Selling Your Small Business in A Post COVID Environment

Selling Your Small Business in A Post COVID Environment

 

COVID rocked the small business community, resulting in some businesses thriving and some struggling.  Regardless of whether you grew or declined during the pandemic, as a business owner you likely considered a PPP Loan.  If you more than considered applying and got a check, that was just the start of the journey.

Even though Nevada does not have a Corporate Income Tax, there are tax implications for PPP loans.  In Nevada, Forgiven PPP loans are treated as taxable gross revenue. Because the PPP loan is new, tax preparers have been waiting for guidance, so your tax preparation will likely be delayed.

If you are doing business in multiple states, especially in California, you will be dealing with different rules in different jurisdictions. It is vital to rely on your tax professional to ensure you remain in compliance depending on the state.

Many business owners are ready to sell after experiencing this period of unprecedented uncertainty in our history. If you are wanting to sell your business in this post  COVID environment, you need to be prepared for the following:

Finances

Ensure your books and financial records are clean for 2020. You may experience better success if your business can show a rebound in comparison to 2019 or better revenue for Q1 of 2021

Buyer Inquiries

Be prepared to answer questions from buyers regarding your PPP loan.

  • What did you use the funds for?
  • Have the loans been forgiven?
  • If they have not been forgiven, have you filed?
  • Were you acting on the advice of a CPA or did you complete the process yourself?

Possible Delays

Due to COVID, many buyers are feeling a higher level of risk and uncertainty in purchasing a business, which could lead to:

  • Lower offers
  • Longer escrows
  • Taxes are likely to be delayed in filing, therefore payment and tax clearance may take longer than traditionally

 

As a seller, there are steps that we recommend to assist in mitigating the risks and make your business more valuable/saleable.

Get Clean

If you are not working with a  tax professional, preferably a CPA, you need one now more than ever.  This is not a time to rely on your bookkeeper or do it yourself (unless you are a CPA of course).

Seek Forgiveness

As soon as you are able to seek forgiveness for your PPP loan(s), the sooner it will be off your books and the sooner that you can move on.  If your loan is not forgiven, it will affect your relationship with your lenders, as well as your taxes.  Even in an asset sale, where the buyer is not taking on your legal entity, this can greatly affect your success if you are trying to sell.

Make Amends

Can’t get forgiveness on the loan?  This can happen if the government does not agree with how you allocated the PPP funds.  If you are unable to get forgiveness, establish a payment plan in order to make amends with the government.  Lawsuits and tax liens are deal killers when you are trying to sell your business.

The Liberty Group of Nevada is knowledgeable, experienced and understands the challenging process of selling a business. We are equipped to assist owners in navigating each step of the transaction, resulting in successful transactions.  We provide high-quality service and guidance through the process to make the selling of your business as simple, profitable, and painless as possible.  http://thelibertygroupofnevada.com/contact-us/.

“The Freedom Point,” 3 Things You Should Consider

Have you calculated how much of your net worth is connected to your company’s value?

When you started your business, it’s value was mostly likely negligible. That is if you didn’t either inherit your company or you purchased an existing company. Over time however, the proportion of your assets tied to your business have probably begun to increase.

For example, a business owner named Tim, starts his company when he’s 30 years old. He has some equity built up in his first home and a small retirement fund. So, when he starts his business, it’s not worth very much and thus does not yet factor into Tim’s net worth.

By the time Tim reaches 50 years old, he has built up $600,000 worth of equity in his home, $400,000 in his retirement fund and his business has grown and is worth $4,000,000. Now Tim’s company has increased to represent 80% of his net worth.

He knows the first rule of investing is to diversify his investments, which he does with his retirement account. Still, he failed to achieve overall diversity given the success of the business he started.

What’s more, he may have passed “The Freedom Point,” unknowingly. Which is when the net proceeds of selling his business would earn him enough money to live comfortably for the remainder of his life. Your lifestyle determines what your Freedom Point will be, if you surpass it, it may be worth considering the risk you may be taking.

The pandemic has taught us many things, one being that nothing is for sure. Your thriving business could one day turn into a struggling company in the blink of an eye. When your business makes up the majority of your net worth and selling would earn enough money for you to retire, there’s no financial reason to continue to own your business. There may be other reasons you enjoy owning your business. You may enjoy the social interactions, the creative process associated with owning your business, the challenges it may provide, however, keeping it could be unnecessarily risky.

