Every year, across the nation, thousands of small to mid-size businesses attempt an ownership transition, and only 17 – 20% SUCCEED! Obviously, we think this is a dreadful statistic that needs improvement!  Our success ratio is much greater!

The #1 reason why business owners are not able to complete a sale of their business is due to unrealistic price expectations! Have you ever had a professional business valuation prepared for your business?  If not, now may be the time!

Many business owners are not aware of the key elements that will have the most impact on the value of their business. Here are just a few of the key elements:

• Net profit + Owner compensation (or EBTIDA, depending on size of business)
• Clean financial statements and records to validate the net profit and owner compensation.
• Upward trends for revenue and profit
• Maturity of the business – most buyers like a business that is at least 5 years old.
• Owner involvement and staff depth – the less the business depends on the owner, usually the higher the value!
• Depending on the type of business, too much customer concentration in one customer, or one industry, can be challenging and scary for a buyer.
• Property/lease status
• Business automation – embrace the 21^st century!
• Keep your equipment up to date
• Obsolete inventory does not have value!

These are just a few things to think about!

The average time it takes to sell a business, across all industries and regardless of the size of the business, is 7 months! So, some businesses sell rather quickly, but many others take much longer to sell!  We recommend expecting a minimum of one year to sell your business!  It doesn’t happen over night.

Assemble a team – an attorney doesn’t know how to value a business, a business broker isn’t a competent legal advisor, and neither a business broker nor an attorney can properly advise on complex tax issues, unless they also happen to be a CPA! Therefore, a good team will consist of a transaction attorney and a CPA to protect you legally and financially, and a business broker to properly advise on business value and find the buyer!

Perhaps after reading the above article you recognize that you are not fully prepared to sell your business at this time, or maybe your time line for exiting is more like 3 to 5 years away, you may want to consider alternative resources to get on the right track to maximize your business value!

Our friends at Mastery Partners have developed The Maximize Business Value MasterYclass, a 12-month program designed for a select group of business owners to start working on their ultimate exit strategy.

What is MASTERYCLASS?

By joining the MasterYclass – here’s what you can expect:

• Each month, the group will work through Mastery Partners’ Transition Readiness Assessment – a proprietary tool that will help you understand how ready your business would be if a transition were to happen tomorrow.
• You’ll learn from experts who will teach you how to be more productive, improve your personal and business financial results, and learn about tools (like the Entrepreneurial Operating System, Story Branding, and Culture Index) that can help you take your business to the next level.
• You’ll be working alongside other like-minded business owners in a peer group setting.
• At the end of the program, you’ll receive an Opinion of Enterprise Value – helping you understand what your business is really worth today, and what levers can really move that needle.
• And, you’ll get a monthly one-on-one with Mastery Partners principal Tom Bronson – who has successfully bought and sold 100 businesses – where you will laser focus on your business and how you can apply what you’re learning to get results right away.

Here is the link to the website explaining more about this amazing opportunity. (By the way, if you decide register for this class, Tom has provided a special discount code for my referrals! Use ‘2022’ at checkout for a 22% discount!) 

Look, I know you can figure this out on your own. You are smart. Look at what you have built so far. But you don’t have to. Put that energy into innovating your company or spending time with your family. This program and its accountability process will put you on the straight and narrow path to transitioning on your terms.

It doesn’t matter if your transition is going to be in 2 years or 15 years, business owners should always be thinking about and planning for their ultimate desired exit strategy. Having a great exit strategy eliminates stress and provides clarity for your future.

I’d like to invite you to join me on a free informational webinar on January 11th at 11a CST to learn more about the MasterYclass, and see if it’s a fit for you and your business. I hope you’ll consider making the investment in yourself and your business by joining the inaugural Maximize Business Value MasterYclass. You can register for the free webinar HERE – I promise you’ll be glad you did!

Before Jeff Bezos & Co. blew up traditional distribution channels, there was some value in being the local guy or gal. Being the local product retailer was a good business and being a regional distributor of a popular line could make you a mint.

Those days are almost over.

In a world where anything is available at the click of a mouse, the fact that you’re local means very little. To build a valuable company, you need to go beyond your physical location as a point of differentiation and cultivate a new value proposition. We refer to this process as improving your “Monopoly Control.” The name is inspired by Warren Buffett, who likes to invest in companies with a wide “competitive moat” — essentially a defendable point of differentiation.

While being a local provider may have gotten you into business, it’s not going to be enough to get you out for a decent multiple. To build a valuable company someone may want to buy one day, you need a fresh sales angle.

Take a look at the journey of Mehul Sheth, who went from a middleman to the owner of an eight-figure business. Sheth started VMS Aircraft in 1995 as a distributor of airline parts. He offered a “one-stop shop” for airlines and their maintenance crews to find parts and accessories.

