Getting More After-Tax Money When Selling Your Business

Question: How can I maximize the amount of cash I receive when I sell my business?

Answer: Acquire every last after tax dollar and get paid in cash . Also, follow three critical steps before proceeding:

• Preplan the sale of your business. This should not be a spur of the moment decision. Rather, it should be well planned in advance. Though it is not possible to control the external environment, such as interest rates and strength of the economy, it is possible to plan for an orderly transition. Start thinking about some obvious sources for a potential buyer. For example, should an employee be groomed for possible succession? Might a good customer be interested in acquiring your business in the event of its sale?

• Recognize the importance of finding the right buyer. Most businesses don't have a value that is set in stone. Instead they have a range of value. This means that different buyers will have different perceptions of the same business' value. It becomes important to pre-plan your confidential marketing effort to gain exposure to multiple buyers, especially synergistic buyers. Synergistic buyers are those individuals who, because of their location, complimentary customer base, financial resources or market position, can profit more from owning your business and are therefore willing to pay more.

• Consider getting professional help. Unless you have a background in taxes, legal issues and merger and acquisition work, you will probably unknowingly make a multitude of costly mistakes by trying to sell your business yourself. Those mistakes may cost you substantially more than any fees paid for competent professional assistance. Do some homework on various alternatives. Become informed by attending seminars regarding tax issues, estate planning, and so on. Ask your CPA or lawyer to recommend “general knowledge” seminars that might assist your learning curve.

Liabilities and Obligations in Selling a Business

Question: When a business is sold, what liabilities are the buyer responsible for and which remain the obligation of the seller?

Answer: In general, whether it is as an asset sale or a stock sale, just remember sellers are obligated to provide “lien free” assets to the buyer. While all transactions are unique, buyers will typically assume liability for the following:

1. Leaseholds related to real estate, unless they are relocating the business
2. Accounts Payable (and if they do they will also get the accounts receivable)
3. Advertising commitments such as Yellow Page contracts
4. Customer deposits, provided seller relays to buyer a like amount of cash
5. Any other liabilities that are agreed upon in writing.

Sellers will typically be obligated to pay off out of the sale proceeds the following:

1. Lines of credit
2. Installment debt and/or leases related to vehicles, computers, equipment
3. All obligations to employees up to the date of closing
4. All tax related matters
5. All other debt that has any claim against any of the assets that are being transferred to the buyer.

There is another issue related to liabilities. The seller is obligated to give the buyer strong “warranties and representations” (guarantees) that there are no undisclosed or unknown liabilities that might create claims against the assets being sold. The California Bulk Sales Law essentially states that a buyer can be held liable for goods transferred to him or her that have not been paid for by the seller. Obviously, all buyers want and are entitled to protection from having to pay for the same goods twice.

In summary, it is essential that both buyer and seller commit to having everything in writing (i.e. no verbal agreements) and that both sides be represented by competent legal advice before signing on the dotted line.

Plan Your Business Exit the Day You Launch

You start your business with dreams of making millions. At selling time, you want to keep as many of those after tax millions as you can in exchange for your blood, sweat and tears. Advance planning can make a big difference in the amount you pocket after the sale.

Consider this: Under prevailing tax rates, Owner A sells a business for $1 million in cash and receives $800,000 in after-tax proceeds while Owner B sells a business for $1 million in cash and receives $500,000 or less in after-tax proceeds. The difference in the cash you keep has everything to do with the form of ownership, the nature of the transaction, and the tax structuring.

San Diego County is home to approximately 145,000 privately owned businesses that cover a wide range of industries including manufacturing, retail, distribution, professional services and just about everything in between. These businesses range in size from one owner with no employees to those with hundreds of employees. Most are quite profitable and have been growing in conjunction with San Diego County 's population and economic growth for many years.

One hundred percent of these businesses will experience a change of ownership. In some cases, this change will be involuntary and take the form of a bankruptcy or closure. However, in the vast majority of cases, it will result in the owners receiving significant amounts of money as they transfer the earning power and goodwill of their businesses to others.

Because there is not a centralized database that tracks all forms of transfers of business ownership interests, the annual rate of transitions of ownership can only be estimated. However, from prior research on the topic and from 25 years of experience in providing representation to those who sell their privately owned businesses, I estimate that between 6% and 7% of all privately-owned businesses change ownership during each year. This means the average period of ownership is approximately 13 years. The vast majority of these transitions will involve the sale and transfer of all prior ownership to new ownership.

In most cases, the owners will have spent years running their businesses on a day-to-day basis to generate both personal income and profits. Yet surprisingly few business owners have assembled the necessary plans for (a) when they elect to sell, or (b) how to be positioned to maximize their after tax dollars when it comes time to transition the ownership of their businesses.

Though an exit strategy should ideally be part of an original business plan, it is never too late to become informed about all aspects of how to unlock the hidden value of your business and convert it to cash when the time comes to sell. In the above $1 million illustration of the sale of a business, the tax savings are obvious, but what is not obvious is a true understanding of getting a buyer to pay you what your business is really worth. The process of profitably transitioning business ownership involves a series of steps that include the following:

• Understanding your personal objectives and financial needs
• Realistically determining the present value of your business
• Understanding what can and will influence its future value
• Determining the best time to move forward
• Correctly “packaging” your business
• Developing strategies to proceed with total confidentiality
• Entering into totally confidential negotiations
• Knowing how to find the best possible buyers
• Financially qualifying buyers
• Finding a lender for your buyer so you can get cashed out
• Reaching agreement on the negotiation of details
• Preparing appropriate legal documents in a time- and cost-effective manner
• Coordinating prorations and closing needs
• Realistically assessing your post-closing obligations, such as training or transition consulting
• Actually closing the transaction
• Knowing how to best inform employees, customers, vendors and others after the transaction has closed.

In most cases, business owners only go through the sale process once and thus cannot develop expertise through successive transactions. Whether you started your business with an original exit strategy or are just beginning to develop one, the concepts are not difficult to either grasp or implement, and the effort can be very profitable.