Once you’ve reached your Freedom Point and decide you want to diversify but still don’t wat to retire, you have some options. Those include:

  • Selling a Minority Stake: Minority recapitalization is when you sell less than half of your shares. They are often sold to financial advisors such as a private equity group. Minority recapitalization allows you to continue to control your business while also diversifying your net worth.
  • Selling a Majority Stake: Majority recapitalization is when you sell more than half of your shares to an investor. Likely, the investor will ask you to continue running your business moving forward. This was you are able to diversify your wealth, keep some equity in your business if the investor sells and continue to run your business.
  • Earn-Out: When selling your company, you will most likely have to agree to some sort of transition period. A popular version of this is called and earn-out, where you agree to continue running the company as a part of the purchaser’s business for an agreed upon amount of time. The earn-out may be as little a year, or even as long as seven years, however the average is about three years. Thus, if you are already past your Freedom Point and see yourself wanting to retire in the next three to five years, an earn-out may be the way to go.

Building a successful business can be rewarding, but when your personal balance sheet does not match, it might be time to consider the risks you are taking and the options available to you.

Common Questions About Purchasing a Business

By the Liberty Group of Nevada

Purchasing a business requires a major investment of resources, time, and financial support. The responsible and prudent entrepreneur will have many questions when they consider making a major investment.   The Liberty Group of Nevada has been in the business brokering industry for many years, having brokered thousands of successful transactions.  During this time, we have been asked countless questions about the process.  We have discovered that most of our clients share the same or similar questions.  We have gathered up some of the most commonly asked questions below.

Question # 1: Why Should I Buy a Business, When I Can Just Start One Myself?

Answer: Starting a brand-new business is often a very risky venture. This process requires devising a brand-new business model, with a lack of evidence to indicate if it will succeed in the current economic environment.  In contrast, a pre-owned business already has a business model that can easily demonstrate if it is currently profitable and can be successfully operated.

Question #2: Where Do I Get the Funding?

Answer: There are many options to procure the needed capital and resources to finance this entrepreneurial venture.  One method that is growing in popularity is the use of retirement funds from an IRA and or 401(k).  There are many financial management firms, such as the Guidant Financial Group, that can provide support with this method.  Another popular method is to use loans supported by the United States Small Business Administration (SBA).  These loans were made for the purpose of encouraging economic activity and have recently been made more attractive by the SBA to attract more prospective lendees in response to the COVID-19 Pandemic.  A third option is to consider going into the venture with a partner, or multiple partners, to lower each respective partners’ risk and investment costs.

Question #3: Why Should I Use a Business Broker? 

Answer: The primary purpose of using a brokerage to purchase a business is the promise of guidance in the complex process of searching for and buying a business, with additional access to the firm’s extensive listings.  The business buying process can be quite intricate and difficult to navigate if one is not experienced with it.  This is where a firm will step in and provide step-by-step guidance.  Furthermore, by using a firm’s services you will have access to the brokerage’s listings.  As selling a business can often be just as difficult as buying a business, many business owners use business brokerages to market and sell their company.  This leads to a firm having countless options for buyers to consider, that may not be otherwise accessible.

If you wish to use the services of a business brokerage in your pursuit of the perfect company to buy, please consider using the Liberty Group of Nevada.  We will guide you forward in the process with our expert knowledge, while providing you access to the most extensive listings of businesses for sale in the Northern Nevada area.  Please contact us today by calling (775) 825-3948 or by emailing us at info@libertygroupnv.com.

 

 

 

By the Liberty Group of Nevada

Purchasing a business requires a major investment of resources, time, and financial support. The responsible and prudent entrepreneur will have many questions when they consider making a major investment.   The Liberty Group of Nevada has been in the business brokering industry for many years, having brokered thousands of successful transactions.  During this time, we have been asked countless questions about the process.  We have discovered that most of our clients share the same or similar questions.  We have gathered up some of the most commonly asked questions below.

Question # 1: Why Should I Buy a Business, When I Can Just Start One Myself?

Answer: Starting a brand-new business is often a very risky venture. This process requires devising a brand-new business model, with a lack of evidence to indicate if it will succeed in the current economic environment.  In contrast, a pre-owned business already has a business model that can easily demonstrate if it is currently profitable and can be successfully operated.

Question #2: Where Do I Get the Funding?

Answer: There are many options to procure the needed capital and resources to finance this entrepreneurial venture.  One method that is growing in popularity is the use of retirement funds from an IRA and or 401(k).  There are many financial management firms, such as the Guidant Financial Group, that can provide support with this method.  Another popular method is to use loans supported by the United States Small Business Administration (SBA).  These loans were made for the purpose of encouraging economic activity and have recently been made more attractive by the SBA to attract more prospective lendees in response to the COVID-19 Pandemic.  A third option is to consider going into the venture with a partner, or multiple partners, to lower each respective partners’ risk and investment costs.

Question #3: Why Should I Use a Business Broker? 

Answer: The primary purpose of using a brokerage to purchase a business is the promise of guidance in the complex process of searching for and buying a business, with additional access to the firm’s extensive listings.  The business buying process can be quite intricate and difficult to navigate if one is not experienced with it.  This is where a firm will step in and provide step-by-step guidance.  Furthermore, by using a firm’s services you will have access to the brokerage’s listings.  As selling a business can often be just as difficult as buying a business, many business owners use business brokerages to market and sell their company.  This leads to a firm having countless options for buyers to consider, that may not be otherwise accessible.

If you wish to use the services of a business brokerage in your pursuit of the perfect company to buy, please consider using the Liberty Group of Nevada.  We will guide you forward in the process with our expert knowledge, while providing you access to the most extensive listings of businesses for sale in the Northern Nevada area.  Please contact us today by calling (775) 825-3948 or by emailing us at info@libertygroupnv.com.

 

 

 

Why You Should Have a Guide When Buying a Business

By the Liberty Group of Nevada

        Whether you are hunting, exploring a new city or tackling a new activity, it is common practice to employ the services of a guide.  We lean on a guide in these unknown situations because they are experienced and knowledgeable, provide guidance and oversight to make sure the experience is successful.  Business brokerage firms, such as the Liberty Group of Nevada, operate in a similar way.  The benefit of using a business brokerage firm is that we provide detailed guidance on the process of purchasing a business, as well as access to listings and assistance throughout the transaction.

Most individuals are unfamiliar with the many complexities and idiosyncrasies that are often littered throughout the business buying and selling process. If unaccounted for, these small details may prevent a successful transfer of ownership from taking place.  This is further complicated by the fact that the minutiae of the buying/selling process can vary widely depending on the industry that the business for sale operates in.  That’s why it is good practice to rely on the services of a business brokerage firm to navigate through the purchase process.

This guidance that we provide takes on the form of a detailed and customized plan that we create for you.  With it, we will lead you through every step on your way to a satisfactory purchase.  In the first stages of the plan, we will evaluate what your needs and desires are for the kind of business you want to buy so that we can help narrow the search.  Then we provide assistance identifying the ideal budget. We provide qualification services that examine your financials.  This is a confidential process that is done to provide a sense of credibility to sellers.

We assist in reviewing our vast pool of businesses for sale and work with buyers to find a business that fits all of the criteria and budget. A major benefit that comes with using a business brokerage firm is access to a greater pool of listings, many of which you may not have access to otherwise.  Once an offer is placed, we will bring both parties to the negotiation table where the final details of the transfer can be hashed out and agreed upon.  Guidance throughout the negotiation and paperwork process is paramount for a successful and thorough transaction.

Buying a business can be a somewhat daunting process and should not be done alone. Relying on a business brokerage allows you as the buyer to focus on what is important; what kind of business you wish to acquire, how you will lead that business and how that business will grow and succeed. Let us focus on the rest.

 

Please click on the link below to explore our current listings: https://www.thelibertygroupofnevada.com/listings/

 

 

Frictional cost is the total direct and indirect costs associated with the execution of a financial transaction. The frictional cost comprehensively takes into consideration all of the costs associated with a transaction.

According to the Exit Planning Institute, only 5% of owners who sell their business are happy with the proceeds. There are a number of factors that contribute to this dismal statistic, but most of them boil down to poor planning and unrealistic expectations.

