstrate the “ability to repay” the intended obligation from business operations.
Working Capital—Working capital means the excess of current assets over current liabilities. Working capital measures what is available to pay a company’s current debts. It also represents the cushion or margin of protection a company can provide its short-term creditors.
Collateral—Collateral can consist of both assets which are usable in the business and personal assets which remain outside the business. For all SBA loans, personal guarantees are required of every 20% or greater owner, plus others individuals who hold key management positions. If real estate is being used as collateral, banks and other regulated lenders are now required by law to obtain third-party valuation on real estate-related transactions of $50,000 or more. Certified appraisals are required for loans of $100,000 or more. The SBA may require professional appraisals of both business and personal assets, plus any necessary survey and/or feasibility study. One note: SBA will generally not decline a loan where inadequacy of collateral is the only unfavorable factor.
Resource management—Simply put, it’s your ability to manage the resources of your business. Management expertise and capacity—sometimes called character—are important factors encompassing education, experience and motivation.
The SBA offers several loan programs. Learn more about what you need to prepare, loan types and related information at www.SBA.org

Dealing with partners when buying a business

Dealing With Partners When Buying A Business
Years ago, in one of the first businesses I purchased, there were two owners. I initially met the managing partner and he told me from the onset that he made “all the decisions”. Allegedly, the other owner was strictly a silent partner. We had several meetings and negotiations, and things were progressing smoothly.
I tabled an offer that reflected all the deal points we had agreed to. Then, the communications started to slow down drastically. I soon learned that the silent partner was not too silent after all. In fact, he was making his opinion loud and clear – he did not want to do the deal.
I managed to get the two partners back to the table although it was not that easy. They were doing a great job of playing “good cop-bad cop” and I had naively fallen for their routine.
It would have been easy for me to walk from the deal, but I am glad I decided to forge ahead. It turned out to be one of the best investments I ever made. However; getting to the finish line was a “hair pulling exercise”.
A lot was learned from the situation, and so if you find yourself in discussions where there is more than one owner, you will want to do the following:
From the onset of discussions, find out how many owners there are in the company. Always make a habit of getting the company's most recent annual coprporate filings from the local state website just to double-check the company's ownership, the legal structure, and to make sure it is in "good standing".
If any are either not active, or “silent”, you will want a clear understanding of the decision making process in the daily business operations, and also regarding the potential sale of the company.
Ideally, if you will only be dealing with one party, you will want to get a letter from the other owner(s) confirming the other partner’s ability to make binding decisions. If they will not agree to this, then your discussions must involve all owners, at all times. If not, you will drive yourself crazy. One partner will agree, and the other will renegotiate. It will happen with every deal point because the partner who is not present will almost always feel he can get a better deal.
Do not fall prey to the seller’s games. If they are going to play off each other in negotiations, and no point is ever really final, then do not commit yourself to any position until you know the position of both parties on the seller side of the deal.
Make Sure You Know What Each Partner Does
One critically important issue is to really drill down to determine what involvement, if any, each partner has in the business on a day-to-day basis. Far too often, a seller will dismiss the impact of their partner’s role, and you can really put yourself in a bad situation.
Even if one has a far lesser role, you need to know whether they plan on leaving the company after the sale as well. If that is the case, then you have to almost certainly adjust the Owner Benefits downwards to account for replacing the second partner’s function. No matter how smart you may be, and regardless of how minimal the sellers may represent one of the partner’s role, if they work in the business at all, you have to replace their function. If there is any cost for you to do so, that must be taken into account.
When Partners Are Fighting
The final point regarding partners is when you come across dealing with feuding ones. This can be a real mess. The points noted above are especially important but more so is that you may have to conduct simultaneous negotiations. I have seen it where the partners no longer talk to each other. You can imagine how much fun that scenario can be. While more time-consuming, if the business makes sense, you can certainly get these deals done. But, you must have each partner sign off (literally) on every deal point.
A word of caution: never get in the middle of their dispute. It does not serve any point. Keep your position and story consistent regardless of which one you are speaking to. If they cannot get along, that is their problem, do not fuel the fire. If the discussions get out of hand, tell them to resolve their issues first and then you will engage in the negotiations.
Richard Anderson

Exit Strategy

Exit Strategy...not the emergency evacuation drill"Begin with the end in mind." states Stephen Covey in his book, The Seven Habits of Highly Effective People.

