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Question Five: How do I limit the amount of taxes I pay on the sale of a company?
This should be a very important consideration when structuring a business deal to sell your company. Can you comprehend the tax consequences of selling a major business for cash and having to claim the total amount as taxable income in one year? Think about ways to spread out the income into multiple years. Maybe you can take payments or self-finance, although you have to be careful with this method; if the new owners lack good business skill, you could lose out in the end or have to take the business over to salvage your investment.
Selling a business is a situation where you may need good council from a CPA or tax attorney. Don’t overlook professional help in structuring the deal. Your retirement income may depend on the final agreement.
Question Six: Do I meet the IRS rules on company value?
This is a very tricky part of selling any business, but is most important when dealing with a corporation. One of the most important issues is to make sure the appraised value meets IRS guidelines dealing with Revenue Ruling 59-60. This rule deals with the appraisal of closely held stock in companies. Some considerations for the establishment of value are lack of marketability discount, minority ownership, value established in buy/sell agreement, gift and estate tax value. As you can see, this issue can be a mine field of problems if not dealt with by tax professionals. The establishment of fair market value is one of the most important steps in selling or buying a company. These rules mostly affect the tax liability of the seller. Many of these rules greatly affect Employee Stock Ownership Plans (ESOP).
Question Seven: How can I help the new owner be successful?
I believe that most professionals who sell a business to new owners desire them to be successful and to grow the firm to new heights. Most sales require that the seller is involved in the transition of the management for six months to two years. At the end of the two-year period the original owner or owners may be available on an as-needed basis.
In structuring the final agreement, the original owners may provide well-defined client maintenance including marketing calls and consulting to make sure the client continues to use the services of the company. When marketing I always looked to get clients from companies undergoing ownership changes. The retiring owner/owners need to be compensated for their services. This is most likely done at an hourly rate, which needs to be set in the final purchase agreement. I know of some cases where the original owners continued on with the company as part-time employees for the remainder of their lives.
Question Eight: How do I preserve my good name after the sale?
You have three options. Number one is to remove your name from the company at the time of the sale. Number two is to have your name used for a limited amount of time such as one year. The third is where the company buys all rights to the company name. This last scenario is more likely to be the case where a company has a regional name such as “Old South Surveying,” as opposed to a company named after a person. I like company names that are not associated with a person because it makes the transition to new ownership much easier and relieves the owner of the burden of having everyone wanting to only do business with the boss. If you choose to remove your name at the time of sale, this will most likely result in decreased value received for the firm. In reality, all that the new owners are buying is records and employees.
The most commonly chosen path is to keep the name for some transition period of time, most often about a year. During this time the original owner must insist on continued involvement to make sure the transition is going smoothly and the value of the original owner’s name is preserved.
Tips to increase the value of your businessMaintain a succession plan for all key employees.
Show potential buyers that the operation is secure and not dependent on any one employee. Have contracts and job descriptions for key people transferable to the new owners.
Maintain your office space including filing paperwork at the conclusion of each job.
A well-organized office, kept properly painted and maintained speaks loudly about the quality of the business. You would not believe some of the messes I see.
Keep your physical plant well maintained.
A nice neat exterior in a good location adds increased value to a company. Like in real estate: location, location, location is everything. If you are looking to sell in 10 years, maybe a new office in an upscale location is the ticket to maximize profit.
Ensure that your receivables aging are in line with industry standards.
In the surveying and small engineering business this means about 60 days for current work and not more than 120 days for larger accounts. Write off and get rid of 2- to 5-year account receivables; for the most part they are uncollectable and send a bad message about company management and client base.
Develop a viable client mix.
Don’t become a one-client company. Work in a couple different market segments. This will make the company more recession proof and can help with cash flow problems. Get out of market segments that have never shown a profit.
Show steady growth in your company value.
Nothing speaks louder than profit on the bottom line. This track record should be developed over time, maybe the last five years and should show consistent growth and profitability.
Avoid a name change shortly before putting the company on the market.
The good name of a company developed over time has value. A name change should be done five years or more before the sale of a company. Register or copyright the company name.
Have the most updated accounting system.
Having good records is not only important for the management of the company, but also important when placed on the market. Have a three-year history on your current accounting system before putting the company up for sale.
The last thing I want to leave with you on this subject are items I call “Milt’s Rules.” This includes a number of issues that need to be addressed by both the seller and the buyer.
I hope you are starting to understand how important buying or selling a company is to your future. Next to getting your college degree and getting registered, no one transaction will have a greater effect on your future. One last word of advice: I know of some purchases that have taken years to complete. Go slowly but don’t drag your feet. Finalize the deal and get on with your future.
Sidebar: Milt’s Rules for the Seller
- Check with the registration board for surveyors or engineers to make sure the buyer is registered and does not have an outstanding complaint pending with the board.
- Run a credit check on the buyer to make sure the person has the means to purchase the company and an adequate credit history. This can even be done on the Internet.
- Ask for earnest money during the processing of the deal. Don’t let a buyer tie you up for months in a deal going nowhere.
- Set a date for the final closing of the contract. The buying of a company can drag on over a long period of time if you as the owner don’t push to get closure.
- Have a mechanism to take back the company if the buyer does not meet payment or obligations.
- Don’t believe everything the buyer tells you; do some checking.
Sidebar: Milt’s Rules for the Buyer
- Do not continue to work for a company under a promise that the company will one day be yours. Insist that the agreement be put in writing including terms and dates. Many companies have been sold out from under long-term employees.
- Find out the value of unpaid vacation and sick leave owed to employees. This amount should be deducted from the selling price.
- Run a credit check on the owners of the company. This could be the most important step you as the potential new owner could take.
- If real property is involved make sure there are no outstanding liens of record.
- Ask to meet with a few key clients. Try to get a feel for the attitude of the clients toward the company.
- Check with the registration board to make sure the company is in good standing.
- Have a CPA review the books and tax returns. Have an attorney structure the terms of the contract. This could be the best money you ever spend.
- Don’t believe everything the seller tells you; do some checking.