To decrease this potential loss, creating and implementing an exit strategy is key. Additionally, creating this plan long before you consider selling is an important aspect of an exit strategy. Research shows that 70% of business owners do not have an exit strategy, leaving the future of their enterprise and potentially their own or their family’s financial future, unprotected.

The first step in a successful and satisfying exit from your business is to figure out your number. Meaning, how much money will you need to achieve your post-exit goals? Typically, we recommend determining your number 5-10 years in advance of your anticipated exit. This may seem like excess planning, but if you wait to determine your number until you are forced to sell, there is very little you can do to impact the valuation of your business.

During the exit strategy planning, knowing the difference between where you are now and what you will need for a sufficient exit will increase your chances of a happy ending. We call the difference the value of your business today you are today and the price that you need to get for your business when you sell, the Valuation Gap. Knowing you’re the Valuation Gap early, can help you set goals and plan to minimize the gap before you put your business on the market.

In determining the number to achieve your post-exit goals, you should consider your motivations for the exit. Here are a couple of steps that can assist you in establishing your number:

  • Consider the lifestyle you imagine post-exit and come up with a number that you will need on an annual basis to obtain that lifestyle. Are you planning on retiring after this transaction? If yes, your number may need to be higher.
  • Using a financial planner can assist you in a variety of areas. These can include managing your investable assets, provide guidance on achieving your financial goals, help you retain your key employees, protect you and your family with various insurance products and help you navigate the complexities of the financial instruments and markets.
  • If you have investments outside of your business, you are able to deduct those assets from the overall goal. It’s important to note that you should not count principal residence as an investable asset.
  • Don’t forget to include those frictional costs! These costs can include taxes on the sale of your business, the cost of an intermediary, legal review, bonuses for employees, and insurance tail.

To most, steps 1-3 are instinctive, but it is the frictional costs can blindside an unwary seller at the end of the sale transaction when there is no opportunity to correct. It is critical that you anticipate these costs and minimize errors from the start.

To identifying these frictional costs, we recommend you consult a professional business intermediary, CPA and financial planner. However, we have listed a few items below to get you started:

Taxes – Determining the tax burden on the potential sale of your business is difficult in the abstract because your taxes will, in part, depend on the business structure. It is critical that you consult with your CPA in advance of signing any letter of intent or offer.

Intermediary success fees or commissions – Intermediaries usually charge a percentage of the sale price of your company. For a small business, they will typically charge 10-15% on the first million dollars of value, with a declining percentage for each million dollars thereafter. Larger businesses, over $10 million in value can expect to pay an M&A professional 3% – 5% of the sales price. A good intermediary will earn their money by helping you to correctly value your business, finding and vetting prospective purchasers allowing you to continue running your company vs. focusing all of your energy on responding to inquiries, negotiating with the buyers and making sure that all of the necessary steps are taken to close the deal.

 Legal fees – These can average 2% – 4% of the deal.

Insurance fees – If you have E&O or other professional insurance, you will want to call your agent and find out how much tail insurance costs. Tail insurance covers you in the event that you are sued in the future for a claim that happened during the time frame that you were practicing.

EXAMPLE:

If you want to retire at 65 and the retirement lifestyle that you envision would cost you $100,000 per year, you will need 25-30 times that amount invested, or $3,000,000. If you have investments assets outside of your business, (not including your primary residence) you would deduct the value of those assets from the amount.

For the sake of the example, we will assume you have $700,000 which means that after the sale of your business you would need to net $2,300,000.

Many small business owners stop their calculations here. However, to end up with the $3,000,000 invested, you would actually need to sell your business for around $3,570,000, not $2,300,000.

Example of Frictional Costs assuming 20% Capital Gains

Sale Price –$ 3,570,000.00

Intermediary Fee Varied – $1M to $262,800.00

Legal – 2% = $71,400.00

Employee – 10% = $357,000.00

Total Frictional Cost Before Tax – $691,200.00

Subtotal – $2,878,800.00

Capital Gains Tax – 20% = $575,760.00

Net Sales Proceeds – $ 2,303,040.00

When you are contemplating your future, it’s important to properly plan and to plan way before you are considering exiting your business. Having an exit strategy does not mean that you have to sell your business immediately.