VMS was the local distributor and survived on gross margins of 22–23%. It was a subsistence living, and Sheth was determined to build a more valuable company. He decided to evolve his value proposition from just being the local warehouse for distributing other people’s stuff to a sophisticated provider of advanced materials. Sheth chose to focus on the materials that airlines need to be stored and handled meticulously. If the safety of your metal tube flying 300 people 40,000 feet in the air is determined by the quality of a seam of metal, you want that steel to be handled carefully. You also want the sealant that joins the sheet of metal kept at a temperature that maximizes its adhesiveness. You may also want your rivets stored with the same care a surgeon uses to put away her scalpel after performing life-saving surgery.

Sheth invested in a clean room that minimized dust at his facility. He bought dry ice containers so certain materials could be stored in a cold environment, maximizing their effectiveness. He also repackaged materials into smaller containers so that an airline that only needed a small amount of a particular material didn’t need to buy an entire tub.

Sheth’s evolution from simple reseller to value-added provider fueled his gross margins to 60–70%. Along the way, Sheth attracted a French company that wanted to enter the U.S. market. Rather than set up shop to compete with Sheth, they realized VMS had created a unique offering with a layer of value-added services that would be difficult to imitate. They decided to acquire VMS for 7.4 times EBITDA.

If you find yourself clinging to the “one-stop shop” sales message, consider evolving to something that truly differentiates you in a world where Amazon (and its various e-tailing competitors) will ship you just about anything, anywhere, overnight.

How can you improve the value of your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

By JoAnn Lombardi, President VR Business Brokers/Mergers & Acquisitions

Unforeseen taxes can turn a good M&A transaction bad – and even result in the loss of thousands of dollars for buyers and sellers alike. Before you green-light a deal, consider how you’ll structure it to offset such risks and maximize tax savings.

Buyers and Sellers Beware

With most acquisitions, either stock or assets are purchased. Buyers typically prefer asset transactions because they allow for a step-up in the target’s basis for tax purposes and help avoid undisclosed tax and other liabilities.

Asset sales also are flexible, allowing buyers to purchase only the parts of the target company they want. And they can provide buyers with a bigger tax write-off. Buyers of depreciable assets can begin reducing their taxes right away by taking the depreciation expense. If, for example, a company pays $10 million to purchase assets with 10 years of remaining life, its taxable income can be reduced by $1 million each year for the next 10, using a straight line depreciation schedule.

Sellers, on the other hand, often prefer stock transactions, because they’re subject to taxation at a relatively low capital gains rate. For sellers structured as C corporations, asset sales can be particularly unfavorable. C corporations are required to pay ordinary income tax on the amount by which the sale price of the assets exceeds their tax basis. What’s more, when money from the sale is distributed as dividends, or the corporation is dissolved, the corporation’s shareholders pay capital gains tax on the distributed money. C corporation sellers, therefore, typically try to negotiate for a stock sale. This way, gains are taxed once at the relatively low long-term capital gains rate of 20%.

Structure the Deal Carefully

The structure of an M&A deal can significantly affect the tax consequences for buyers and sellers. Typically, deals are structured as one of the following types of transactions: Taxable. In this type, the buyer purchases a company’s stock or assets and the company realizes a taxable gain or loss on the transaction.

Tax-deferred. Here, the buyer generally acquires stock or assets in exchange for stock in its own company. There’s no immediate gain or loss to the seller or shareholders. Instead, the shareholders “carry over” their basis in their old stock to the new stock and realize a taxable gain or loss only on a taxable disposition of the new shares.

Hybrid. This reorganization also involves a certain degree of non-qualified deal consideration at the time of the transaction. As such, the transaction may be taxable to some parties but not to others. It may offer flexibility if some of the participants are willing to realize taxes when the deal closes, and others need to defer the taxable event until a later time.

Find Common Ground

Although buyers and sellers have different needs – which often are at odds – financial advisors can help structure a transaction so that it’s amenable to both. Even, for example, when the seller exchanges stock with the buyer, the deal can be structured as a more tax-advantaged asset acquisition by making a Section 338 election.

In this case, the buyer benefits from the step-up in basis on the acquired assets and is able to claim the acquired company’s financial and tax liabilities resulting from the transaction. Although the seller treats any asset sale gains above the tax basis as ordinary income, the bulk of the transaction is likely to be taxed as capital gains. Adjustments in the purchase price can offset the ordinary income amount.

Beware of Tax Traps

Determining the tax implications of a potential deal should occur early – preferably during the due diligence phase. But even if you plan ahead, tax pitfalls lurk. State and local governments assess a varying range of income, sales and transfer taxes, particularly if one or both parties to the transaction do business in multiple states or internationally.

Buyers also should assess the target company’s property tax situation. This includes searching for any liens and requesting proof of payment for the most recent property tax cycle. If the target company isn’t in compliance, buyers risk failing future audits, potentially subjecting themselves to unnecessary tax liabilities. They also should be mindful of a potential property value reassessment – which typically results in a tax increase – after the deal closes.

Even an advantageous M&A transaction can sour if you fail to plan for taxes. But with thorough preparation, buyers can minimize net costs and sellers can maximize after-tax proceeds, resulting in a win-win situation.

How can you improve the value of your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now: