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PREPARING TO SELL YOUR BUSINESS
A. REASONS FOR SALE
1. Selling a company in a market that is strong is always better than the other way around.
Potential buyers want to associate themselves with winners and if your company is succeeding,
people will be more likely to pay more for it.
2. You can perform a few simple exercises to ascertain where you are positioned in your current market:-
- Did your company recently receive a
contract that extends over a couple of years? From a buyers
perspective this brings income consistency that is always an
attractive feature.
- It is always good news if your company
has been gaining market share with respect to other companies in
your industry.
- A company is seen to be a viable
financial investment if it has shown a profit for the last few
years.
- Consistency in a companies net-income-before-tax results is beneficial from a financial markets perspective
and makes your company look much better on paper.
3. A downturn in markets can spell opportunity for a well-run company that shows solid investment returns. It should
be noted that selling before reaching the bottom of a market allows you to keep more of what you have
worked hard for.
4. It can take many years for new technologies to upturn current markets, but if your company is threatened by the introduction
of new technology into one of your competitors companies, you should seriously consider selling your company
sooner rather than later.
5. If you have become tired of your business and want some other new challenge it might be wise to sell your business before
doing something that could reduce its financial condition.
6. It is important as a buyer or a seller to be aware of any family or management conflict as any personnel problems could
potentially ruin many years of work in a very short period of time.
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B. PREPARING TO SELL
1. The most important thing to remember when selling a business is to start preparing for the sale long before you actually
decide to put it on the market.
2. It is necessary for you to prepare financial statements so as to gain the confidence of prospective buyers.
3. If you do not already have them, it is a good idea to have procedures manuals which shows any potential buyer what procedures are
in place to deal with the operational running of the business, such as how to maintain a particular piece of equipment,
for example.
4. It is always a good idea to try to standardize your terms and conditions in agreements that are of a similar format while using written
agreements so as to make the work as efficient and understandable as possible to your colleagues and potential buyers.
5. It is important to let your banker know about any financial changes relating to your company. Remember to treat your banker as a potential ally.
The new owners of your company might have to take over your financial obligations, so it is imperative to involve your banker from the very
beginning of the sales/buying process.
6. It would be advantageous to you selling the company if you allow your banker to discuss with potential buyers, as your banker not only add
credibility to your selling efforts but also has access to many high level business contacts.
7. It is important to be discrete with information relating to the sale of your business. Information should be released only on a need-to-know
basis and those not involved in the preliminary sales talk, such as your employees, should be told only when the sale is finally completed.
8. When you do eventually reveal the sale make sure that you present it in a way that is beneficial to the employees, customers and any other owners.
It is important to prepare your declaration so that it presents things in the most positive way for everyone involved.
9. When selling your business to make sure that the day-to-day business of the company carries on as usual. You must try to make tomorrow look just like
today when it comes to your customers, employees and vendors. They must not see any major disruption of standard business operations during the
change of ownership.
10. Change often induces anxiety in people which could cost you money as a seller due to an uncertainty-induced sale price reduction from a buyer who sees
worried employees in a business which is chaotic. Always try to keep things in order.
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C. FINANCIAL PREPARATION
1. The ultimate goal of everything you do or create with respect to the sale of your company should be to improve
the likelihood of that sale happening.
2. It is very important that your financial/information documentation are kept up-to-date. Whoever decides to purchase
your company will go through the relevant documents meticulously, so it is important that they are correct.
3. When buyers purchase a company they expect some level of future performance level which is often based on past performance levels. In order for
you to create good future performance projections you need to create historical reports with as much positively oriented accuracy as possible
and then make a pro-forma projection of a reasonable future based on the past.
4. It is important to remember that you cannot change the past but you can shape the buyers perception of the future. This is the
primary purpose when you recast your financial statements.
5. Recasting is the process of removing unnecessary expenses from historical financial statements so that they more accurately reflect
a realistic financial assessment of performance.
6. Pro-forma financial reports bridge the gap between past financial performance and what may happen in the future.
7. It is important to remember that you should use the services of an accountant to create your pro-forma financial statements, unless you have
some form of accountancy experience. A good accountant will produce a statement that is more numerically consistent and may even turn out to be
a relatively accurate prediction of future company performance.
8. It is very important not to take your customers for granted. Remember that customers are your most valuable asset, without customers you have no
sales and no profit. Try to estimate your customer value as any one of your customers represents a certain amount of money that they will spend
over the course of many years.
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D. TAX IMPLICATIONS
1. Tax avoidance strategies can increase the after tax income seen by the seller while decreasing the purchase price paid by the
buyer. It is always important to structure a transaction that gives you what you want along with what you need and then
incorporate tax strategies.
2. In general, taxes incurred from the sale will be minimized if a few simple strategies are used;-
- Try to show as much of the sale in the
form of a capital gain to the seller, which should then qualify
for a lower capital gains tax rate.
- Defer income to future years when the
sellers tax rate might be lower, which would decrease the overall
tax burden.
- Avoid double taxation to the selling company and its shareholders, which is achieved with the sale of a S type corporation or
with a non-taxable transfer to the purchasing company.
3. It is also a good idea to treat an asset as a long-term capital gain item, as it allows you to take advantage of the IRS capital gains tax rate.
This rate is 10% for those in a 15% tax bracket and 20% for everyone else. This saves 5% in taxes for those in the 15% tax bracket and saves as
much as 20% for those in the highest tax bracket.
4. It is important that you must not forget your initial requirements once all the details of the transaction have been worked out. Never finalize
a sale until you get what you really want out of it.
5. Something else that you should consider when in business is what will happen to your company when you die. You could set-up a succession plan to
ensure that your heirs get the most from your estate. It is a good idea to discuss your plans with your heirs as you might discover that none of
them want your company but might want the proceeds that would come from its sale.
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