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
Tuesday, May 12, 2009
Tuesday, May 5, 2009
Constantly learning for the small business owner
Scaling the Learning Curve
“Jack of all trades, master of none,” is generally used as an insult today. In its original form, however, it included an additional phrase, “though oft-times better than master of one,” and was intended as a compliment. While most small business owners are used to wearing many hats and become pretty good at doing a lot of different things, it’s the rare entrepreneur who can truly claim to be a “master” of more than just one or two.
Additional training and education is available in virtually every aspect of business and from a multitude of different sources. The cost of ongoing business training runs the gamut from free to an Ivy League tuition bill. (Think six-week leadership programs at Wharton or Harvard Business School.) Most business owners should be able to find what they need at little or no cost through online resources, state and federal government programs, local community colleges and similar sources.
What you learn, and how you learn it
Entrepreneur Susan Ward, who runs an IT consulting business with a partner and holds a Master of Education degree, taught business education for many years before going into business herself. She’s a proponent of learning as a lifelong pursuit for small business owners. With so many options available, however, she advises spending some time determining just what you want to learn and the best way for you to learn it.
“Identifying the need you want to fill is the obvious starting point,” Ward says. If you have a glaring lack of business acumen in a critical area, such as marketing or finance, for example, it makes sense to look at training in that field. Whatever kind of training you choose, it is sure to involve a considerable commitment of time and, in some cases, money on your part, so make sure you choose something that will really fill a business need.
There is a cost-benefit decision to be made here in terms of both time and money, Ward stresses. Some skills take a great deal of time to learn, but if you will only be able to use that skill infrequently in your business, is it worth it? If that’s the case, it might make more sense to use an outsource provider for that particular service. Even if it’s a skill that your business does use frequently, is it one that an employee already has? If so, learning it yourself may not make much sense.
Once you have identified an area where business training can really benefit you and your business, you also need to determine your own learning style to choose the best type of training solution.
Learning styles are simply different approaches or ways of learning. While there are more than 80 different learning style models currently in use, most involve variations on three basic types. Visual learners learn best through seeing, auditory learners through listening and tactile/kinesthetic learners through moving, doing and touching. If you plan to attend business training classes in person, scheduling is a consideration, Ward notes. Some training programs are offered as intensive, weekend-long seminars, while others are spread out over a period of weeks or months. If possible, see if you can sit in on a session before signing up to determine if the instructor’s approach is a good fit with your learning style.
Many small business owners find online training to be a more practical alternative, and the web offers a huge and ever-expanding array of options, including degree programs ranging from associate and bachelor degrees all the way up to MBAs and PhDs. Government and quasi-government organizations can also be valuable sources of free and low-cost business training options. SCORE, for example, offers more than 25 online courses through its virtual learning center, accessible at SCORE’s Learn Online area. The SBA’s Small Business Development Centers (SBDC) offer another rich source for business training at centers located throughout the country.
If you’re thinking about getting off to a good start this year, this just might be the perfect time to expand your business knowledge horizons.
©2009 Wells Fargo Bank, N.A. All rights reserved. Member FDIC
“Jack of all trades, master of none,” is generally used as an insult today. In its original form, however, it included an additional phrase, “though oft-times better than master of one,” and was intended as a compliment. While most small business owners are used to wearing many hats and become pretty good at doing a lot of different things, it’s the rare entrepreneur who can truly claim to be a “master” of more than just one or two.
Additional training and education is available in virtually every aspect of business and from a multitude of different sources. The cost of ongoing business training runs the gamut from free to an Ivy League tuition bill. (Think six-week leadership programs at Wharton or Harvard Business School.) Most business owners should be able to find what they need at little or no cost through online resources, state and federal government programs, local community colleges and similar sources.
What you learn, and how you learn it
Entrepreneur Susan Ward, who runs an IT consulting business with a partner and holds a Master of Education degree, taught business education for many years before going into business herself. She’s a proponent of learning as a lifelong pursuit for small business owners. With so many options available, however, she advises spending some time determining just what you want to learn and the best way for you to learn it.
“Identifying the need you want to fill is the obvious starting point,” Ward says. If you have a glaring lack of business acumen in a critical area, such as marketing or finance, for example, it makes sense to look at training in that field. Whatever kind of training you choose, it is sure to involve a considerable commitment of time and, in some cases, money on your part, so make sure you choose something that will really fill a business need.
There is a cost-benefit decision to be made here in terms of both time and money, Ward stresses. Some skills take a great deal of time to learn, but if you will only be able to use that skill infrequently in your business, is it worth it? If that’s the case, it might make more sense to use an outsource provider for that particular service. Even if it’s a skill that your business does use frequently, is it one that an employee already has? If so, learning it yourself may not make much sense.
Once you have identified an area where business training can really benefit you and your business, you also need to determine your own learning style to choose the best type of training solution.
