Earlier this week I attended the ACG Rocky Mountain Capital Growth Conference. The event was well attended and populated by Private Equity Groups and lenders from across the country. Boasting over 700 attendees the message that was conveyed at the conference was that deal activity is up substantially and that the lenders are actively pursuing transaction financing. This message mirrors our observations in the Colorado/Rocky Mountain Region.
This month's article is authored by Kevin Forbush, an experienced transaction attorney that has successfully represented some of our clients. The article addresses several of the issues that should be addressed prior to going to market. Being prepared, can save time, dollars, and brain damage.
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Ronald V. Chernak
In many endeavors in life, good outcomes depend on good planning. From securing a happy family vacation to ensuring you have enough money for retirement, good planning is key. Not surprisingly, the same is true for a successful, profitable business sale - planning is key. Remember, proaction is always better than reaction.
Though most agree in principle that planning is important, many business owners often fail to plan for the sale of their businesses. Not surprisingly, these people then end up not being able to sell, sell for much less than the business is really worth or paying too much in income tax on the sale proceeds. So, why then, don't more business owners carefully plan their exits? The answer is actually pretty simple - business owners are busy. They're busy running their businesses, caring for their customers, dealing with regulatory and tax issues and a myriad of "other duties as assigned." The good news is that getting your "ducks in a row" really is not all that hard.
Unfortunately, planning for the sale of your business will require time - your time. How much time varies from sale to sale and from business to business. For many the timeline from decision to sell to closing can be three to five years or more. What could possibly take three to five years?
Frankly, there is a lot to do. For a successful sale you must carefully address, at a minimum, the following issues: compliance issues, income tax mitigation, legal agreements, employee and HR issues, financial records and statements, and other tax (income, employment, sales and property) issues.
Compliance Issues: Compliance issues in business are often neglected. The degree and type of "compliance" varies depending on the entity. For example, corporations have filing and documentation requirements imposed by statute. Very often, business owners get distracted by the day-to-day tasks of running their business and fail to comply. Potential buyers don't like surprises. A prospective buyer can, and likely will, be turned off by a "messy" business structure. Therefore, good pre-sale planning should include ensuring that all company books, records and legal compliance matters are up to date. Other compliance issues include ensuring that all required tax returns have been properly filed and taxes paid (including employment taxes) and that other required regulatory checks and licensing requirements have been completed.
Income Tax Mitigation: Federal income tax rules changed significantly in 2013. We can expect that the federal and state income tax environments will continue to change (most likely not in the favor of taxpayers). In light of recent changes, a selling business owner should carefully consider the income tax consequences of any sale. More specifically, you want to understand your tax basis - both for the business itself and for specific business assets. You will also want to consider the income tax consequences of different sale terms and whether you should sell the business itself or the business' assets. Some sellers find that, with careful advance planning, they can significantly mitigate their income tax consequences by layering one or more charitable strategies into their sale plans. A key take away here is that careful planning can yield substantial income tax savings.
Legal Agreements: Another area of business operation that often gets overlooked and neglected is the business' legal agreements. More specifically, most businesses will have longer term arrangements like premises leases, equipment leases, licensing or franchising agreements, IT services agreements, employment agreements and other important agreements. Often, a key inducement to a buyer is the favorable terms of various agreements that the selling business has with vendors, employees or others. Advance planning can help ensure important agreements can be assigned to a buyer and, where appropriate, coordinated with closing to ensure no interruption in important services.
Employee and HR Issues: The ability of a purchaser to retain key employees is often a significant inducement to purchase a specific business. By planning in advance, you can implement retention and incentive programs designed to keep key employees on the payroll during any transition and for an appropriate time after closing. Advance planning is also likely key to ensuring that there are no HR "surprises." A prospective buyer will be more comfortable when there are clear employee policies (and perhaps an Employee Handbook), including policies addressing discrimination, sexual harassment and related matters.
Financial Records and Statements: Probably one of the most important factors in obtaining maximum value from a business sale is having good, clean financial records. The financial records of small businesses often require substantial cleaning up prior to sale. A buyer always wants to know what a business REALLY makes. Financial records may need to be adjusted for items of income and expense that are unique to the current owners - items that will not affect, or be handled by, the buyer in the same manner. By planning well in advance of the decision to list the business for sale, you can ensure that your financial statements and records accurately and most favorably represent the opportunity to the buyer.
Other Tax Issues: Finally, there are many "other" tax items that must be mastered prior to sale. More specifically, a prospective buyer will be very wary of the risk inherent with failure to withhold and remit payroll taxes, sales taxes and property taxes. Other potentially sticky tax-like obligations include, federal and state unemployment insurance and worker's compensation insurance. Demonstrating the "cleanliness" of your business on these potentially ugly matters could prove to be very important.
A thorough, thoughtful plan for the sale of your business will reap great rewards. These rewards can include reduced time from listing to sale, increased net sale proceeds and reduced stress and anxiety from being unprepared.
Remember, proaction is always better than reaction!