It means your business has great financial records, is positioned for, and has a plan for growth, is staffed appropriately so that you could leave your business for 30 days or more, and that you have confidence that the business would run smoothly in your absence, if not grow.

It means that you have plans in place for replacing employees if they leave and that you are not overly reliant on a single customer or supplier. Your cashflow is excellent and you have a well-positioned product or services that help you stand out from the crowd. This kind of business is not only ready to be sold when the time is right, but it is a pleasure to own.

If you take some time to figure out your number early you can take definitive steps to maximize the value of your business over time and when the market valuation and your personal valuation coincide, it may be the right time to consider an exit.

The Liberty Group of Nevada is well-aware of the laborious and often challenging process of selling a business and is equipped to assist owners in navigating through each step of the transaction.  We provide high-quality service and guidance through the entire process to make the selling of your business as simple, profitable, and painless as possible. If you have any questions or would like more information, please contact us today, www.thelibertygroupofnevada.com/contact-us/.

Broker Kathryn Guthrie discussed how buying and selling businesses are selling at record pace in Nevada with Nevada Business Magazine. Read more below!

 

Through Challenging Times, Buying and Selling Business Continues at Record Pace in Nevada

With all of the tragedy, shut down and hardship associated with COVID, there have been a few bright spots in the Nevada business community that give us great hope for 2021.

As the new year is underway, it is interesting to note that entrepreneurship is notably on the rise. Nevada has experienced an increase in the sale of existing businesses to the next generation of entrepreneurs. Many people looking to buy a business are local, however we are seeing increasing interest from buyers outside of Nevada.

The business-friendly climate in Nevada is drawing people from across the country including California, Wisconsin, Illinois, Alabama and Florida. People are more mobile now due to the disruptions cause by the pandemic. Demographically we are seeing buyers who have been downsized at the height of their careers and have decided to consider business ownership as an alternative to seeking new employment.

Fueling this turnover in ownership is the growing number of current business owners who are ready to retire. We are facing what some in the business transaction community are calling the “Silver Tsunami”. Business owners in the Baby Boomer generation who were starting to think about retirement in 2018 or 2019 have weathered the pandemic with all of its trials and tribulations. Now they are ready to pass the torch. What was a passing thought for these individuals two years ago is now an imperative.

The Small Business Administration (SBA) is doing their part to ensure that businesses pass on to the next generation of entrepreneurship. In order to relieve pressure on current lendees and incentivize small businesses/entrepreneurs to invest, they are making loans more accessible. As of December 2020, Congress signed the Consolidated Appropriations Act, which will continue the economic assistance provided by the government through the CARES Act. More specifically, this act allowed for an additional $325 billion in funding to help small businesses, with some of this financial support going towards the SBA 7(a) loan programs, saving new borrowers (between February 1 2021 and September 30, 2021) thousands of dollars in waived guarantee fees and subsidized loan payments.

To take advantage of the increased interest in business ownership, business owners thinking about selling should be focused on protecting and increasing the value of their business and minimizing the impact of the COVID disruption.

While lenders are making allowances for COVID, to get the best price for their businesses, owners must have excellent bookkeeping demonstrating evidence of a rebound. Business buyers need to have investment capital and excellent credit. Buyers will also benefit from preparing a detailed bio that describes their strengths and experience. The ability to sell yourself to lenders (and business owners) is critical to success.

The economy has certainly been impacted by the effects of the pandemic and we don’t want to downplay the suffering of so many in our community. But, there is a silver lining; businesses are selling at a record pace in Nevada. We see this as a reason for hope. When businesses survive to be sold, it benefits, not only the buyers and the sellers, but Nevada as a whole. It leads to economic growth and preserves the vibrancy and character of our community, which in turn attracts new business and business owners. Nevada is poised to reap the benefits of the creativity and stimulus with which we responded to the unprecedented COVID pandemic.

So, you have made a very big decision.  You have decided that you want to sell your business.  Owning a business takes a significant investment of wealth and effort from an individual, so it can be a tough choice to make.  When you have selected this path, you may be confused on what to do next.  Luckily, we have extensive experience in all aspects of the business selling process.  This includes a deep understanding of the preparation needed.

