Why Not Sell The Business On Your Own?

How many “Business For Sale” signs have you ever seen while you drive down main street or on your daily drive to work? None? Well, there are very logical reasons why you haven’t. The biggest reason is that the “Business For Sale” sign would soon be replaced with a “Going Out Of Business Sale.” Consider the following points.

First off, even if the you don’t actually hang a “For Sale” sign outside the window, trying to sell it on your own through classified ads, or, heaven forbid, by word of mouth, for instance, threatens the business’ reputation and future. Secondly, even if the right prospective buyer comes along, do you — an owner of a privately-held company — have the required skills and knowledge in the fields of accounting, law, taxes, marketing, and more importantly, negotiating on your own behalf about perhaps your most important asset — your livelihood?

Do you, a business owner who is trying run your business on a daily basis, have the time to find, contact and liaise with potential buyers that are serious about buying your particular business? Can you maintain the confidentiality that is required to prevent damaging your competitiveness in your market area? If staff and suppliers find out that you are selling, it will affect current trading ability. Do you have any experience in selling a business? Can you remain cool and patient when a buyer is trying to negotiate a lower price, particularly if their objectives are the complete reverse of your own? Do you even know how to value your business and what it is really worth in the marketplace?

Let’s discuss the issue of primary concern when selling a business…confidentiality. The most important aspect of selling a business is confidentiality. It must be maintained throughout the entire selling process. If people find out that your business is for sale, it will be perceived in a negative light, where some, mainly your competitors, will take advantage and can cause damage to the ongoing viability of your business.

There is, of course, the proper time to disclose an impending sale. The preferable time to come clean is when the business is under contract and has entered the final stages of the selling process. By looking at the different responses by the varied types of people associated with your business to the news of your business being for sale, you will understand why confidentiality is necessary.

Customers -

If customers get wind that your business is on the market, they will most likely take about a New York minute to hike on over to one of your competitors to do business. Losing customers affects the value of the business — less sales means less profit, and less profit means less interest from prospective buyers. After all, one of the major reasons why someone would want to buy your business is because of the profit they could make.

Employees -

If employees are told that the business is up for sale, think nano-second. If you think a New York minute is fast, your employees would evacuate the premises before you can blink. They will feel insecure about their future and will seek more stable employment. Fear of new management and whether job cuts would ensue are legitimate concerns for anyone in which your business is their livelihood. If key members of staff left the business after hearing the news, it may seriously cripple the performance of your business. Consequently, not only will the value be reduced, but the chance of selling your business is significantly diminished.

Suppliers -

Your relationship with suppliers may take a turn for the worse if they are aware of your plans to sell the business. They may feel that your decision to sell is based around financial difficulties and, if you currently purchase supplies on credit, they may reconsider your position and demand cash on delivery, which may certainly have an effect on your immediate cash flow. Great businesses are sold every day. However, in general, their is a negative perception of a business when it is rumored to be for sale.

Banks -

Banks are very cautious of small businesses because of their risky nature and so it is no surprise to how they would react when they find out that yours is for sale. They may decide to put a halt on further borrowings, overdrafts or lines of credit available to you . Or, even worse, put out a call to recover any outstanding debt.

Competitors -

How would you react to news of your competitor putting their business on the market? Very positively one would assume. This is exactly how your competitors will react should they discover that you are selling your business and would take quick action to affect your sales and customer confidence. Competitors would announce it from roof tops if they could to make it known that you are selling so they can reap the harvest of new profits from your old customers.

For these reasons a business brokerage firm would be very helpful towards selling your business. In fact, they can be the essential ingredient. Let’s explain this statement further. Before you believe in the necessity of contracting with a brokerage firm to represent you in the sale of your business, it is important that you recognize the value they bring to the table.

Business brokers, in general, work on a success-based commission. They get paid when the business is sold and the deal is closed. They are your partner throughout the process and utilize unique marketing methods to achieve the goal. Not only will they find and screen prospective buyers for your business, they can value your business, settle negotiations, and help obtain. Experienced business brokers can often obtain a higher selling price because they are in tune with current trends and economic conditions in their market area and are aware of what people are looking to buy. Supply and demand plays a factor when a business is up for sale. For example, a seller’s market in Houston has existed for the past couple of years and is still ripening due to the superior economic conditions it has enjoyed over the rest of the country.

Also, potential buyers will feel more at ease speaking to brokers then they would directly to the owner and by doing so, it allows you the time to continue running the business and keeping it profitable. Most importantly, brokers will provide the confidentiality you need, saving you potential grief from the issues surrounding customers, suppliers, and competitors.

Finding a reputable broker can be done through referrals from fellow professionals such as accountants, attorneys, small business lenders, and even by word-of-mouth from people that have previously used a broker.

In conclusion, whenever a business is on the market, it must to be done in a confidential manner by someone who has done it thousands of times. Owners have good reasons for selling, and there are great businesses being sold every day. But there are negative connotations attributed to a business for sale in the general public’s eyes. They think there must be something wrong with the business. Which, of course, is not the case in most instances. Keep in mind these two statistics. The national average of businesses that actually sell once they are on the market is approximately 30%, the reasons for which a business broker could explain to you. And, only one in ten people who are looking to purchase a business, ever actually do. So, if trying to sell your business on your own fails, you may have lost customers, vendors, or employees. You don’t want to end up putting that sign on the window that says, “Going Out of Business Sale!”