As a successful small business owner you probably followed the path of most entrepreneurs: forming your business on a kernel of an idea and then working like a fanatic to realize your dream. You've devoted countless hours to learning how to ride the wave of your success, only to find out that your hard work generally results in more hard work which creates greater growth and then even more hard work. All the while you continue to rise to the occasion until one day you begin to question if there is more to life than this spiral of never ending toil and worry. You begin to think about selling, wondering if you can sell your business, cash out and begin to live like a "normal" person. Of course the answer is yes... you can sell... BUT! There is an underlying axiom of business that states with hard work, strong management and a little luck all businesses will sell one day! Unfortunately in the owner's haste to form the business and keep on top of the growing enterprise very little thought is given to the end game. All business start-up guides state that the first step of a strong business plan must be the exit strategy. A business should be launched with the idea that an exit for the owner is imminent. Eventually the time will come to transition the ownership of the company and pass the mantle of leadership to another individual. The truth is that most owner exits do not have happy endings due to a lack of planning and foresight. Business owners need to plan for their exit whether it will be in the near term or in the distant future.
And the best time to begin that plan is today. Start planning for your departure today by implementing the E-V-A-C-U-A-T-E planning system:
E = Evaluate your personal goals: The process of planning for the eventual departure from your business needs to start with a personal plan for your future! Evaluate these areas: • Gain a good understanding of the capital that will be required to sustain the lifestyle that you choose for the future. The profits from the sale of most small businesses do not yield enough capital for the owner to completely retire without the additional resources of retirement plans such as 401k's, SEP's, social security or alternative sources of income. At the beginning of your planning process, it is a good idea to meet with a certified financial planner to design a program that will provide you with the necessary income to support your future life choices. • If you can not afford to stop working completely you will need to decide what your next professional undertaking will be. Most business owners have not taken the time to determine their professional and personal aspirations beyond ownership of this particular business. Now is the time to ask yourself, "What type of career/profession will give me the greatest personal and professional satisfaction?" Once you determine a new direction, begin to gather the necessary internal and external resources to support the transition to a new career whether that is further education, skills training or networking within the chosen field. • Other areas for contemplation and concern should be: o Solicit the advice and support of friends and relatives to help you design your future. Make sure to swear them to confidentiality BEFORE you say anything about selling. o If you are planning to retire, will you be leaving the area? If leaving the area is in your future make sure to consider states that have low or no state taxes as an alternative. o Consider the fall out that will happen as a result of selling your business and transferring the assets. Does the business have a family name that may make others within the family disgruntled to have someone else entrusted with the family moniker? Are your children desirous of owning and operating the business even though they may not have the money necessary to buy you out? Will you miss the standing in the community as a business owner? o What will be necessary to train and transition a new owner to ensure their success? Are you prepared to stick around and help through the transition period? Each individual is different and their plans need to be unique and customized by their personal requirements. The key is to take time to plan now when you have the luxury of time on your side.
V = Value of the business: Do you know what your business would sell for in the market today? Oddly, most business owners know the value of their homes, cars and personal possessions, yet they do not have a reliable and realistic idea of what their businesses would sell for in today's market. Most proprietors rely on rumor or unrealistic rules of thumb when it comes to the estimation of the selling price of their businesses and they are shocked by the actual market driven selling price when it is time to sell. It is critical for all business owners to know the real world selling value for their business. Further, it is imperative to understand the dynamics that account for the selling value. Businesses are commonly valued and sold on multiples of cash flow. Cash flow is not solely profit, but all of the cash that is available to a new owner to pay themselves an income, retire debt and have capital left over for emergencies or funding expansion. The multiplier that is applied to the cash flow determines the marketed listing price and eventually the actual selling price. The multiplier is a value that is derived from the overall assessment of the business by a knowledgeable individual. Generally, determining the selling value of a business is not within the preview of the business owner or even the owner's accountant. It is better left to an expert in the field of selling businesses. The market is fluid and dynamic and is influenced by a myriad of factors. Knowing the true value of a given business requires an expert opinion. An expert in the field should be able to place a market value on the business in a short period of time by reviewing historical financial data and interviewing the owner regarding the critical value drivers associated with a particular industry and your specific business. Even if you do not plan to sell your business in the near term it is imperative that you know and understand the probable selling price that you could receive at any given time. The time to know the selling value of your business is today!