Learning styles are simply different approaches or ways of learning. While there are more than 80 different learning style models currently in use, most involve variations on three basic types. Visual learners learn best through seeing, auditory learners through listening and tactile/kinesthetic learners through moving, doing and touching. If you plan to attend business training classes in person, scheduling is a consideration, Ward notes. Some training programs are offered as intensive, weekend-long seminars, while others are spread out over a period of weeks or months. If possible, see if you can sit in on a session before signing up to determine if the instructor’s approach is a good fit with your learning style.
Many small business owners find online training to be a more practical alternative, and the web offers a huge and ever-expanding array of options, including degree programs ranging from associate and bachelor degrees all the way up to MBAs and PhDs. Government and quasi-government organizations can also be valuable sources of free and low-cost business training options. SCORE, for example, offers more than 25 online courses through its virtual learning center, accessible at SCORE’s Learn Online area. The SBA’s Small Business Development Centers (SBDC) offer another rich source for business training at centers located throughout the country.
If you’re thinking about getting off to a good start this year, this just might be the perfect time to expand your business knowledge horizons.
©2009 Wells Fargo Bank, N.A. All rights reserved. Member FDIC
Navigating Through Turbulent Times
Navigating Through Turbulent Economic Times
Anyone who remembers the recessions of the early 1990s and of 2001 knows what it’s like to go back to the financial fundamentals, to seek any edge to be found in a difficult economic environment. President Obama’s stimulus plan, the American Recovery and Reinvestment Act, may offer some relief, but, at the end of the day, the fate of your business still rests in your hands.
We’ll offer some perspective on the help the current stimulus plan might present and outline a series of tips that can help you manage costs and find additional potential revenue sources.
Help from Uncle Sam
Whether the stimulus plan offers specific help for small business has been debated, but, says Dr. Scott Anderson, Vice President and Senior Economist at Wells Fargo, the $789 billion package, which will largely be allocated over the next three years, will aid the country as a whole.
“The specific allocations can potentially help any number of sectors, including businesses involved in retail, health care, education, energy and other fields,” he says. For example, the plan encompasses $190 billion for infrastructure improvements, including $30 billion to modernize the electric grid and develop new battery technology, $19 billion to physicians and hospitals to upgrade records and processes and $29 billion for roads.
The key impact for small business should be greater access to credit. Specifically, the plan provides $730 million to the Small Business Administration (SBA) and makes changes to the agency’s lending and investment programs so that they can reach more small businesses. The funding includes:
$375 million for temporary fee reductions or eliminations on SBA loans and increased SBA guaranteed shares, up to 90 percent for certain loans;
$255 million for a new loan program to help small businesses meet existing debt payments;
$30 million for expanding SBA’s Microloan program, enough to finance up to $50 million in new lending and $24 million in technical assistance grants to micro-lenders;
$20 million for technology systems to streamline SBA’s lending and oversight processes; and
$15 million for expanding SBA’s Surety Bond Guarantee program.
And opening credit is what it’s all about, adds Anderson. In addition to the stimulus package, the Federal Reserve recently announced an expanded $200 billion joint Treasury program, called the Term Asset-Backed Securities Loan Facility (TALF). TALF’s low-interest loans should have investors buying AAA-rated securities backed by new consumer and small business loans. The Obama administration also plans to launch a “small-business and community-bank lending initiative,” according to U.S. Treasury Secretary Tim Geithner, which would finance the purchase of highly rated SBA loans, increase the government guarantee for SBA loans and reduce the fees on certain SBA loans, among other things.
Containing Cash Flow, Growing Revenues
While any external help is welcome, it’s what you do internally that will likely make the biggest difference. The following tips may kick-start your thinking around managing costs and even finding potential new revenue streams.
No matter what, you always have to do the math. In general, you’ll always monitor expenses, but it makes sense to look at them in terms of the value they deliver and the ways in which you can modify variable expenses with minimal impact on your business.
Look at your lease—Whether you’re moving into a new space for the first time, evaluating new space or dealing with a lease coming up for renewal, you can always negotiate better terms. “There are basically two categories of terms on which you can negotiate: economic and business terms,” explains Eric Postle, principal at corporate real estate firm Washington Partners. Talk to your landlord about better pass-through costs, penalty and late fee structures and rights to sublet. To learn more, check out “Negotiating a Better Lease,” at AllBusiness.
Consistently review service providers—While certain utilities can’t be negotiated (although electricity and natural gas providers offer “balanced billing” services that give you fixed monthly cost figures), cell phone and Internet service providers may be willing to work, if you contact them. Review your insurance coverages every year; you never know what benefits you might find.
Talk to your vendors and suppliers—Everyone is in the same economic boat here. Find out if you can get more favorable terms (e.g., from 30 to 45 days) or whether you can get discounts for early payment. As a supplier, you might want to consider offering improved terms to valued customers.
