M&A Blog

Your Small Business Exit Strategy:  Think Bigger

Posted by Andrew Newell on Apr 19, 2018 8:37:50 PM

            Many small business owners dream of the day they can sell their business and retire to a life of opulent leisure.  Well, perhaps not opulent.  Comfortable.  That dream usually involves a cash sale of their business (perhaps at an unrealistic price), preferably as early as possible.  Age 65, for many, is an abstraction.  We may be hurtling quickly toward it, but most retirement dreamers don’t want to wait that long.

            How sophisticated is the average small business retirement dream?  And is it a retirement plan?  The purpose of this article is to encourage small business owners to think holistically about their exit strategy and beyond – not just about how much money they’ll have in the bank, but how to maximize it, how to preserve it through tax deferral strategies, and creative ways to make that money go further.  The goal you’re working for, after all, is an improved quality of life, whatever that means to you and your family.

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Topics: Mergers and Acquisition

Seven Mistakes You’re Likely to Make When Selling Your Business

Posted by Andrew Newell on Mar 17, 2018 11:50:33 AM
  1. You haven’t thought enough about how you’re getting paid. Business owners almost always have an idea what their business is worth, and it’s usually based on some formula they’ve either heard about or developed on their own over the years.  What owners often fail to consider is how dramatically that price can differ based on the means of payment.  An all cash at closing sale should bring a different price than, for instance, an installment sale over a term of years, or payment based on future revenues or profits of the new owner.  Most owners dramatically underestimate the effective discount they are giving buyers when the terms don’t involve 100% cash up front.
  2. You haven’t thought enough about what happens if you aren’t paid. Successful business people tend to think positively and assume success.  A great quality to have when running a business, to be sure, but often it blinds owners to what can, and often will, go wrong in a sale scenario.  What if your buyer stops making installment payments?  Can you repossess the business (and do you want to)?  What if they’ve severely impaired the value of the business through mismanagement?  Created unknown liabilities, such as potential employee lawsuits, that you don’t want to assume the risk for?  Even if you have an absolute right to repossession, your optimistic nature may be keeping you from acknowledging the risks that remain.
  3. You haven’t been creative enough. Every business transaction is different, and nearly every possible transaction offers creative ways to generate more value, often for both sides.  Staying on as an employee and teaching the buyer how to run the business is a classic example of creating a win-win value proposition, but there are always more.  The business may lend itself to creating residual income through royalties.  You may wish to retain a small ownership stake if you believe the company may be on the verge of great things under new leadership.  It might make sense to structure the purchase price with a contingency based on the short-term performance of the company post-sale to build confidence for the buyer, and increase the overall value of the transaction. 
  4. You haven’t considered the tax implications thoroughly. It is not uncommon for business owners, especially small business owners, to count the number of months they’ve owned a business, determine whether they will owe short-term or long-term capital gains taxes on the proceeds, and end their tax considerations there.  There are a variety of strategies available to defer taxation altogether, and a good tax strategy can often be more significant to your bottom line than the sales price. 
  5. You haven’t been realistic about your buyer. For any number of reasons, you may be blind to the obvious red flags about your buyer, or mistakenly think they don’t matter.  They always matter.  There is no adequate legal remedy for doing business with unethical people and businesses.  No lawyer, no contract, and no down payment of any size can offer you complete protection.  Due your due diligence on your buyer, and not just their financial health but their business history.  People and businesses involved in numerous lawsuits should be avoided at all costs.  You don’t want to be the next entry on the list.  Even large companies vary greatly in reputation for keeping to the terms of their business commitments.  Don’t assume that any company, large or small, is “okay.”
  6. You haven’t sought legal or financial advice because it’s too expensive. One thing nearly all successful small businesses have in common is a focus on the bottom line, and often that means watching expenses like a hawk.  This is often counterproductive with professional services, especially when you’re selling a business.  The sale of every business could benefit from the insight of a good business lawyer.  While there are certainly some deals that are too small to justify the expense, the number of deals that fall into that category are so small you should assume yours isn’t one of them.  A good transactions attorney won’t cost you money, he or she will save you money.  In extreme cases, they may even keep you from making a monumental mistake.
  7. You haven’t considered the potential risks of the transaction. I tend to refer to this as the “unknown unknown.”  These are the things you haven’t even considered as potential risks because we’re all constrained by our own imaginations.  For instance, a former client of mine never imagined they would be involved in bet-the-company sized litigation when they drafted their own independent contractor agreement to pay part-time workers rather than consult an attorney.  Or when they drafted a temporary lease agreement that resulted in the forfeiture of their entire company.  They simply weren’t risks that were foreseeable to them when they entered these transactions.  The stakes with a business sale tend to be even higher than ordinary transactions. 

Final Thoughts.  Don’t take anything for granted when you sell your business.  Question everything, including your own biases, because they often keep you from seeing the entire picture.  Almost all transactions will benefit from engaging a professional, usually an experienced attorney.  Above all else, never do business with people you know are dishonest or unethical.  This rule alone will help you avoid the vast majority of the risks you face in selling your business.

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Topics: Mergers and Acquisition

Holdbacks When You Buy

Posted by Andrew Newell on Jan 30, 2018 7:48:49 PM


What is a “holdback” and how can it help

We’ve all bought something that didn’t live up to our expectations.  When it’s something small, we may grumble about it for a moment or two, and move on with our lives.  When you’re buying a business, your financial life may hang in the balance.  Understanding your rights if you don’t get the business you were promised, or better yet, having an effective remedy, is critically important. 

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Topics: Mergers and Acquisition

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