A = Accounting: Businesses are valued and sold on a basis of provable historical cash flows and as such a buyer will pay more for a business that has accurate detailed financial records. In terms of maximizing the selling price of your business, the best investment that you as an owner can make is to install an accounting/bookkeeping system such as QuickBooks and use it religiously to account for the activity of the enterprise. Secondly, secure the assistance of a good accountant that is familiar with your industry and have them prepare quarterly financial statements (operating statements and balance sheets) as well as year end statements and tax returns. It is not enough to have the accountant's involvement only at tax preparation time. It is well known throughout the business brokerage industry that accurate detailed financial statements will raise the multiplier by a factor of 0.25 to 0.75 over a business that lacks good financial records. Raising the multiplier by a factor of 0.25 to 0.75 has an astounding impact on the selling price. For instance; if your business has $100,000 of cash flow you would realize $25,000 to $75,000 in additional selling proceeds over a business that has poor financial documentation. The next "must do" item is to make sure that you are reporting all of the revenue of the business on your tax returns. Again, it is important to realize that every dollar that is reported as provable cash flow will raise the selling price by the factor of the multiplier. Most small businesses sell for a multiplier of 2.0 to 3.0, so therefore every provable cash flow dollar should be worth $2.00 to $3.00 at time of sale. Larger businesses often sell for even greater multiples, making the benefits exponentially greater. These additional dollars at time of sale far out weigh the tax savings you may realize by under reporting your revenue and/or profits. Finally the key watch word in maximizing the proceeds from the sale of your business is provable cash flow. Your financial documentation must stand up to a buyer's rigorous due diligence efforts. Make sure that all elements of the accounting cycle tie out and there aren't any magically appearing cash flow dollars that skew the true picture. Buyers are very weary of financial documentation that does not ring true when put to the test accounting principals. On the other hand, a buyer generally is willing to pay a premium price if they feel assured that the cash flow will actually be there once they own the business. So invest in your financial reporting and accounting to make certain that it is complete and accurate. The pay back on the investment will be big!
C = Correct: A good business leader constantly strives to recognize operational flaws and then takes corrective action to eliminate identified weaknesses. The same activity needs to occur when thinking about getting your business ready for sale. But in this case, the business owner needs to identify the areas of weakness that will negatively affect the selling value multiplier, (thereby reducing the selling price) and then take the steps necessary to rectify those conditions. The multiplier is made up of a set of value drivers. Value drivers are the tangible and intangible elements of a business that a buyer assigns value to. Value drivers cover the full operational spectrum of an enterprise and can include 25 to 30 areas of concern. Areas such as the transferability of tangible and intangible assets, availability of key management, competition, capital investment requirements, competency & longevity of the employee base, age of operating assets, customer sales concentration, documented processes and procedures, operational technology, intellectual property such as patents, contracts, franchise rights, leases, operating capital requirements, value of the business name within the marketplace, and much more blend together to determine the multiplier. It is important for a business owner to identify and inventory all of the value drivers pertaining to their operation and implement a program that will enhance the multiplier's characteristics in order to maximize the selling price. Often times the value drivers can either be put into practice or improved upon without much capital investment on the part of the ownership. The activity of correcting value driver deficiencies will give you a big bang for your buck when it comes to selling your business. If you do not have a good grasp on all of the value drivers for your business, contact a business sales expert that can help you determine the operational elements that will be used to establish the multiplier. As Ed Pendarvis, founder of Sunbelt Business Brokers, is fond of saying; "A business is made of multiple chapters just like a book, and each chapter contributes to the overall value of the business. A buyer wants to read the whole book, examining all of the chapters word by word in order to discern the true worth of the enterprise." Make sure that the book for your business is all inclusive and as such will be highly valued by perspective buyers.
U = Understand: Most business sellers and buyers equate the activity associated with the sale or acquisition of a business to the purchase of real estate, such as a home or a commercial building. Comparatively, selling a business is unlike the sale or purchase of real estate and is probably very different than any undertaking that you have engaged in previously. A business owner must be generally acquainted with the processes and procedures pertaining to the orderly transition of ownership in order to protect the business and themselves from the dire consequences that can occur if mistakes are made. Planning and knowledge will help you avoid the many pitfalls that are inherent with this complicated undertaking. First and foremost your decision to sell (or even if you are thinking of selling) must be handled in a strict confidential manner. If word gets out that you are considering selling your business, regardless of your reasons, the general public perception will be that the business is on the verge of bankruptcy. Your business could be damaged by a breach of confidentiality. Employees and management may seek a new employer, vendors could seek alternative outlets and competitors will make sure that your customers know that you may not be in business in the near future. Be very careful who you trust with the idea that you may be selling and make certain that they sign a confidentiality and non-disclosure agreement before relating any information. Secondly, an owner needs to understand the flow and process of the business selling cycle to maximize selling price and mitigate liability. Selling a business is not as simple as placing an ad in the classified newspaper section of the Sunday paper and then sitting back to review the multiple offers that you receive. Placing the business for sale involves; placing a salable value on the enterprise, reviewing and implementing tax mitigation tactics, strategic marketing, confidential prospective buyer qualification review, facilitating multiple operational buyer-seller meetings, extracting an offer for purchase from the buyer, negotiating the offer to maximize seller value, supporting the buyer's due diligence, negotiating transition of leases and contracts, drawing up binding legal closing documents and much more. Each phase of the process needs to be handled in an exact order with great care and diligence to maximize the results for all parties while mitigating post transaction liability. Gaining a reasonable understanding of all of the intricacies of the business selling process will pay big dividends by reducing the problems and risk associated with selling a business.