Buying “not necessarily new”—Used equipment can save you some serious cash. Depending on what you’re after, there are hundreds of suppliers out there, covering everything from retail “open box” and reconditioned deals, to resellers who do all their own repair work. Office supply retailers may offer open box offers in their stores, while major computer manufacturers offer good deals on their own refurbished machines.
Lease vs. buy—Depending on your equipment needs, leasing offers a wide range of potential benefits, such as lower upfront and monthly costs, better cash forecasting, consistent upgrades and tax advantages. For more information, check out “Business Equipment: Buying vs. Leasing,” at legal site Nolo.com.
Restructure your debt—One way to fend off a possible cash flow crunch is to restructure outstanding debt to spread your payments out or consolidate debt into a single, lower payment. It’s not a solution for every company, but it may be worth exploring.
Expanding revenue means more than ramping up sales. There are several avenues to a better bottom line. Here are a few ideas:
Plan your way to better cash flow—If you’re buying a car, getting new equipment, thinking of implementing new processes in your business or even making energy efficiency changes, your Federal and state government may be able to help. That assistance chiefly takes the form of tax credits—dollar-for-dollar deductions on your taxes. Talk to your accountant or tax professional about how you can take advantage of tax credits for your business.
Don’t go it alone—“All small business owners face the dilemma of limited resources—both time and money—and bringing in a partner can help extend them,” notes Darrell Zahorsky, Guide to Small Business Information at information provider About.com. “It also offers a level of accountability to both sides, which makes reaching goals more likely.” The right partnership offers a range of benefits, helping you reach new audiences, markets and industries, giving you capabilities you don’t currently possess, expanding your product or service lines and even offering access to new vendors and suppliers.
Keep existing customers happy—Loyalty programs reward your customers for shopping with you, and are a great way to keep them engaged. Programs like pre-purchase discounts, cash rewards, “one free” after reaching a purchase level and punch cards are simple and easy to implement. The rewards, in terms of increased customer lifetime value, are just as much yours as they are your clients. In her USA Today column “Strategies: Keeping Customers Loyal,” Rhonda Abrams outlines some common program structures and how to institute a program for your business.
Upselling/cross-selling—According to Dana VanDen Heuvel, Director at RSS marketing firm Pheedo, Inc., upselling and cross-selling can take several forms. “You can try to move an existing customer to an upgrade of a product or service they already have the next time they’re in your store, or you can migrate a new customer from an entry-level purchase to a more appropriate, and likely more profitable purchase by seeking to better understand their needs and illustrating that you understand their needs by selling them the right solution,” he explains. In addition, upselling/cross-selling may mean not getting more money from an existing customer, but getting the same money in a guaranteed and regular fashion by selling your product in the form of a service. For example, a drycleaner who sees a customer once every month, who brings in a pile of clothes each time, might suggest that its bi-weekly pickup service may be more convenient for the customer—and, as a result, a more stable stream of regular revenue for the business. In that sense, there may well be ways in which you can build a “subscription model” into your business to ensure a more consistent stream of revenue.
Get more social—Social networking has taken the concept of business networking to a whole new level. During the past five or so years, social networking has taken a giant leap forward, thanks in great part to the web. Network sites like Facebook, LinkedIn, Spoke, the Downtown Women’s Club (DWC) and others mix both social and professional elements to help push business agendas. While each of the sites offers a variety of services at inexpensive costs, the basis of most of the networks is the member profiling they do. It’s what helps in-network members find out about each other, both personally and professionally, and what facilitates member-to-member contact. Why has social networking become so prevalent? It’s a good way to handle the time crunch. According to a recent DWC survey, some 71% of its users say that they use social networking because it’s a more time efficient way to network, and 49% do it because they can multi-task while they’re at it.
There’s no dearth of tactics that can help you work through this difficult economy. Hopefully, the tips above have helped stir your thoughts. Talk to colleagues, customers and vendors; you never know where a good idea will come from.
©2009 Wells Fargo Bank, N.A. All rights reserved. Member FDIC
Anyone who remembers the recessions of the early 1990s and of 2001 knows what it’s like to go back to the financial fundamentals, to seek any edge to be found in a difficult economic environment. President Obama’s stimulus plan, the American Recovery and Reinvestment Act, may offer some relief, but, at the end of the day, the fate of your business still rests in your hands.
We’ll offer some perspective on the help the current stimulus plan might present and outline a series of tips that can help you manage costs and find additional potential revenue sources.
Help from Uncle Sam
Whether the stimulus plan offers specific help for small business has been debated, but, says Dr. Scott Anderson, Vice President and Senior Economist at Wells Fargo, the $789 billion package, which will largely be allocated over the next three years, will aid the country as a whole.
“The specific allocations can potentially help any number of sectors, including businesses involved in retail, health care, education, energy and other fields,” he says. For example, the plan encompasses $190 billion for infrastructure improvements, including $30 billion to modernize the electric grid and develop new battery technology, $19 billion to physicians and hospitals to upgrade records and processes and $29 billion for roads.
