Preparing for the frustrating surprises
This article is Part 3 of a 3 Part series of articles related to the sale of businesses. These topics are covered in detail during “The Business Sale Solution™ Seminar,” a must-have resource for any CEO or Business Owner. Part 1 addressed, “The #1 concern business owners have about selling their business.” The #1 concern is business valuation. Part 2 addressed “Which Buyer is best for you?” There are three types of buyers, outsiders, insiders, and the public. In this article, we will explore how to prepare for the frustrating surprises.
Preparing for the frustrating surprises really has to do with process and best practices.
A maze suddenly appears when a business owner decides that he or she wants to sell their business. What is this maze and what does it mean? To complicate matters, there is often a short period of time to get through the maze. An owner may have only four to six months.
Some business owners don’t like the maze. They’ll say, “Going through the maze is too difficult to do. I’m not going to do that. I’m just going to go around the maze.” They will then fail because they’re not going to do a transaction.
We are going to discuss 6 potential obstacles that could hit you while you’re going through this maze of selling your business.
First, stress or depletion of operational cash. The cash can quickly go out the door during this process. You may spend hundreds of thousands of dollars. Once you decide to sell your business, one of the first people you want to sit down with is your banker and say, “I want to sell my business.” You want to talk about money, lending, and banking and lines of credit. You don’t want to use your operational cash flow.
Second, large carryback note demands. It’s not unusual for you to be asked to carryback 5% or 10%. Creating a carryback note means you are now a bank! It is in your best interest to think like a banker. You need adequate security for the carry-back note. You have the right to ask for lot of security to do this, and so you want to make sure that you have good security, otherwise, you’re running a risk of losing your carryback note.
Third, key employees start jumping ship. So, you’ve made the decision to sell your company. Now, what are you going to tell your key employees? Because the good ones are going to leave your company if you don’t treat them right and tell them what’s happening. You must consider explaining the possible reward and job security to them. You might say “Okay, here’s what I’m going to do. I’m going to give you some bonuses. I’m going to give you a stay bonus, and I’m going to treat you right. And you’re going remain employed by the buyer,” or something to that effect. The value of your company may decrease if these employees leave.
Fourth, customer or vendor problems. That could be a huge problem. If you were to lose your biggest customer of biggest supplier, that might spook the buyer and he will walk away.
Fifth, minority shareholder demands. One of the reasons that minority shareholders are tough to deal with is there are very stringent federal and state laws that must be complied to meet the disclosure demands of the minority shareholder. You can’t just say, “I’m going to sell the business and you’re going to make some money.” No, you must legally disclose everything to them, and perhaps more than you expect to disclose.
Sixth, ordinary income tax rates. When you sell a business, what is the usual tax that’s in your mind that you’re going to pay? “Capital gains taxes!” There is an important exception to the Capital Gains taxes that you must consider. Does your company have material accumulated depreciation or accumulated amortization on your balance sheet? If so, that amount is going to be taxed as ordinary income tax rates.
One of the complications of going through the maze is that you own and operate a business. You are taking an additional risk by going through a possible transaction. You may already be spending 60-70 hours a week running your current business. Now, a potential buyer wants more of your time to go through this maze. Sometimes the maze appears to be too complicated. But it’s not complicated if you have the proper information and know the Best Practices.
You want to create the Success Team™, as outlined in Chapter 3 of The Exit Strategy Handbook, 4th edition,. You work with the team and have the team get you through the maze as quickly and profitably as possible.
Be sure to register for one of the upcoming The Business Sale Solution™ seminars.
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