Selling a business – how insurance reduces risk

Insurance can help mitigate risks when buying or selling a business

It’s dead winter.  You wouldn’t head out on a family road trip without checking your car and local weather forecast would you?

There are many actions available to reduce the risks when embarking on the buying or selling of a business.  Adequate protection through insurance is high on our checklist.

The majority of our transactions involve the seller financing a significant portion of the purchase price.  Most also involve a training program to equip the new owner to operate the business successfully and ensure a smooth transition. We build these into the agreement.  But what if the buyer or the seller were to get ill or die? Insurance can mitigate the risks for both.

Selling a business: minimizing taxes when you sell

Minimizing taxes when you sell

Although our one-cent coin may soon be retired, those of us in business can still bank on the premise “a penny saved is a penny earned”.  And we don’t want to pay out one penny more than we have to in taxes.

When Sunbelt sells a business, the goal is to obtain a fair price for the business and for the sale to be structured in a tax-efficient manner. To capitalize on the best tax strategies for their circumstances, the seller needs the professional guidance of accountants, lawyers and financial advisers.

McCay Duff, Humphrey Law and Advanced Planning Group have contributed to this post on the two main tax structures in the sale of a business:  1) the shares of a corporation and 2) the assets of the business. Tax considerations and lead times are different for each option.

Selling a business: what is your business worth, part two

owner’s compensation tends to be the area of biggest adjustment in an income statement

As you read in part one of selling a business: what is your business worth, a seller’s price expectation needs to be in line with market reality.  Most financial statements of small businesses are prepared to minimize the tax burden for the company and its owners.  To reflect the company’s true earnings, we need to recast/normalize the balance sheet and income (profit and loss) statement.

Recasting income statements

In a small- to medium-sized business, owner’s compensation is often based on what the business can afford. It tends to be the area of biggest adjustment in an income statement, where we “add back” expenses considered discretionary, extraordinary, non-recurring or non-cash. We also add back interest as the new owner may have a different capital structure.

Owner’s compensation can include pension plans, profit sharing, health and life insurance, auto travel, entertainment, meals, memberships, dues, fees, subscriptions, salary, wages, bonus and payroll taxes, family and relatives on payroll.

In recasting, you need to ask:  Will the new owner incur this expense to obtain these earnings?

This process can take some time and requires the business broker/appraiser to have the right questions.

Selling a business: what is your business worth?

The worth of a business lies in the eyes of the market

If beauty is in the eye of the beholder, then the worth of a business lies in the eye of the market. For the market is really what decides the price an owner will get for their business when they go to sell – the scenario most have in mind when they ask what their business is worth.

Determining that value, the most probably selling price (MPSP), is an art that’s goes beyond valuation.   Brokers at our company have expertise in both.

We start by formally appraising the value of the business to determine Fair Market Value (FMV), using methodology of the International Business Brokers Association (IBBA), the Institute of Business Appraisers (IBA) and the National Equipment and Business Brokers Institute (NEBB). Sunbelt has staff certified by each;  I am a Life Member of IBA and teach business valuation for IBBA and NEBB.

From the FMV, we determine the MPSP. This calculation represents a reasonable price, factoring the true (recast) earnings past and future, what the market is willing to pay, and motivation. The seller can then negotiate on an informed basis.

How the MPSP differs from value