Selling Businesses Is Not the Same As Selling Real Estate

There is a danger in treating the sale of a business the same way as the sale of real estate. Many business owners think of it as the same process but when you take a closer look you will see great differences and will understand why treating business buyers as property buyers is a trap to be avoided at the all cost. Lets examine the important differences and what a seller should do to compensate or take advantage of each of them

1. In most cases of property sale, the vendor and purchaser don’t meet. While in the sale of a business, the owner of the business is a crucial part of the business sale. The owner is essential for the introduction of buyers to the business during the sales process and when the business sale takes place, the owner plays a big role during the business handover to the new owner.

That’s why it is paramount that the owner and the buyer establish a good relationship. In some cases, depending on the size and complexity of the business a longer handover may be needed, and it would be difficult for the buyer to believe that she or he can successfully take over the business and sustain the profits if the seller is not cooperative or they simply they don’t get along.

2. When purchasing property, buyers normally have decided to buy the house, then only need to decide which house they going to buy. When buying a business, buyers have the desire of owning a business, the decision to buy a business and to which particular business to buy happen simultaneously. While selling the business you have to present the business in a way that clearly shows both the risks and benefits to the potential purchaser. Present and give to the buyers all the documents and information required to evaluate the business. Create processes and do as much as you can to ensure a successful takeover of your business by the new owner

Doing this will give more confidence to the buyers and will help them make the decision to buy your business

3. Selling Real Estate is all about marketing and attracting buyers to your property. Selling business is not only about attracting buyers to your business but even more than that it is about presenting your business to the buyers and devising a plan of handover of the business that will help the future owner continue operation of the business without interruptions and with continued success. Before putting the business on the market, owners of the business should take actions to reduce the reliance of the business on themselves as much as possible. This will not only increase the likelihood of a successful sale but also increase the sale price of the business as well.

4. Real estate purchasers can supplement their funds by borrowing from the bank. It is not so easy to borrow money against a business. In some instances owners of the business should be prepared to enter into a payment arrangement or provide vendor finance in order to secure the sale of the business.

5. When you are selling a house the only competition on the market are other houses. Business sellers are competing against other businesses, other forms of investment (Property, managed funds, share investments etc.), buyers starting a business from scratch and even not buying a business at all. When pricing the business you must not only look at other similar businesses on the market but also you have to keep in mind other investments and options available to buyers.

So, due to the intangible nature of business and the reliance on the owner in most SMB’s, a business sale is a much more complex process than selling real estate, recognizing this is the first step to a successful sale of your business.

Alternative Minimum Tax Impact From Investing Activities

Income that is earned from investments is a significant factor in the amount of Alternative Minimum Tax an individual pays. Certain types of investment income (dividends, capital gains, certain interest, e.g.) as well as the amount of this income in relation to the taxpayer’s other income, all factor into the AMT formula. A taxpayer usually has much more control over investment income than he does his salary, for example, making this source of income much more important from an Alternative Minimum Tax planning point of view. In general, an investment portfolio can be changed any time a taxpayer finds it advantageous to do so.

Discussed below are a few key items associated with investing activities, and the AMT planning opportunities that may exist.

Dividends and capital gains

Most dividends on common stocks are “qualifying,” and, thus, are eligible for a lower tax rate than “ordinary income,” which consists of things such as salaries and wages, interest income, rental income, and the like. Similarly, a capital gain that qualifies as a “long-term” capital gain also is eligible for this lower tax rate. Even though the tax rate on dividends and capital gains is the same for both the Regular Tax and the AMT, the effect on a taxpayer’s exemption amount can mean that these items of investment income are the reason a taxpayer is paying the AMT.

Planning strategy – determine the real tax rate being paid on dividends and capital gains. For maximum returns, investors should always consider after-tax yield when evaluating investment alternatives.

Tax-exempt bond interest

In general, municipal bond interest is exempt from Federal tax. However, certain muni bonds are designated “private activity” bonds, depending on how the proceeds of the bond issuance are used. Interest from private activity bonds continues to be exempt for the Regular Tax, but it is fully taxable for the AMT, with the result that the after-tax yield is significantly less than what the taxpayer originally thought he was earning. Note that, in order to boost yields, certain muni bond funds may allocate a portion of their portfolios to private activity bonds.

Planning strategy – Again, a taxpayer always should be considering after-tax yield in evaluating investments. An AMT payer generally should not be holding private activity bonds. If the investment is in mutual fund form, there are plenty of muni bond funds available that do not invest in private activity bonds.

Partnerships and other “pass-through” investments

In many cases partnerships themselves will have AMT items, but since a partnership “passes through” these items, it is the individual partner who ends up paying the AMT. For example, a real estate partnership may use a depreciation method that is allowable for the Regular Tax but is not allowable for the AMT. This difference in depreciation methods is an AMT item that will be reported to the partner on the Form K-1 he receives from the partnership, which, in turn, must be reported on the partner’s own AMT schedule, the Form 6251.

Note that this same pass-through treatment results in the case of S corporations, LLCs, and certain estates and trusts.

Planning strategy – Before investing in a partnership, an individual should inquire about AMT items that the partnership may generate. Once invested, it generally is too late to do anything about them.

Conclusion

While the old maxim that taxes should not determine an investment strategy is true, nevertheless an investor who is stuck in the AMT may be earning a significantly lower after-tax yield on his investments than he realizes. Remember that it is only after-tax income that an investor actually gets to keep; ignoring taxes, especially the AMT, is unwise.