A = Assets: One of the biggest areas of confusion surrounding the selling value of a business is what constitutes salable assets and what value should be placed on those assets. From an accounting perspective, the value of an asset is its acquired cost less the amount of depreciation taken over a set period of time. This is generally known as the book value of the asset. However, in the case of valuing assets as they relate to the sales price of a business, an asset is defined as anything that brings value to the operation. Generally the assets are divided into tangible and intangible groupings. The tangible assets are the furniture fixture and equipment known as the FF & E. The intangible assets are often referred to as blue sky or "goodwill" and are made up of items such as business name, location, phone and fax numbers, customer lists, vendor relationships, contracts, etc. Generally, sellers have a large misunderstanding as to the worth of tangible operating assets. Most sellers view the value of their FF & E on a replacement cost basis when it comes to attempting to determine a sales price. However, this is not accurate when it comes to the selling price of a business. The FF & E needs to be valued as assets in place making money in order to fall within the underlying math of valuing and selling businesses (cash flow times a multiplier). For example, a business may have operating assets that have a replacement value of $500,000; and the operations are producing $100,000 of cash flow. Let's assume that this business has a selling multiple of 3.5 times cash flow, so the expected real world selling price would be $350,000 which is $150,000 less than the replacement value of the tangible assets. Unfortunately the cash flow from operations does not justify a selling price for the assets based on replacement value. This can be a bitter pill for most business owners to swallow. However, from a taxable liability mitigation stand point this can be a bonus to the seller. If the seller sells the FF & E for an amount greater than the book value (acquired cost less accumulated depreciation) than the amount of gain from the sale will be taxed at ordinary income and must be paid in the year of the sale. The FF & E of the business should be generally valued at an arbitrary value that nearly matches the book value. Essentially if you sell your assets for more than their stated book value you are going to pay a large tax bill. If you are in the unenviable position of having tangible asset (FF & E) holdings far in excess of the selling value of your business based on cash flow from operations, it would seem that you have surplus equipment capacity and you need to either find more work and/or liquidate the underutilized equipment.
T = Taxes: If you are fortunate enough to sell your business you will have an uninvited third party at the closing table! Uncle Sam will be there with his hand out. The sale of your business will more than likely constitute a taxable event, which could take a substantial bite out of the sale proceeds. However, with some research and advanced planning you may be able to lower your Uncle's take and walk away from the table with more of your hard earned money. Business owners need to meet with their accountants to research the taxable consequences of selling their businesses in order to understand the tax laws governing the sale of a business. Unfortunately, most small business owners wait until they put the business up for sale before they investigate the taxable issues surrounding the transaction. This is way too late and the delay will cost you in real dollars. The taxable consequences are intricate and variable and are dependent on the formation of the legal entity and the past tax history of each business; much too intricate for discussion here. There are general rules of the thumb that can be applied, but in this area you need the help of an expert that knows your business and has been through multiple sales. Make sure that you start today to gain a thorough understanding of tax laws pertaining to your business and how they will affect the sale of the business. Remember, the selling price is of secondary importance to the actual after-tax proceeds that you will receive from the sale.
E = Engage: Any good plan ends with an action step. If you believe that your business will sell one day you must start preparing immediately in order maximize price and minimize liability. Whether you are planning on selling in the near term or in the future the best first step is to meet with a qualified professional business sales agent. The agent will get you started in the right direction by helping you understand the value of your business, the corrective steps that you can implement to create greater value and familiarize you with the process of successfully marketing and selling your business. The next steps are to enlist the aide and support of qualified individuals in the areas of personal financial planning and accounting and tax mitigation. Of course, the rest is up to you. Maximizing your selling price through proper planning and timing can result in large difference in the cash that you finally get to take home at the end of your tenure of ownership. Don't delay, get proactive and get going. Time is money and the clock is moving fast.


Contact
Scott Lofgren
Source One
sourceonenw.com
360-606-3504
503-895-5307