The key impact for small business should be greater access to credit. Specifically, the plan provides $730 million to the Small Business Administration (SBA) and makes changes to the agency’s lending and investment programs so that they can reach more small businesses. The funding includes:
$375 million for temporary fee reductions or eliminations on SBA loans and increased SBA guaranteed shares, up to 90 percent for certain loans;
$255 million for a new loan program to help small businesses meet existing debt payments;
$30 million for expanding SBA’s Microloan program, enough to finance up to $50 million in new lending and $24 million in technical assistance grants to micro-lenders;
$20 million for technology systems to streamline SBA’s lending and oversight processes; and
$15 million for expanding SBA’s Surety Bond Guarantee program.
And opening credit is what it’s all about, adds Anderson. In addition to the stimulus package, the Federal Reserve recently announced an expanded $200 billion joint Treasury program, called the Term Asset-Backed Securities Loan Facility (TALF). TALF’s low-interest loans should have investors buying AAA-rated securities backed by new consumer and small business loans. The Obama administration also plans to launch a “small-business and community-bank lending initiative,” according to U.S. Treasury Secretary Tim Geithner, which would finance the purchase of highly rated SBA loans, increase the government guarantee for SBA loans and reduce the fees on certain SBA loans, among other things.
Containing Cash Flow, Growing Revenues
While any external help is welcome, it’s what you do internally that will likely make the biggest difference. The following tips may kick-start your thinking around managing costs and even finding potential new revenue streams.
No matter what, you always have to do the math. In general, you’ll always monitor expenses, but it makes sense to look at them in terms of the value they deliver and the ways in which you can modify variable expenses with minimal impact on your business.
Look at your lease—Whether you’re moving into a new space for the first time, evaluating new space or dealing with a lease coming up for renewal, you can always negotiate better terms. “There are basically two categories of terms on which you can negotiate: economic and business terms,” explains Eric Postle, principal at corporate real estate firm Washington Partners. Talk to your landlord about better pass-through costs, penalty and late fee structures and rights to sublet. To learn more, check out “Negotiating a Better Lease,” at AllBusiness.
Consistently review service providers—While certain utilities can’t be negotiated (although electricity and natural gas providers offer “balanced billing” services that give you fixed monthly cost figures), cell phone and Internet service providers may be willing to work, if you contact them. Review your insurance coverages every year; you never know what benefits you might find.
Talk to your vendors and suppliers—Everyone is in the same economic boat here. Find out if you can get more favorable terms (e.g., from 30 to 45 days) or whether you can get discounts for early payment. As a supplier, you might want to consider offering improved terms to valued customers.
Buying “not necessarily new”—Used equipment can save you some serious cash. Depending on what you’re after, there are hundreds of suppliers out there, covering everything from retail “open box” and reconditioned deals, to resellers who do all their own repair work. Office supply retailers may offer open box offers in their stores, while major computer manufacturers offer good deals on their own refurbished machines.
Lease vs. buy—Depending on your equipment needs, leasing offers a wide range of potential benefits, such as lower upfront and monthly costs, better cash forecasting, consistent upgrades and tax advantages. For more information, check out “Business Equipment: Buying vs. Leasing,” at legal site Nolo.com.
Restructure your debt—One way to fend off a possible cash flow crunch is to restructure outstanding debt to spread your payments out or consolidate debt into a single, lower payment. It’s not a solution for every company, but it may be worth exploring.
Expanding revenue means more than ramping up sales. There are several avenues to a better bottom line. Here are a few ideas:
Plan your way to better cash flow—If you’re buying a car, getting new equipment, thinking of implementing new processes in your business or even making energy efficiency changes, your Federal and state government may be able to help. That assistance chiefly takes the form of tax credits—dollar-for-dollar deductions on your taxes. Talk to your accountant or tax professional about how you can take advantage of tax credits for your business.
Don’t go it alone—“All small business owners face the dilemma of limited resources—both time and money—and bringing in a partner can help extend them,” notes Darrell Zahorsky, Guide to Small Business Information at information provider About.com. “It also offers a level of accountability to both sides, which makes reaching goals more likely.” The right partnership offers a range of benefits, helping you reach new audiences, markets and industries, giving you capabilities you don’t currently possess, expanding your product or service lines and even offering access to new vendors and suppliers.
Keep existing customers happy—Loyalty programs reward your customers for shopping with you, and are a great way to keep them engaged. Programs like pre-purchase discounts, cash rewards, “one free” after reaching a purchase level and punch cards are simple and easy to implement. The rewards, in terms of increased customer lifetime value, are just as much yours as they are your clients. In her USA Today column “Strategies: Keeping Customers Loyal,” Rhonda Abrams outlines some common program structures and how to institute a program for your business.
