August 2016

Why Should You Hire A Business Broker

It’s more interesting to begin by asking: Can a business be sold without the use of a business broker? The undisputed answer is obviously yes. Many businesses still sell through private parties. Sellers hire brokers because they believe the broker will do a better job than they would.

Key functions of a broker

Business valuation: Fair market value is what a willing buyer will pay a willing seller, period. Without selling a number of businesses in a particular area, a broker couldn’t possibly know what fair market value is for a business. Without this experience it’s simply theory. The right broker will know the value based on experience, and work with local valuation experts to assist in the process.

Confidentiality: Brokers protect the seller and buyer in every possible way, even though the selling process requires the sharing of information. Using a good broker is the optimal way to ensure confidentiality.

Packaging and marketing: Quality brokers have expertise and know what makes a business attractive to a buyer. They can therefore identify strong selling points for each business, which a seller might not have considered. After all, selling a business is just that… Selling!  Packaging and marketing are critical to the successful sale of a business.

Finding prospective buyers: Brokers should be constantly marketing to buyers through websites, direct mail, phone solicitation, and networking. This results in a large database of interested buyers of all sorts.

Buyer qualification: Brokers screen prospective buyers in several ways. They obtain documents such as credit reports and financial statements, as well as interview buyers regarding credentials and experience. Sellers do not want to waste time with buyers who may not have the needed experience or are not serious buyers.

Consultation: A broker works with owners throughout the process regarding all aspects of the sale, including the terms of sale, financing issues, non-compete and other contract issues, customer retention, and whatever else is needed to make the process run smoothly.

Negotiations: Brokers provide important third-party negotiation skills to ensure that the deal gets done under terms that are satisfactory. This is one of the most underappreciated aspects of what a good broker provides and could fill an entire book of its own. This is where the broker either pays for himself or costs the seller money.

Financing: Successful brokerage firms have access and expertise in obtaining financing for the buyer so that the seller can receive cash at close if the business and buyer qualify. A broker can also provide guidance and valuable experience with regard to seller financing issues when necessary.

Large Pools of Buyers: It is simple Economics 101: Sellers can’t get the best deal from one or two potential buyers they met at an industry seminar. The larger the pool of potential buyers, the better the chance of getting not only the right price and terms, but the best fit for your clients and staff.

There is a reason some brokers successfully sell many businesses each year, while others don’t. Some work hard and produce results while others merely list businesses and wait. Selling a business is not a simple process. It’s a complex, legally binding transaction with potential repercussions far into the future.

Randy Hendershot   916.993.5433 ext 5

3017 Douglas Blvd, Suite 300, Roseville, CA 95661

randy@evobizsales.com     www.evobizsales.com

Estate Planning Opportunities May Be Lost in December 2016

Proposed Regulations Just Issued: The United States Treasury (IRS) just issued Proposed Regulations that could have a dramatic impact on your estate planning by eliminating valuation discounts. For wealthy people looking to minimize their future estate tax, this is critical. Planning can also be essential for others as well. If you are concerned about protecting a family business from the risks of future divorce, or protecting your assets from lawsuits or malpractice claims, discounts can enable you to leverage the maximum amount of assets out of harm’s way, without triggering a gift tax to do so.

Act Now: Time is of the essence. Once the Proposed Regulations are effective, which could be as early as year-end, the ability to claim discounts might be substantially reduced or eliminated, thus curtailing your tax and asset protection planning flexibility.

What are Discounts, Anyway?: Here’s a simple illustration of discounts. Bernie has a $20M estate which includes a $10M family business. He gifts 40% of the business to a trust to grow the asset out of his estate. The gross value of the 40% business interest is $4M.  Since a minority 40% trust/shareholder cannot force a sale or redemption of its interest, the non-controlling interest in the business transferred to the trust is worth less than the pro-rata value of the underlying business. Thus, the value should be reduced to reflect the difficulty of marketing the non-controlling interest.  As a result, the value of the 40% business interest transferred to the trust might be appraised, net of discounts, at $2.4M. The discount has reduced the estate by $1.6M from this one simple transaction.

Election Impact: If the Democrats win the White House and the Democratic estate tax proposals are enacted, the results will be devastating to wealth transfer planning. Some experts project that a Democratic White House could affect down-ballot races and flip the Senate to the Democrats. The Democratic tax plan includes the reduction of the estate tax exemption to $3.5M, elimination of inflation adjustments to the exemption, a $1M gift exemption and a 45% rate. The Democratic plan will most likely include the array of proposals included in President Obama’s Greenbook which seek to restrict or eliminate GRATs, note sale transactions to grantor trusts, and more. Wealthy taxpayers who don’t seize what might be the last opportunity to capture discount planning, might lose much more than just the discounts. They might lose many of the most valuable planning options.

