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Ground Rules for Successfully Selling Your Business

Sooner or later you are going to exit your business. The question isn’t whether or not you will be ready. The sixty four thousand dollar question is whether or not your business will be ready.

It is estimated that seven out of ten privately held businesses have no succession plan to transfer the business to the next generation of owners. What does that mean to you? It means that if you do not currently have a plan in place to transfer your business to family members, existing partners, management or employees, someday you will think about selling your business.

That day might come sooner than you anticipate. Don’t make the mistake of thinking that just because you are not currently ready to retire that you have plenty of time to prepare your business for sale.

As a business broker, I have been involved in a number of transactions (and potential transactions) where the business owner wanted to sell, or in some instances, was forced to exit the business earlier than expected. In fact, retirement is NOT the number one reason why businesses sell.

Here is a list of the most common reasons why owners sell (or otherwise discontinue) their businesses:

Burn-out (the number one reason for selling)

Health issues

Personal diversification

Retirement/semi-retirement

Death

Divorce/partner disputes

Business growing too fast

Second generation not up to the task

Loss of market share

TAKE GOOD CARE

The sad truth is that many business owners do not take good care of their most valuable asset: the business. They don’t groom someone to continue the business in their absence, and do not keep the business in salable shape during the time they operate the business.

Business owners tend to get too bogged down in the day to day business operations to worry about–or plan for an event that they perceive won’t occur until sometime in the distant future; selling the business.

Unfortunately, fate sometimes dictates circumstances beyond your control, and tough decisions must be made. If your business isn’t ready to sell when the time comes, what are your alternatives?

1. Liquidation of business assets–may be a solution, but one that usually returns very little money to the business owner. If the business had been an operating business, the underlying assets (except for real estate) may be outdated and of little use to anyone. At auction, the assets will bring only what the attending bidders are willing to pay. In some instances, underlying assets are sold to liquidators (or scrap) for only pennies on the dollar. Liquidation of a going business often occurs where the owners have become ill or disabled, or need to retire and have not planned adequately for their exit from the business.

2. Closing the business–is even less attractive than liquidation. That is because many who find themselves in this situation have a tendency to “put off” liquidating the underlying assets in hope that maybe someone will come along to buy this business. This almost never happens.

BUILD WEALTH NOW BY PLANNING FOR THE SALE OF YOUR BUSINESS

Okay, so you think you have enough to do without throwing more onto the pile. Am I right? That is why I have written this article for you. It provides a “down and dirty” overview of things that you ought to begin thinking about and planning for right now. Doing so will provide you with an additional safety net that will help safeguard your valuable business asset.

Here are just a few of the benefits of planning now:

A planned sale allows for your goals and objectives on your timetable

You may begin to identify potential buyers

You may be able to create an attractive acquisition candidate

You can begin to understand why a buyer may want to buy

You might learn why buyers would not want to buy–and be able to fix the problems

You may begin to realize the worth of your business now, and learn how to increase the value as part of your retirement planning

BUSINESS VALUE HOUSEKEEPING CHECKLIST

Record All Sales

Business owners often invent remarkable ways to beat the tax collector. But the taxman can be a business owner’s best friend when it comes to selling one’s business. Income taxes are a great investment in the years immediately preceding an anticipated sale of the business.

Paying income tax proves to the buyer AND the banker that your business operations have been profitable.
Nobody wants to pay more income tax. But consider this example: Ronald Bunk systematically underreported business income by an average of $20,000 per year. Assuming a combined tax rate of 40%, Mr. Bunk saved $8,000 in taxes per year. But, the underreported income also reduced the company’s earnings base by $20,000 per year. If, for example, the business could be sold for a multiple of 5x the company’s reported earning base—the company would sell for $100,000 less ($20,000 average earning base not reported times the price multiple of 5) than it is really worth!

Without considering the time value of money, it would take in excess of twelve years of (illegal) tax savings to make up for the loss of $100,000 in business value. The lesson: In trying to screw the government, business owners often find themselves on the short end of the stick; often in more ways than one.

Eliminate co-mingling of business and non business assets

A common practice among closely held companies is to co-mingle non business assets and expenses with business assets and expenses. I have seen businesses owning motor coaches, boats and airplanes; all reported as business assets. The costs of maintaining and operating the assets were expensed as regular business operating expenses.

It is true that those businesses (not audited by the IRS) are saving a certain amount of income tax, and providing an extra “fringe” benefit for the owners of the company.

Wise business owners should endeavor to separate non business assets from the business in the three to five years before a planned sale of the company. Doing so will make it much easier to accurately measure and reflect the true earning power of the business, as it will be unfettered by the capital investment in non business assets and the associated costs.