Upselling/cross-selling—According to Dana VanDen Heuvel, Director at RSS marketing firm Pheedo, Inc., upselling and cross-selling can take several forms. “You can try to move an existing customer to an upgrade of a product or service they already have the next time they’re in your store, or you can migrate a new customer from an entry-level purchase to a more appropriate, and likely more profitable purchase by seeking to better understand their needs and illustrating that you understand their needs by selling them the right solution,” he explains. In addition, upselling/cross-selling may mean not getting more money from an existing customer, but getting the same money in a guaranteed and regular fashion by selling your product in the form of a service. For example, a drycleaner who sees a customer once every month, who brings in a pile of clothes each time, might suggest that its bi-weekly pickup service may be more convenient for the customer—and, as a result, a more stable stream of regular revenue for the business. In that sense, there may well be ways in which you can build a “subscription model” into your business to ensure a more consistent stream of revenue.
Get more social—Social networking has taken the concept of business networking to a whole new level. During the past five or so years, social networking has taken a giant leap forward, thanks in great part to the web. Network sites like Facebook, LinkedIn, Spoke, the Downtown Women’s Club (DWC) and others mix both social and professional elements to help push business agendas. While each of the sites offers a variety of services at inexpensive costs, the basis of most of the networks is the member profiling they do. It’s what helps in-network members find out about each other, both personally and professionally, and what facilitates member-to-member contact. Why has social networking become so prevalent? It’s a good way to handle the time crunch. According to a recent DWC survey, some 71% of its users say that they use social networking because it’s a more time efficient way to network, and 49% do it because they can multi-task while they’re at it.
There’s no dearth of tactics that can help you work through this difficult economy. Hopefully, the tips above have helped stir your thoughts. Talk to colleagues, customers and vendors; you never know where a good idea will come from.
©2009 Wells Fargo Bank, N.A. All rights reserved. Member FDIC
Thursday, March 19, 2009
The Succesful Business Buyer
Excellent advice from the folks at Bizquest .....
Become a Successful Business Buyer, Increase your chances of success in buying a business by improving how you communicate with sellers. Good businesses receive many inquiries through BizQuest, and sellers/brokers are always more inclined to work with buyers who present themselves as serious, motivated, and educated about the buying a business process. Here are a few tips:
Business brokers will typically require that you sign a confidentiality or non-disclosure agreement (NDA) prior to providing more detailed information about the business.
Sellers will also want to know a bit about you: how serious you are about buying a business, what your financial picture looks like, your time horizon to buy a business. Organize your finances and be prepared to answer a few questions about your plans.
It's best to not ask for detailed information about the business just yet. An effective inquiry that's sure to be taken seriously would be something similar to this: "I am interested in this business. Please send me the necessary non-disclosure and any additional documents to complete so we can discuss it further."
Become a Successful Business Buyer, Increase your chances of success in buying a business by improving how you communicate with sellers. Good businesses receive many inquiries through BizQuest, and sellers/brokers are always more inclined to work with buyers who present themselves as serious, motivated, and educated about the buying a business process. Here are a few tips:
Business brokers will typically require that you sign a confidentiality or non-disclosure agreement (NDA) prior to providing more detailed information about the business.
Sellers will also want to know a bit about you: how serious you are about buying a business, what your financial picture looks like, your time horizon to buy a business. Organize your finances and be prepared to answer a few questions about your plans.
It's best to not ask for detailed information about the business just yet. An effective inquiry that's sure to be taken seriously would be something similar to this: "I am interested in this business. Please send me the necessary non-disclosure and any additional documents to complete so we can discuss it further."
Saturday, November 22, 2008
The Benefits if Buying versus starting a new business
The Benefits of Buying a Business versus Starting a New Business
So you want to be your own boss. Consider the options – work as an independent contractor…start your own business…buy an existing company.
Certainly there are pros and cons to each option. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered…the risk-to-reward ratio is tipped in your favor when you purchase an existing business.
Admittedly, as an independent contractor, your risk is minimal. The up front investment and overhead costs are limited. However, without the ability to leverage the work of an employee base, the returns are limited by your own personal capacity.
Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years.
On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit.
There are a number of reasons to consider the purchase of an existing business rather that starting one:
Proven Concept. Buying an established business is less risky – as a buyer you already know the process or concept works. Financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record. A bank will be able to look at the historical results for the business, not just rely on projections.
Brand. You’re buying a brand name. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up. That’s an intangible benefit that’s difficult to put a price on.
Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build. It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer.
Focus. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.
People. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, develop them and assimilate them into the company culture. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies. Plus, with trained people in place you will have more liberty to take vacation, spend time with family, or work on other business ventures. When start-up owners and independent contractors go on vacation, the business goes too.
Cash flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. Start up owners, on the other hand, often "starve" at first. Some experts say start-ups aren’t expected to make money for the first three years.