Not a 2012 Boy Who Cried Wolf: You may recall the mad rush to plan in late 2012 on the fear that the gift, estate and generation skipping transfer (GST) tax exemption might be reduced from $5M to $1M in 2013. After many incurred significant costs and hassles in implementing planning quickly, that change never occurred. For those who might be affected by discounts, the situation in 2016 seems vastly different. The Proposed Regulations could be changed and theoretically even derailed before they become effective. The more likely scenario is that they will be finalized after public hearings and the ability to claim valuation discounts will be severely curtailed. If you do undertake planning, be cognizant of an important lesson from much of the poor planning that was done in 2012. Consider using planning techniques that assure you (or if you are married, your spouse) access to funds transferred in the discount planning. The main regrets in 2012 planning were for those who transferred assets out of their own reach. That is really not necessary.

What You Should Do: Contact your planning team. A collaborative effort is essential to have your planning done well. As your estate planning and tax attorney we can review strategic wealth transfer options that will maximize your benefit from discounts while still meeting other planning objectives. Projections completed by your wealth manager could be essential to confirming how much planning should be done and how. Your CPA will have vital input on wealth transfer options, federal and state income tax implications and more. Your insurance consultant can show you how to use life insurance to backstop some of the planning strategies, in coordination with the financial forecasting done by your wealth manager, to maximize both the tax benefits and your financial security.

Who Should Act: Married clients with estates that exceed $8M or more and single clients with estates of $4M or more should reevaluate the effectiveness of their plan.

Look for Upcoming Seminars: We are setting dates for seminars which detail the effect of these changes and describe some of the actions that may be appropriate to take. Please contact our office if you are interested in attending and let us know if a lunch, afternoon or evening time is best for you.

Content provided by:  The Goralka Law Firm helps successful families, business owners and real estate owners achieve their enlightened dreams by better protecting their assets, reducing income and estate tax and providing for the distribution of their estate to the right people, at the right time and keeping the wrong people out. For over two decades, the Goralka Law Firm has satisfied our clients’ unique planning needs by collaborating with our partners, attorneys, accountants, business managers, financial planners, stock brokers and insurance professionals.  As tax attorneys and as estate planning and asset protection professionals, our job is to provide peace of mind by easing the process of estate and asset protection planning, minimizing estate and income taxes and developing sophisticated retirement and post-mortem plans.  Email:  info@goralkalawfirm.com, Phone: (916) 571-9155.

Highlights From Q2 2016 IBBA and M&A Source Market Pulse Survey On Businesses Sold

• Strongest Growth in businesses selling that are valued at $5M-$5M

• Buyers market for businesses valued under $1M, over the $1M mark is a Seller’s market

Is It Possible To Sell Your Business To A Competitor?

A common question in the realm of buying and selling businesses is, “Is it possible to sell your business to a competitor?” The short answer is yes, it is quite possible and rather common. That stated, selling to a business competitor is different than selling to a buyer who is completely new to the industry. The two types of buyers should not be treated the same way, as there are various differing variables.

A Competitor Can Be a Great Buyer

One reason is that a competitor may indeed be the right party to buy your business, is that they usually have an excellent understanding of how your business and your industry works. They may also enter the negotiation process already understanding the value of your business, and this can serve to speed up the process.

Always Proceed with Caution

Competitors, however, must be approached carefully. Unfortunately, there have been many cases where competitors acted as though they wanted to buy in order to acquire access to inside information. That’s why sensitive information like client lists and other “secrets” shouldn’t be shared until the sale is complete and the money is literally in the bank.

Working with a business broker is always a prudent move when it comes to buying and selling businesses; however, when working with a competitor is involved a business broker is even more important than normal. A business broker can act as something of a shield in the process, helping to ensure that you don’t reveal too much prized information until the sale is 100% complete.

Negotiate from a Place of Knowledge

Further, a business broker understands how much your business is worth and can back up that valuation. Having this information before discussing a potential sale with a competitor is of great importance.

Be Prepared to Accept Certain Legal Conditions

Finally, don’t be surprised if your competitor asks you to sign a non-compete or for you to stay on as a consult after he or she has acquired your business. This is a prudent step and one that makes tremendous sense. If you were buying a business from a competitor wouldn’t you want to make certain that the competitor didn’t simply “set up shop” somewhere else a few months or even a couple of years later? Likewise, tapping your expertise is another prudent move for your former competitor.

Summed up, selling your business to a competitor is a potentially great move, but it is also an opportunity that absolutely must be explored with extreme caution. Never divulge critical information to your competitor until the deal is finalized.

Five Important Positioning Tips In Planning To Sell Your Business

In order to get top dollar for your business, it is necessary to prepare for the sale well in advance. In short, a tremendous amount of strategy and preparation goes into a successful sale. The amount you ultimately receive for your business is directly tied to how well you prepare.