Tip # 1 Be Sure on Your Reasons!

The first step that should be taken is to ask yourself why?  Why do you want to sell your business?  Selling a business is a life-changing event.  That’s why it is important to identify why you are choosing this path.

Over the years, we have brokered hundreds of business ownership transfers.  This experience has given us a knowledgeable perspective on knowing if you are selling your business for the right reasons.  For example, we would consider selling your business because it is not performing well to not be a strong reason.  This is mainly built on the understanding that if a business is struggling, it will be much more difficult to sell and or receive a fair price on.

Tip #2 Know Your Value!

The best single piece of advice we can share with you is that you must understand the true value of your organization.  It is the basic starting point of any plan to sell your business.  If you do not know the value of your organization, how can you expect to get a fair payment for it?  Therefore, going through a thorough evaluation process is a necessity.

This valuation process will be based on the measurement of several factors.  They will include current assets/liabilities, the potential for future earnings, company structure/leadership, industry, competitors, selling point, and other variables.

Tip #3 Timing is Everything!

Our next piece of advice is to consider timing and begin preparations as soon as possible.  The time you choose to sell your business can have a major impact on how the selling process will go.  For example, in economic downturns, it will be much more difficult to sell a business.  Therefore, we would recommend preparing right away and gathering all the needed materials for the transaction in advance.  This will allow you to pick the ideal time to sell for the most profit and ease.

Tip #4 Don’t Check Out to Soon!

When business owners make the choice to sell, they think this the time to begin distancing from direct management.  This is false.  Now, more than ever, you must be involved in leading your organization.  This is because if you do not continue operations and or establish a strong succession system for leadership, your company could risk losing value.  This in turn will make it harder and less profitable to sell.

We want you to focus on running your business and preparing for your next phase, utilizing a business broker will enable you to focus on what matters most. The Liberty Group of Nevada is prepared to guide you through all aspects of selling your business.  This includes the evaluation process, research into when the prime economic time to sell is, and assistance in procuring all needed materials to sell your business.  Call us today at (775) 825-EXIT (3948).

According the BizBuySell a premier listing site for main street businesses, more than 85% of the businesses that list fail to sell.  As a business broker I can tell you that even businesses we sell are frequently sold for less than the owner originally had in mind.

Why do so many businesses fail to make it across the finish line in a transaction?

Most of the time it is because the business is overpriced.  As business brokers we see this in our business ALL THE TIME.  I believe it is the number one reason after bad, (or nonexistent), financial records.

There are many reasons that owners are unable to recognize the true value of their business.  What they frequently fail to understand is that in business and particularly in small business, investors are buying cashflow discounted for risk.  The lower the cashflow (or the riskier the cashflow) the lower the value of the business.  Our founder used to ask business owners, “If I were to buy your business today would I be able to make a comfortable living that is in proportion to my investment?”  If they answer is “No” the business won’t sell at the owners’ desired price and the emotional toll of a realistic offer frequently causes the deal to fail.

No matter how much an owner has invested in a business, no matter how much they need the money for retirement or want to feel successful, small businesses (sold as businesses and not liquidated at auction) are purchased based on the lifestyle that they will provide for the new owner.

We once worked with a software app developer who spent almost $500,000 developing a niche product for the property management industry.  At one point the product was producing over $400,000 per year in cashflow.  Because the business was based on low cost subscriptions that created strong recurring revenue, the owner thought it would run itself and they stopped developing new functionality.  Due to changes in the marketplace (including freemium competitors) their customer base declined.  As the business started to fall off, the owners decided to sell.  The issue is that the owner was emotionally committed to a price that the cashflow of the business no longer supported.

The seller at least wanted to recover the cost of development.  But at the time of this transaction, only a few years after the product was rolled out, developments in technology, processes and labor markets meant that the acquiring company could likely have developed a substitute product for a fraction of the original cost.  According to John Warrillow of the Value Builder System, “The number one rule of buying a business is don’t buy anything that you can build for less.” Even though the prospective investors had no intention of redeveloping the idea, there was no reason to overpay for technology.

In the end there was a knowledgeable buyer who was willing to purchase at a price that was about half what the owner was asking.  The owner insulted by the offer, walked away from the table.