Risk. Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one. But risk is relative. A buyer may pay $1 million, for example, for an established business with strong cash flows of approximately $200,000 to $300,000. A lending institution funds the transaction because historical revenues show the cash flow can support the purchase price. For many people, however, that is far less risky than taking out a $300,000 loan with an unproven concept and projections that may or may not be realized.
Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start up.
Sunbelt
So you want to be your own boss. Consider the options – work as an independent contractor…start your own business…buy an existing company.
Certainly there are pros and cons to each option. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered…the risk-to-reward ratio is tipped in your favor when you purchase an existing business.
Admittedly, as an independent contractor, your risk is minimal. The up front investment and overhead costs are limited. However, without the ability to leverage the work of an employee base, the returns are limited by your own personal capacity.
Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years.
On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit.
There are a number of reasons to consider the purchase of an existing business rather that starting one:
Proven Concept. Buying an established business is less risky – as a buyer you already know the process or concept works. Financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record. A bank will be able to look at the historical results for the business, not just rely on projections.
Brand. You’re buying a brand name. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up. That’s an intangible benefit that’s difficult to put a price on.
Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build. It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer.
Focus. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.
People. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, develop them and assimilate them into the company culture. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies. Plus, with trained people in place you will have more liberty to take vacation, spend time with family, or work on other business ventures. When start-up owners and independent contractors go on vacation, the business goes too.
Cash flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. Start up owners, on the other hand, often "starve" at first. Some experts say start-ups aren’t expected to make money for the first three years.
Risk. Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one. But risk is relative. A buyer may pay $1 million, for example, for an established business with strong cash flows of approximately $200,000 to $300,000. A lending institution funds the transaction because historical revenues show the cash flow can support the purchase price. For many people, however, that is far less risky than taking out a $300,000 loan with an unproven concept and projections that may or may not be realized.
Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start up.
Sunbelt
Thursday, November 13, 2008
Small business Lending
Looking to sell your Business? Looking to buy a business? Looking to fund the acquisition of a business?
Perhaps with Paulsens trashing of TARP and taking those dollars scheduled to go for foeclosures and earmarking them for banks instead, just maybe we can see a loosening of credit in this country.. The SBA must free up dollars now for acquistion of small businesses.. We have folks who want to buy and folks who want to sell their business and there will be no deals without our credit markets working freeely...
For those with experience in the industry that they are looking to buy into, those with good credit and a down payment of 25 to 30 percent , there is good news !! There are banks in the Pacific Northwest who have money to lend and are lending ... Call me Scott Lofgren 360-606-3504
If you have a business to sell that has 3 years of verifiable income and EBITDA of $60,000 to $5million.. We have buyers and lenders to get deals done NOW !!!
Perhaps with Paulsens trashing of TARP and taking those dollars scheduled to go for foeclosures and earmarking them for banks instead, just maybe we can see a loosening of credit in this country.. The SBA must free up dollars now for acquistion of small businesses.. We have folks who want to buy and folks who want to sell their business and there will be no deals without our credit markets working freeely...
For those with experience in the industry that they are looking to buy into, those with good credit and a down payment of 25 to 30 percent , there is good news !! There are banks in the Pacific Northwest who have money to lend and are lending ... Call me Scott Lofgren 360-606-3504
If you have a business to sell that has 3 years of verifiable income and EBITDA of $60,000 to $5million.. We have buyers and lenders to get deals done NOW !!!
Wednesday, July 23, 2008
Stock sale Vs Asset sale
Stock Sale - Allocation of Purchase Price
In a stock sale, the corporation is the legal "owning entity" of the company, and the purchase price may be allocated completely (100%) to the sale of the stock. However, in tightly held non-public corporations, the purchase price is frequently allocated to the company's stock in addition to "service contracts" or "service agreements" such as:
1. Value of the stock
2. 2) Value of the Covenant Not to Compete, which is provided the buyers from key individuals selling the corporate stock
3. 3) Value of Training, which is provided the buyers are the key individuals selling the corporate stock who also manage / operate the company
Due to the current U.S. tax structure, sellers usually prefer to have most (if not all) of the purchase price allocated to the value of the stock, since that is usually taxable at Capital Gains tax rates, and that tax rate currently is usually much more favorable than the seller's Ordinary income tax rate. Of course, buyers usually prefer to minimize the value attributed to the stock in order to place larger values to the Covenant No to Compete and the Training & transition, since the covenant and training values allow the buyers to "write off" those portions of the overall purchase price.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price
Non-Stock Sale - Allocation of Purchase Price
When the buyers are purchasing the tangible and intangible assets from a corporation, or purchasing the business from a sole proprietor, a partnership, and LLC or LLP, the purchase price is usually allocated to some, or all, of the following components:
1. Tangible Personal Property (trade fixtures, furniture, equipment)
2. Leasehold Improvements
3. Value of Premise Lease (if the lease is at or below market rent)
4. Covenant Not to Compete (include time and distance of covenant)
5. Training and Transition (include schedule of time, hours, etc.)
6. Liquor License (include license type and number)
7. Customer List
8. Goodwill
9. Buildings
10. Land
11. Inventory
The total value allocated to all of the appropriate assets should equal the total of the purchase price. IRC Section 1060 further delineates specific items included in each of the seven "classes" of assets.
