While some members of the baby boomer generation are already retired, many more among this demographic are expected to retire in the next several years. Baby boomers are born between 1946 and 1964 and are currently between 57 and 75 years of age. Since many baby boomers are also business owners, some estimates expect the rate of business sales to increase in the next five years.
Selling a business requires time, an experienced team of business and tax professionals, and pre-planning to achieve the best outcome for all involved. That was among the advice offered by experts during the seminar: Succession Planning, How to Prepare and Value Your Business, presented by Bank of Nevada and First Independent Bank.
Preparation is Important
Whether you plan to sell your business soon or not, it makes sense to start preparing now. Having relatively quick access to up-to-date and clean company records is not only a good idea, but it may also bring you a better selling price, according to Katrina Loftin, CBI, M&AMI, of M & A Business Advisors.
It has been Loftin’s experience that the longer it takes to put a sale together, the more likely it is to fall apart. She says sometimes buyers will get cold feet when a seller can’t provide the required documents promptly. For that reason, Loftin offers potential clients a checklist of an owner’s due diligence to help them understand the scope of what they will need to provide and a reason to start collecting the information.
“You have to clean up your financials, including profit and loss statements as well as the company’s balance sheet. This is essential to complete before you need to submit these documents to a potential buyer,” says Loftin. “If you happen to have personal expenses in the company, perhaps a vehicle that you want to keep out of the sale, I suggest working with your CPA now to remove those items, so the financials are clean and organized when you need them.”
What’s my Business Worth?
That’s often the first question many business owners will ask. However, the answer can be much more complicated and requires the insight of professionals. In general, Loftin says a Seller’s Discretionary Earnings (SDE) or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) are used with a multiplier to determine the value of a company. Specific considerations about the company will specify which multiplier is used. Many brokers and business advisors, including Loftin, will also offer a more precise initial valuation at no cost.
Many other factors will affect the purchase price. On the positive side, company exclusivity, a steady and moderate increase in sales, increasing EBIDTA and SDE, combined with good management and stable employees, are all good indicators. However, a lack of contracts, extreme customer concentration, non-assignable contracts, and minimal product lines can often reduce the selling price.
Tax Implications of a Sale
While many owners will often focus on the selling price, the tax implications of a sale should also be of primary concern, according to Jim Main, CPA, CCIFP, CEPA, Principal, Real Estate & Construction, CliftonLarsonAllen. A qualified and experienced CPA can help an owner net more from the sale of a business through tax planning and strategies, but it requires pre-planning.
His first piece of advice is never to sign a Letter of Intent (LOI) for the sale of your business without first speaking to a qualified CPA.
“As an experienced CPA, we hate to hear a client say I just signed an LOI to sell my business,” says Main. “Generally, 99.9 percent of the time, nothing good happens after the LOI, as many things can come out of the woodwork, including things the seller doesn’t like.”
Main encourages sellers to understand that every sector of the business will have a different tax characteristic. Any covenants in a sales contract are taxed as ordinary income. Equipment is taxed as regular income on the amount between what has already been depreciated and the current value. Inventory is taxed at market value. Additionally, legal fees, holdbacks and working capital required to close the sale can be significant and should be discussed with an experienced business advisor and CPA.
“These things need to be brought out, talked through, and investigated with your accountant and your business advisors before the time you decide to sell, and especially before the time you go out and sign an LOI,” said Main.
Financing a Business Acquisition
Small business owners looking for resources to finance a business acquisition or sale will likely utilize a loan program through the Small Business Administration.
The SBA has been essential to the merger and acquisition space for many years, according to Roe Belzer, SBA Lending Manager for Bank of Nevada. Bank of Nevada and First Independent Bank are divisions of Western Alliance Bank, Member FDIC.
“There is a significant amount of goodwill that is created when you sell a business given that the cash flow you’ve generated over the years can be quantified, allowing you to be paid through a buyer for that value,” said Belzer. “Since there is no collateral associated with goodwill, conventional lenders are often hesitant to provide this type of financing.”
Belzer says the SBA 7a loan is probably the most frequently used financing vehicle for small businesses. The 7a loan is a government loan guarantee program that can offer up to 90 percent financing, attractive rates, and loan terms. The SBA’s involvement is also critical in that it provides a guarantee should there be a default.
A business owner can use a 7a loan to finance a commercial real estate purchase, refinance a real estate loan, and finance construction. Additionally, 7a funds are used for business acquisitions, the buy-out of a practice, partner buy-out, stock or asset sale, key manager buy-out, and expansions through acquisitions.
The financing requires a 10 percent down payment by the client. Although there is no minimum on a 7a loan, the maximum loan amount is five (5) million dollars. However, if the sale of a business exceeds that amount, there may be options to incorporate a different type of loan or cash infusion to keep within the guidelines.
Selling a business is a complex decision with pros and cons that need to be fully considered with the advice of qualified advisors, tax professionals, and experienced bankers at First Independent Bank. Experts agree that pre-planning gives business owners the benefit of being prepared for an offer, and the ability to structure the sale so an owner gets the most benefit.
To learn more about how to prepare for the potential sale of your business, now or in the future, please call First Independent Bank at (775) 824-4352 or email Jim DeVolld at email@example.com.
To view the entire Succession Planning, How to Prepare and Value Your Business seminar, click here.
First Independent Bank is a division of Western Alliance Bank. Member FDIC. All offers of credit are subject to credit approval, satisfactory legal documentation and regulatory compliance.