Buyers of your business are generally purchasing future income and benefit streams that will be produced by your business. The leaner and more productive your business is–the more it is worth. It is never too early to begin segregating non business assets from your business, as it may take some planning and time.

Do your own due diligence

Some executives of both public and private firms get a physical check-up once a year. Many of these same executives think nothing of having their personal investments reviewed at least once a year, if not more often. Yet, these same prudent executives never consider giving their company an annual physical, unless they are required to by company rules, regulations or some other necessary reason.

Anyone interested in purchasing your business will perform “due diligence” procedures on your business before closing on the purchase. All too often, sellers are surprised at the skeletons purchasers can find in the closet. These skeletons can reduce the value of your company, and in some cases, kill any chance at closing a sale. What skeletons are your company’s closets?

Why not give your business a periodic physical? In essence, I am suggesting you would do well to treat your business as if someone else owned it–and you were the potential purchaser. What problems would you discover that could cause you and your advisors to reduce or withdraw your offer?

Spending the time and money to discover and fix your company’s problems now will pay huge dividends in the form of increased company value–which is exactly what you want when it’s time to sell.

Compliance with taxing and regulatory authorities

Mountains of regulation often seem to impede a company’s growth and profitability. Some regulations might seem rather easy to “slight” or ignore.

Take for example one of my recent sellers who swore to me that the business had no regulatory violations of any type. I reminded the seller that anything “hidden in the closet” would most likely be discovered in a buyer’s due diligence (investigatory) process. “Nope–no problems of any kind” I was assured.

Well, guess what the buyer’s due diligence turned up? Seems the seller had a couple of shipping/storage containers sitting behind the building–which the sellers KNEW were in violation of local zoning ordinances. How did they know? They had received four previous “reminders” from the trustees about the containers, and the need to remove them.

“Why didn’t you mention that to me, or disclose that fact on your disclosure statement?” I asked. “Gee, nothing ever happened and the township never did anything–so we just figured it was no big deal.” Was the seller’s reasoning.

No big deal, except when the purchaser turned up the non compliance issue, it threw a few extra wrinkles into the mix. In that case, the issue was easily resolved (yet, much to the additional cost and chagrin of the sellers). But, sometimes known violations are not so easily remedied. In those instances, a seller runs the risk of blowing a good deal.

What’s the bottom line?

Clean up any tax, industry, OSHA, EPA or zoning issues with which your company does not comply.

Organize and keep records available. One never knows when opportunity might knock. If and when it does knock, will you be ready to strike while the iron is hot? How many times have you heard someone say something like, “I’d sell anything, including my business for the right price?”

Maybe you have even said it yourself. But would you know what paperwork and documents a serious buyer will immediately need in order to pursue the purchase? When a qualified buyer is ready to begin serious due diligence, they will need a variety of company documents.

Following is a partial list of things a buyer will ask for:

o Three to five years income tax returns

o Copies of one to three years quarterly payroll reports

o Three to five years CPA prepared financial statements

o Current year to date financial statements

o Detailed depreciation schedules listing each fixed asset owned by your company

o Corporate Minute Book with updated minutes

o Recent aged accounts receivable trial balance

o Recent aged accounts payable trial balance

o Company organization chart

o Copy of the Summary of Insurance Coverage (provided by your carrier)

o Information about Employee Benefits provided by the company

o Information about Employee Retirement Plans

o Copies of labor contracts

o Copies of other contracts to which the company is a party

o Copies of licenses, registrations for patents, copyrights, trademarks, etc.

The foregoing list is an example of the types of records your company should have up to date and on hand at all times. These records are extremely important to speed the sales process along. Though this advice sounds basic, I often encounter companies whose records are not complete and up to date. This situation can dramatically affect a potential sale.

I suggest using a three ring binder to keep the basic updated records available at all times. This also makes other business needs for the documents much more manageable.

CONCLUSION

You can increase your wealth by knowing a few simple ground rules for successfully selling your business. Just like other owners of closely-held businesses, you know how to operate your business on a day to day, month to month and year to year basis. But your experience in running the business has not prepared you to know how to sell your business.

While the information I provided in this article is not all inclusive, it should help you get started in preparing your business for a successful sale–no mater when the business might be sold.

What’s New For Your Business In 2006?

A new year means a new beginning, and it’s a good time to think over your ideas
and tactics for 2006.

The plans you have for your business in 2006 will depend on where your business is
in the business cycle. You’ll have different tactics if it’s your first year in business, to
someone whose business has matured and who has passed the five-years-in-
business mark.

If your business is new, recognize that more businesses fail in the first year than at
any other time. The failure can be due any number of reasons, including: a lack of
preparation, a lack of understanding, and a lack of financial support.

More often than not, extremely successful people have had many business failures.
If your business fails, it’s not the end of the world. It doesn’t mean that you’ll never
be able to run your own business — it will just take you longer to get there.

Also, if it’s your first year in business, accept that business runs in cycles. You’ll
have busy times, and you’ll have slower times. Sometimes the slow times will be
seasonal, either because it’s summer and people are on vacation, or it’s holiday
time. At other times, business will just be slow! After the first year, you’ll
understand that business moves in cycles, and you’ll put money aside to tide you
over in slow periods.

If you’ve been in business for a number of years, your business faces other dangers
— that of the maturing business. Six years is a danger point. I’ve seen this in many
businesses. They steam ahead brilliantly for five years, and then hit the skids. For
whatever reason, once a business gets to the six year mark, it needs to revamp itself
to stay alive and vital.

So, whether your business is brand new, or whether it’s maturing, what’s NEW for
your business in 2006? Here are some ideas:

=> Set New Goals

When it comes to setting goals, don’t be timid! Set outrageous goals for yourself in
2006, goals which get you enthusiastic and excited.

You’ll sometimes read articles which suggest that you should set realistic goals. Fair
enough. The trouble with realistic goals — like doing ten per cent more business
this year than last year — is that these kinds of goals don’t get you excited. What
you need are BIG, extreme goals which get you enthusiastic.

Set a goal to double or triple your income — why not? After all, you just might
reach the goal!

=> Get New Clients

How many new clients do you want to attract in 2006? Ten? Twenty? A hundred?

Start by working out what processes you’ve used to attract clients in the past. Do
you mainly get new clients through referrals, through advertising, or through cold
calling?

Set a goal to do more of what’s worked in the past. Don’t stop at setting the goal
however, schedule the work in too — block out the necessary time in your day
planner each week.

=> Make New Contacts

The more people who know about you and your business, the more business you
will get. When you own a business, you can’t afford to be a shrinking violet, or you
won’t be in business for long.

You can make new contacts in any number of ways. You can network in your local
area through business groups, join clubs, and join volunteer groups.

You can also network online, by joining various business-oriented groups.

=> Learn New Techniques

This is the time to decide what you need to learn to move your business ahead in
2006. You could take a couple of business courses at your local community college,
or learn CSS or some other technical skill related to the online world.

Don’t feel that your education has to be related to business or to writing —
anything you learn will improve your work in subtle ways. If you’ve always wanted to
take a photography course, or an advanced driving course, go for it!

Make your plans for 2006 now. Remember to review your plans at least once a
month so that you stay on track. All the best for 2006 — you CAN make it your
best year ever.

Is The “At Home” In Your Work At Home Business?

Have you ever thought about the fact that most people with a “home” business
probably spend more time outside their home working their business, than actually
being at home?

With the exception of certain types of home based businesses, most, whether in
businesses of the traditional variety, such as real estate agents, mortgage brokers,
etc., or network marketers, spend a great deal of time outside the home in an effort
to build and maintain their businesses.

When it comes to network marketing the number one activity that takes place
outside the home is probably the classic hotel and/or conference room meeting
where people gather at least once a week to bring prospects to hear their company’s
business presentation.

Of course, industry veterans know that these meetings often turn into mere social
gatherings, because the same people (representatives who are already in the
business) usually keep showing up week after week, as opposed to the new
prospects who are supposed to be getting into the business.

Many home business owners routinely meet prospects at the prospects’ homes or
offices, or have the prospect come to them in order to conduct a business
presentation.

Yet another popular practice is to take your prospect to lunch or dinner to discuss
your business proposal over a meal. Prospects often love it, because they get a free
meal, usually with no obligation to join you in your business.

For some types of high dollar transactions, as in the type of business that is often
conducted among larger businesses and organizations, taking your prospective
customer, client, or new business partner out on the town may be justifiable.
However, especially if you are involved in network marketing, the amount that you
stand to make up front if a new prospect signs up may range from as little as
nothing, to perhaps a few hundred dollars.

For example’s sake, lets say that you are with a company where at your level in their
compensation plan you earn $100 each time someone new comes into your
business and qualifies for whatever your initial product/service purchase
requirements are. As always, it is the consumption of the product that you are being
paid for.

And let’s say that for every 10 prospects you take to lunch 1 prospect typically signs
up. Again, this is for example’s sake, as your actual closing rate may be higher.
However, especially for someone new, it’s reasonable to assume that he or she may
sign up as few as 1 prospect out of every 10.

Let’s further assume an average lunch bill of $25. Again, this is being very
conservative, as a typical lunch even for two can easily be higher.