The story of our frustrated business owner above illustrates the second reason that businesses overestimate the value of their business.  They wait too long.  Stewart Guthrie, Broker at The Liberty Group of Nevada has a saying. “The best time to sell your business is when things are going GREAT.” In truth growing revenues over a three-year period make your business very attractive to potential buyers.

The problem is the owner develops an expectation of value at the peak of the market when the business has been growing and they believe that investors should pay for what the business is capable of in the future (when they turn things around and return to or exceed the previous cashflow). The truth is that the business may have been worth $1,000,000 when it was at its peak but once the business begins to decline your value will fall off 2x to 3x times as fast as your profitability.  This is due to the common practice of using a multiplier of earnings to value a business.  If your earnings fall $50,000; your business has lost  $100,000-$150,000 of value.  Investors rarely pay for unrealized potential.

Potential buyers want to know not only that you have been successful growing the business but that there is more room to grow.  An owner with plans for how they would continue to grow the business is in a much better position to sell the business than an owner who is at the end of their ideas and skill set.

Owners frequently believe that their business is worth more because they “know” they make more money than is reflected in their books.  They believe that people will take their word for the profitability of their business.  But the truth is bad bookkeeping = more risk and a greater discount on multiple that a prospective buyer is willing to pay.

  1. Hiding cash transactions

We once had a business listed.  It was a nice sellable small business with a value of around $300,000.  The owner called us one day and proudly advised us that he had converted his two largest customers to cash which was going to reduce his taxes by $10,000.  This means that he removed around 60,000 from his earnings.  Worse he removed it from his earnings on record.  NO smart business buyer is going to take your word for your earnings.  Hiding the cash and saving $10,000 in tax cost him $120,000 -$180,000 in the value of his business.

  1. Too many deductions

Saving money on taxes is one of the primary benefits of owning a business.  The problem is that a business that is serving as a piggy bank for the owner is unattractive to lenders and buyers alike.  Clean books make your business worth more.  We recommend that our owners start cleaning up their books 3-5 years before they want to sell their business.  A good accountant can help you straighten out your financial house while still getting reasonable tax benefits from your business.  Good books give buyers confidence that you are honest and fair dealing, which makes invensting in your business a better risk.

  1. Excess Capacity

Expansions need to be carefully considered with respect to your intentions to sell.  There are a number of perfectly legitimate investments that you can make in your business that need TIME to allow your profitability to catch up.  Adding a facility is a great example.  When you add a second location your cashflow will (at least for a short period) go DOWN.  So your business operating at capacity from a single location could easily be more valuable than a business with two locations one of which is being supported financially by the other.

How do you give yourself the best chance to successfully sell your business?  Get professional advice early.  You should be regularly speaking with your advisory team including your financial planner, your accountant and a qualified business broker.  Find out the value of your business, even if the numbers aren’t what you hoped it is better to have realistic expectations so that you can take proactive steps (which may change depending on your timeline to sale) The sooner you need to sell, the less you will be able to do to maximize your business value.

We are pleased to welcome Stewart Guthrie to our team. Stewart, a licensed business broker, brings more than 16 years of entrepreneurial experience to his role.

Liberty Group of Nevada, Inc., announced recently the addition of Stewart Guthrie as a licensed business broker at the company’s downtown Reno office.

Guthrie will work with business owners to assess value, market and sell their business to qualified buyers, according to a March 15 press release; in addition, he will work with buyers to facilitate acquisitions.

Guthrie has been an entrepreneur for more than 16 years and has successfully owned, built and sold two businesses; in 2019, he sold Real Property Management Sac-Metro, and he re-purposed his California Real Estate Sales license to become a business broker in the Sacramento region.

“Stewart is an individual and an agent of the highest caliber,” Brad Bottoset, founder of the Liberty Group of Nevada, said in a statement. “We are very excited to have him aboard and know that he exemplifies the Liberty Group of Nevada commitment to integrity, and service.”

Guthrie has an extensive background in sales that spans multiple industries, including real estate services, industrial equipment, material handling conveyors and telecommunications.

He attended the University of California, Davis, with coursework in agricultural engineering, and he served as a U.S. Marine in Okinawa, Korea and 29 Palms.