At the top of the list of making sure that your business is attractive to potential buyers is to make certain your business is as well positioned in the market as possible. Of course, this is often easier stated than done. Here are some of the best ways to make sure your business is optimally positioned.

Tip One – Start Positioning Your Business Well in Advance 

Selling your business isn’t something you should just do one day. You should start positioning your business at least one year before the closing.

Quite often, experts say business owners should always operate as though a sale is on the horizon. This makes a great deal of sense on one hand. If you ever experience an unexpected turn of events and need to sell, then you will certainly be ready. Another reason that this advice is solid is due to the fact that operating as though a sale is on the horizon helps you make certain that your business is running as effectively and efficiently as possible.  This also helps with your short and long term decision making.

Tip Two – Always Think About Growth

Another way to ensure optimal position in the market is to always stay focused on growth. Asking yourself what steps you can take to grow your business in both the short term and the long term is a prudent move. You should always know what it takes to launch a new growth stage.  As unusual as it sounds businesses can even foster growth by acquisition if well planned.  This can show faster results than organic growth helping to foster new markets, add needed employee talent, and decrease the impact of fixed costs.

Tip Three – Customers, Lots of Customers/Clients 

You don’t want a prospective buyer to see that you have only one or two key customers or clients. Understandably, this situation should make a buyer quite nervous. It comes across as extreme vulnerability. Having many varied customers or clients is a step in the right direction.  Make sure to have an understanding of your customer concentration percentage.   As a general rule your business should not have any one customer with over 15% of your total revenue.

Tip Four – Be Ready for Due Diligence

Whatever you do, don’t overlook due diligence. Neglecting or waiting to prepare for the buyer’s due diligence stage until the eleventh hour is quite risky. Have all of your financial, legal and operations documents ready to go. A failure to properly handle due diligence could derail a deal or even reduce the amount you receive.  One of the easiest items that will have the most impact on value is the readiness and accuracy of your financials.  Invest the time and money to have a professional account/CPA keep your records accurate and up to date.

Tip Five – Understand Your Business’s Strengths and Weaknesses

Every business has strengths and weaknesses. Don’t attempt to hide your weaknesses or overplay your strengths. Be transparent!  There is no such thing as a perfect business!  Many times a weakness can be turned into a positive in the buyers eyes.  As an example, if your marketing efforts have not been consistent yet you have a nice growth curve, imagine a buyer proficient in marketing and what he/she could do to affect future growth.

A business broker is an expert at handling investors and even writing a business plan that you can hand to potential buyers.

Think about boosting your market position while simultaneously increasing the odds that you receive top dollar for your sale. Instead of rushing, take the time to prepare and work with a business broker to achieve the best market position and sale price possible.  Planning leads to increase value and a much smoother transaction.

Working “On The Business” vs. Working “In The Business”

Thinking Vs. Doing: A Consistent Dilemma for business owners.

The train conductor vs. the thinker

Your role as a CEO/Business owner can be divided into two buckets: one for managing and the other for thinking.

The managing bucket is where, metaphorically speaking, you ensure the trains all run on time. In this role, you’re establishing goals for your employees and holding them accountable for achieving their targets. You’re making sure your products and services are of a high quality and that your biggest customers are happy.

When you’re wearing your manager hat, you’re scouring your company looking for small enhancements every day. This obsession with continuous improvement is what big companies call “six-sigma thinking,” but you probably just think of it as building a great company.

The other bucket is reserved for thinking and it’s where you create the future of your company. In this visionary time, you get to design new products, imagine new ways of serving customers, or contemplate where you could take your business in the years ahead.

Your visionary hours are spent dreaming and imaging what your business could be, instead of worrying about what it is today.

The most valuable companies

The question is, how much of your time should you devote to each role? If your goal is to create a more valuable business—one that someone might like to buy one day—data reveals that you should start gradually increasing the time you spend on thinking and hire someone else to do the managing.

For example, after analyzing more than 20,000 businesses who have received their Value Builder Score, it has been discovered that companies of owners who know each of their customers by first name (i.e., managers) trade at just 2.9 times their pre-tax profit, whereas the companies of owners who do not know their customers’ first names (i.e., thinkers) trade at closer to 5 times pre-tax profit.

Further, companies that would suffer if their owners were unable to come to work for three months, receive significantly lower offers when compared to companies that would not feel the absence of the owner for a month or two.

Finally, in a recent survey of merger and acquisition (M&A) professionals, they were asked who they like to see an owner hire if they can only afford one “C-level” executive. The M&A professionals overwhelmingly identified a general manager/second-in-command as the most important role a founder can fill ahead of a chief revenue, marketing or financial officer.

In short, the owners of the most valuable businesses have found managers to ensure the trains run on time while they spend an increasing amount of their energy thinking about what’s next for their business.

To take the 13 minute Value Builder survey and find out your Value Builder Score Click here.