Ok, let’s do the math. You take 10 prospects to lunch at $25 each, and 1 signs up in
your business, which earns you an up-front commission (when your check comes)
of $100. $25 x 10 = $250 so you are now at a loss of $150 for your efforts. That’s
not including gas money, wear and tear on your car, or any sales aids or samples
that you may have also given away to each prospect. So, conservatively, at this rate
you’re going to LOSE AT LEAST $150 for each and every person you bring into your
business!

Again, your closing rate may be higher than 1 out of 10, and your initial
compensation may be higher, perhaps even by hundreds of dollars. However, if you
are like 9 out of 10 typical home business people or network marketers, the
numbers above are probably very realistic. Many network marketing compensation
plans pay considerably less than $100 in up-front money.

If you are doing hotel conference room meetings then your cost may be lower as
you, along with all other representatives attending, are likely sharing in the expense
of the room and facilities.

The above examples assume that you are working with prospects and/or
representatives who are in your immediate local vicinity. Many network marketers
travel out of town to grow their businesses. Sometimes this may be to sign up a new
prospect. However, typically it is to provide support and assistance to new out of
town people who have come into your organization. One thing that you’ll quickly
learn as you grow your business is that even if you only recruit and sponsor people
locally, because they will have friends and family in other states and perhaps even
other countries, it won’t be long before any organization of any size is spread out
quite far geographically.

Almost every industry or network marketing company also holds at least one annual
company event or meeting, which all representatives are encouraged to attend.
These events require yet more expense, time away from your main occupation
(unless you are working your business fulltime), and even time away from your
primary business. Sometimes you’ll recruit someone along the way using the old “3-
Foot Rule,” (prospect anyone who gets within 3 feet of you) which is absolutely NOT
one of the methods advocated here on ABCIncome.com. But otherwise, when you
attend company functions you usually do so at the expense of taking time away
from the activities that are actively making you money.

It can be true that you will gain enough new information and insight into your
business that what you learn at these company functions can help you build your
business even better, but seldom can you count on such an even to guarantee
dollars into your bank account. Over the years I’ve watched countless people spend
money they didn’t have in their budgets in order to attend such events. That’s
because most such events cost you money, as opposed to making you money.

There is nothing wrong with company conventions, seminars, etc., as long as you
can readily afford it, enjoy it, and, most importantly, can afford to pay for it out of
PROFIT! If your business isn’t making you enough money to pay for such a trip then
wait until it does, unless you are already in a position to easily and comfortably
afford the trip out of your existing budget (most likely from the income from your
day job).

Not to digress too far away from the main theme of this article, but key rules to
always remember in your business are to grow your business out of profit, spend as
little money as possible on things that don’t make you money, and what money you
do spend try to invest wisely in those things that will make you money.

Lastly, be reasonable about how many functions you attend. Some groups of
network marketers (usually not an official company sanctioned position) encourage
or even demand their representatives to attend pep talks and rallies as often as
once a month or more. Follow the guidelines already mentioned above: Can you
afford it, and what impact will attending that function have on your business? Is it
costing you money or making you money?

Returning to our original theme, even if you can afford activities like those just
discussed above, do you want to spend that much time away from your home and
family? Many people find that they are out and about so much, traveling to work
with out of town groups, and attending functions, that they are tired and barely
recover after returning from one before they are off to the next.

Even if your efforts are profitable the above methods can be among the least
efficient ways of building a business. That’s not to say it can’t or doesn’t work, many
have built organizations of thousands that way, including me (in years past, as I use
better and more efficient methods today). But ask yourself, if you could build an
organization just as, if not more, effectively while still being able to spend as much
time at home with your family as you would like, wouldn’t that be better?

Sure, you can always take people to lunch, dinner, and travel, to socialize, but,
especially with all of the tools that you now have at your disposal such as the
telephone, conference lines, Internet, fax, etc., it simply isn’t necessary to do so in
order to build a successful and profitable business.

There are some people who just love and enjoy always being on the go, or
socializing, etc. There too such things become a matter of personal preference. I
know people, for instance, who, especially in years past before online bill pay, etc.,
love to pay almost all of their bills in person. For a stay at home parent, or someone
not working fulltime, or a retired person, etc., they often view it as a way to get out
of the house and keep active. However, if you employ the kinds of training and
techniques that are available to allow you to build a growing, successful, and
profitable business, right from the comfort of your own home, you will be busy with
so many new prospects and representatives that you are unlikely to get bored
sitting around home with nothing to do!

So, if you’re happy with the way in which you are currently growing your business,
which may include some of the methods above, that’s fine. Some people still enjoy
building their businesses in the traditional way, in person, one person or a few at a
time. However, if you would like to learn more about some of the things that you
can change, and techniques that you can employ, in order to start growing your
business effectively right from home, then please take a look at the programs that
we offer on ABCIncome.com. They allow you to achieve better results, faster, than
using any of the less efficient methods mentioned above.