Buying a business is an exciting adventure as well as an investment in your future.  Yet, as a first-time business buyer, it can also be fraught with anxiety and uncertainty.  This is because most first-time business buyers go into the process of purchasing a business with little experience and knowledge about how the process will playout.  Below is some information to reduce the stress and unease of your first transaction.

Be Prepared

The preparation for buying a business can often be a long process but is necessary to ensure that the investment of your time and money is not wasted.  You will need to address three different elements, personal preparedness includes determining the criteria you will use to select a business including industry, the role you would like to play, and your strengths and weaknesses.  Financial preparedness includes knowing how much money you are able to invest and developing your funding sources. Additionally, you will need to put together your deal team to evaluate opportunities and to complete due diligence.

Personal Preparedness

The common adage of “stick with what you know” applies quite well to buying and owning a business.  It is vital that first-time business buyers invest in a business located in an industry they are familiar with or that uses a skill set that they have developed in their professional experience.  When we purchased our first business (coffee distribution) we didn’t know about coffee perse, but we did have experience with industry management, brand development and equipment maintenance. Direct industry experience provides you with familiarity regarding how the business should operate and can make taking over leadership of day-to-day operations easier.  It will also give you an edge during due diligence when you are evaluating the operations of the business if you know how businesses in that field typically operate.

Develop a Plan for Funding

Cash is king and if you don’t have the resources to buy a business then the process will be difficult if not impossible.  As a rule of thumb for smaller businesses, you will need a minimum of one year of cashflow for a successful transaction.  That means if the seller’s discretionary income is $60,000/ year, you will need $60,000 cash for a successful transaction.  If you are borrowing money, you will typically need 20% of the purchase price. Some common funding sources include:

  • Bringing in one or multiple partners for the venture
  • Finding passive investors
  • Using a U.S. Small Business Administration Loan
  • Seller financing
  • Use of your IRA or 401k

 

The bottom line is that you will need to have some cash to invest personally because anyone lending you money is going to want you to have some skin in the game.

Assemble your Team

Buying a business is a team sport.  Even seasoned buyers have a deal team that includes a busines intermediary, an accountant, a lawyer, a banker/lender and their financial planner.  Before going into the process of buying a business, you’ll need to make sure that you are doing your homework.  Your goal will be to gather as much relevant information as possible about the industry, the specific business opportunity and the current economic environment.  Once you have identified a target acquisition your due diligence will begin. You and your team will be investigating:

  • The financials of the prospective business for sale, which should cover the last three to five years of operations
  • Current company contracts/leases
  • Current company licenses/permits
  • Certificates of good standing for the prospective business
  • Environmental regulations/applicable zoning laws
  • Organization charts and employment agreements
  • Condition of buildings, equipment, and other company materials

Your team will be instrumental in minimizing expensive oversights and errors.

The Selling

Once you are prepared you are ready to start evaluating specific opportunities. Once you find a likely acquisition target you and your team will use the information that you have developed to vet the opportunity a begin the negotiation/purchase stage of the process.  This process can be very involved. (The seller will have a deal team too). A great busines broker will help you get through the process.

The Liberty Group of Nevada, Inc., has a team of business brokers who are committed to making the process of buying or selling a business an informed and pleasurable experience, with no surprises. For more information or to speak with one of our brokers, please contact us today! http://thelibertygroupofnevada.com/contact-us/

 

Works Cited

BizBen. (2011, June 1). First-Time Business Buyers – What You Need To Know. BizBen.com. https://www.bizben.com/blog/posts/first-time-business-buyer-advice-062509.php.

Burkinshaw, V. (2019, September 16). The 7 step selling process. Beyond Business Groups. https://beyondbusinessgroups.com.au/the-7-step-selling-process/.

Chen, J. (2021, March 4). Due Diligence. Investopedia. https://www.investopedia.com/terms/d/duediligence.asp.

Prakash, P. (2020, October 22). How to Buy an Existing Business. JustBusiness. https://www.justbusiness.com/starting-a-small-business/buying-an-existing-business.





Contact Us

    Whether You Are Building, Buying or Selling, We Can Help.


    © 2021 The Liberty Group of Nevada . All Rights Reserved.