Please be aware in states that collect sales tax on both (1) the tangible personal property and sales tax associated with (2) the transfer of vehicle licenses, it very important that the value of the Registered (licensed) Vehicles not be included with the other Tangible Personal Property on the allocation, lest the escrow officer may inadvertently collect sales tax on the licensed vehicles in escrow while the buyer will again have to pay sales tax to the licensing department when they re-register the vehicles to the new owners / buyers.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points
Tax Implications - General Guidelines
(AS OF JANUARY 2001, FEDERAL TAXES ONLY; STATE TAXES ADDITIONAL)
STOCK SALES
Value placed on Stock:
1. Seller: Capital gains tax rate (currently at 15%) for stock held more than one year
2. Buyer: No write off; must accept assets at current book value (i.e., existing depreciation schedule)
Value placed on Covenant Not to Compete:
1. Seller: Ordinary income to recipient (is considered personal to seller / principal)
2. Buyer: Amortize value over 15 years
Value placed on Training / Consulting Agreement:
1. Seller: Ordinary income to recipient
2. Buyer: Expense out as paid
Non-Stock ("asset") Sales
Value placed on Tangible Personal Property (trade fixtures, furniture, equipment):
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Established basis, depreciate per IRS schedules
Value placed on Premise Lease savings (if the lease is at below market rent, it is an intangible asset):
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize value over 15 years
Value placed on Covenant Not to Compete (include time and distance of covenant):
1. Seller: Ordinary income as received
2. Buyer: Amortize over 15 years
Value placed on Training/Consultation (include schedule of time, hours, etc.):
1. Seller: Ordinary income as received
2. Buyer: Expense out as paid
Value placed on Registered Vehicles (do not include in Tangible Personal Property above:)
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Established basis, depreciate per IRS schedules
Value placed on Liquor License (include license type and number; is an intangible asset):
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize over 15 years
Value placed on Customer List:
1. Seller: Ordinary income as received
2. Buyer: Amortize over 15 years
Value placed on Goodwill:
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize over 15 years
Value placed on Buildings:
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Establishes basis, depreciate per IRS schedules
Value placed on Land:
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain, otherwise ordinary income
2. Buyer: No immediate tax impacts
Value placed on Inventory:
1. Seller: Ordinary income, to the extent that is over basis
2. Buyer: Treated as "cost of goods sold" upon sale of products
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price
Key Points - Allocation of Purchase Price
Consistency between the seller and buyer in their reporting of the allocation is important. Work with professionals (licensed and/or accredited Brokers, CPA's, attorneys) in these transactions to save you time and money down the line. Tax laws change frequently, so treat this article as a guideline subject to change by the IRS, and subject to interpretation by the appropriate professionals/advisors.
The larger the transaction the more likely there will have to be a formal valuation some, or many of the various asset values may be indicated.
About the AuthorJim Pease, CPA, is a licensed CPA in the state of California, and is a principal at W. H. Mayer Accountancy Corporation in Pleasanton, CA. He specializes in taxes, business accounting, business valuation and business acquisitions/sales.
Ron Johnson, CBI, MM&AI, Fellow of the IBBA, is president of Allen Business Investments and principal of Onyx Associates, both in San Ramon, CA. Allen Business Investments specializes in the sales of Main Street businesses, in the sales of non-public firms with revenues less than $10 million. Onyx Associates is a mergers and acquisitions firm specializing in privately-held companies with revenues up to $50 million. Ron is a past president of the California Association of Business Brokers (CABB), and an active member of the International Business Brokers Association (IBBA). You can email Ron at ron@abi.nu.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price
In a stock sale, the corporation is the legal "owning entity" of the company, and the purchase price may be allocated completely (100%) to the sale of the stock. However, in tightly held non-public corporations, the purchase price is frequently allocated to the company's stock in addition to "service contracts" or "service agreements" such as:
1. Value of the stock
2. 2) Value of the Covenant Not to Compete, which is provided the buyers from key individuals selling the corporate stock
3. 3) Value of Training, which is provided the buyers are the key individuals selling the corporate stock who also manage / operate the company
Due to the current U.S. tax structure, sellers usually prefer to have most (if not all) of the purchase price allocated to the value of the stock, since that is usually taxable at Capital Gains tax rates, and that tax rate currently is usually much more favorable than the seller's Ordinary income tax rate. Of course, buyers usually prefer to minimize the value attributed to the stock in order to place larger values to the Covenant No to Compete and the Training & transition, since the covenant and training values allow the buyers to "write off" those portions of the overall purchase price.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price
Non-Stock Sale - Allocation of Purchase Price
When the buyers are purchasing the tangible and intangible assets from a corporation, or purchasing the business from a sole proprietor, a partnership, and LLC or LLP, the purchase price is usually allocated to some, or all, of the following components:
1. Tangible Personal Property (trade fixtures, furniture, equipment)
2. Leasehold Improvements
3. Value of Premise Lease (if the lease is at or below market rent)
4. Covenant Not to Compete (include time and distance of covenant)
5. Training and Transition (include schedule of time, hours, etc.)
6. Liquor License (include license type and number)
7. Customer List
8. Goodwill
9. Buildings
10. Land
11. Inventory
The total value allocated to all of the appropriate assets should equal the total of the purchase price. IRC Section 1060 further delineates specific items included in each of the seven "classes" of assets.
Please be aware in states that collect sales tax on both (1) the tangible personal property and sales tax associated with (2) the transfer of vehicle licenses, it very important that the value of the Registered (licensed) Vehicles not be included with the other Tangible Personal Property on the allocation, lest the escrow officer may inadvertently collect sales tax on the licensed vehicles in escrow while the buyer will again have to pay sales tax to the licensing department when they re-register the vehicles to the new owners / buyers.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points
Tax Implications - General Guidelines
(AS OF JANUARY 2001, FEDERAL TAXES ONLY; STATE TAXES ADDITIONAL)
STOCK SALES
Value placed on Stock:
1. Seller: Capital gains tax rate (currently at 15%) for stock held more than one year
2. Buyer: No write off; must accept assets at current book value (i.e., existing depreciation schedule)
Value placed on Covenant Not to Compete:
1. Seller: Ordinary income to recipient (is considered personal to seller / principal)
2. Buyer: Amortize value over 15 years
Value placed on Training / Consulting Agreement:
1. Seller: Ordinary income to recipient
2. Buyer: Expense out as paid
Non-Stock ("asset") Sales
Value placed on Tangible Personal Property (trade fixtures, furniture, equipment):
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Established basis, depreciate per IRS schedules
Value placed on Premise Lease savings (if the lease is at below market rent, it is an intangible asset):
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize value over 15 years
Value placed on Covenant Not to Compete (include time and distance of covenant):
1. Seller: Ordinary income as received
2. Buyer: Amortize over 15 years
Value placed on Training/Consultation (include schedule of time, hours, etc.):
1. Seller: Ordinary income as received
2. Buyer: Expense out as paid
Value placed on Registered Vehicles (do not include in Tangible Personal Property above:)
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Established basis, depreciate per IRS schedules
Value placed on Liquor License (include license type and number; is an intangible asset):
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize over 15 years
Value placed on Customer List:
1. Seller: Ordinary income as received
2. Buyer: Amortize over 15 years
Value placed on Goodwill:
1. Seller: If held for more than one year, is long-term capital gain
2. Buyer: Amortize over 15 years
Value placed on Buildings:
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
2. Buyer: Establishes basis, depreciate per IRS schedules
Value placed on Land:
1. Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain, otherwise ordinary income
2. Buyer: No immediate tax impacts
Value placed on Inventory:
1. Seller: Ordinary income, to the extent that is over basis
2. Buyer: Treated as "cost of goods sold" upon sale of products
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price
Key Points - Allocation of Purchase Price
Consistency between the seller and buyer in their reporting of the allocation is important. Work with professionals (licensed and/or accredited Brokers, CPA's, attorneys) in these transactions to save you time and money down the line. Tax laws change frequently, so treat this article as a guideline subject to change by the IRS, and subject to interpretation by the appropriate professionals/advisors.
The larger the transaction the more likely there will have to be a formal valuation some, or many of the various asset values may be indicated.
About the AuthorJim Pease, CPA, is a licensed CPA in the state of California, and is a principal at W. H. Mayer Accountancy Corporation in Pleasanton, CA. He specializes in taxes, business accounting, business valuation and business acquisitions/sales.
Ron Johnson, CBI, MM&AI, Fellow of the IBBA, is president of Allen Business Investments and principal of Onyx Associates, both in San Ramon, CA. Allen Business Investments specializes in the sales of Main Street businesses, in the sales of non-public firms with revenues less than $10 million. Onyx Associates is a mergers and acquisitions firm specializing in privately-held companies with revenues up to $50 million. Ron is a past president of the California Association of Business Brokers (CABB), and an active member of the International Business Brokers Association (IBBA). You can email Ron at ron@abi.nu.
Section 1: Allocation of Purchase PriceSection 2: Stock Sale - Allocation of Purchase PriceSection 3: Non-Stock Sale - Allocation of Purchase PriceSection 4: Tax Implications - General GuidelinesSection 5: Key Points - Allocation of Purchase Price
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