The Business Side: Company planning for the future, Part 4.
March 31, 2008
This is the fourth and final installment of my series on company planning. We’ve reviewed business concepts and types of business structures (September 2007), management of the firm (October 2007) and new technology (February 2008). Now we will look at how and when to exit a firm.
Deciding When to LeaveNotice that I am not using the word “retirement.” Many owners get to a place in their lives where they want a new challenge. Today, semi-retirement and second careers are becoming common. For some, this means pursuing other interests, such as a hobby, or going back to college.
But how do you, as an owner, know when the time is right to move on? It might be time if you no longer have the desire to face the day-to-day demands of being in business, such as managing employees, dealing with clients and keeping accounts current. Another indicator is when the thrill of winning another new job is gone. A sure sign that it’s time to sell is when you have a mature company with employees who have stayed with you from the beginning but are now retiring.
I recently met an owner in his late 70s who said the only reason he did not close his company was that he did not want his employees to lose their jobs. I asked him if the company had become less profitable each year. His reply was yes, and he wanted to know how I knew. I told him his employees did not feel the need to work hard and produce a profit because the owner no longer wanted to be in business. I told him to close shop before he wasted any more money. But I doubt he took my advice.
Getting Ready to SellExcept for the cash-cow business that makes high profits and can afford to just close its doors and bail, the time to sell is not the day you want to sell. It’s five years before. During this five-year preparation time, the No. 1 priority should be to work at becoming profitable. A five-year history of profitability is a good selling point.
The second priority should be determining what the company is worth. Today, most companies sell within the range of one-half to three-quarters of one year’s gross sales. Very profitable companies, in some cases, can sell for one year’s gross. A company in a fast-growing, highly populated area will bring more money than a company in a rural area. And if the sale involves some or all owner financing, companies can be sold for a higher price.
Selling Options and EssentialsConsider the selling options you have as an owner. One option is to offer your company to a larger firm as a branch office, which is the most cost-efficient way for many companies, such as large engineering firms, to move into a new area. Another option is to sell to a select group of your employees. If handled properly, this can be a great method to slowly remove yourself from a company over a period of time. Or, when you are ready to sell, you can pursue national advertising. I recently heard about a company that was sold through an Internet ad.
But no matter who your buyers are or how you find them, a very important person that should be involved in the sales transaction is an accountant well-versed in the many IRS rules governing the sale of companies. Limiting the amount of taxes the seller pays is one of the most important considerations in any sale. In many cases, this means the original owner takes the money over time or at least partially finances the sale. In one sale I was involved with, the original owner leased the company to the new owners until they could develop the capital necessary to complete the sale. The danger with financing the sale, of course, is that the original owner may need to become involved again if the new owners have a problem running the company.
The Internal SaleMy favorite way to sell a company is internally because after the sale, you can still, in most cases, maintain some involvement with the new owners. This method should be handled with a contract written by an attorney with all parties in agreement. Otherwise, the internal sale may fall through. Below are five important items for a successful internal sale:
1. Develop licensed employees who will be able to take over the company.
2. Train the new owners in the art of running the business.
3. Give the new owners time to accumulate funds to purchase the company.
4. Put a very specific contract in place long before the sale process, including a timeline for the handover.
5. Structure the agreement with the help of both an attorney and an accountant.
If the seller is interested in maintaining contact and aiding the buyer after the sale, he or she may consider helping in the areas of marketing and client maintenance, taking on a public relations role to keep the company connected in the local area until the new owners develop their own contacts, and serving as a financial consultant, which is very important if the sale is seller-financed. Helping the new owners can become a nice part-time job, which will decrease over time as they become comfortable in their new roles.
Read, Read, ReadOne fault I find with some surveyors is that they do not read business-related books. Everything you need to know to operate a successful business has already been written. Currently, I am reading “No Man’s Land: What to Do When Your Company Is Too Big to Be Small but Too Small to Be Big,” by Doug Tatum, which explains why the larger company is no longer as much fun to manage or not as profitable. It’s a must-read for those who are trying to run a larger company by the seat of their pants.
For further information on how and when to exit a firm, review my list of rules for buying and selling found in the sidebar. Don’t believe everything you are told by a buyer or seller. And always remember that if you fail to plan, you plan to fail.
Milt's Rules for Buying and SellingSeller:
1. Check with the licensing board to make sure the buyer has a current license.
2. Run a credit check on the buyer, including bankruptcy.
3. Ask for nonrefundable earnest money.
4. Set a closing date to prevent the sale from dragging on.
5. Set up a mechanism to take back the company if the sale is owner-financed.
6. Take the money over time to reduce taxes.
1. Do not continue to work as an employee under the promise to sell without a written agreement.
2. Know the amount of accrued vacation and sick leave on the books owed to employees (this is an often-overlooked liability by buyers).
3. Run a credit check on the seller.
4. Check for liens on the real estate.
5. Ask to meet with key clients.
6. Check with the licensing board to make sure the company does not have an outstanding complaint.
7. Hire a CPA to audit the financial records.
8. Hire an attorney to structure the deal.