Finding Your T-Spot!
(Plan, Negotiate & Agree on the Business Transition before closing!)
Whether you’re buying a business or selling a business, the transition needs to be planned out with as much care and thought as the deal itself. The deal is sexy and fun and gets all the attention. It’s exciting to figure out how much you’re buying the business for, or what a great deal you’re getting, amortization schedules, interest rates, balloon payments, ooh la la!
But finding the T-Spot, in other words drafting a solid transition plan, will absolutely make or break the business, no matter what wonderful terms you were able to negotiate. The transition must be planned out ahead of time and negotiated along with the deal.
The first 30 days are critical, but the first few days will set the scene for all that is to come.
Despite the best due diligence efforts, you still have loads to learn about this company.
Literally, follow the seller around like a puppy for at least the first couple of weeks
And absolutely, do more listening than talking!
Begin by asking yourself three questions.
1. What must the seller do/continue to do/teach you in order for you to be successful?
2. What are you hoping the seller will continue to do, based on skills and relationships and your own situation?
3. What do you need the seller to stop doing immediately so that holes get plugged and policies get tightened up?
There is a due diligence deal I’ve been working on and I’d love to grab the seller’s shoulders and give him a good shake and tell him, “For the love of God, please stop ordering inventory!!” He has almost 5 years worth on hand right now, about three quarters of a million dollars.
This is just the starting point, the brainstorming session. The details will depend on many factors, including your experience and skills, the status of the business, and the team you inherit, so unfortunately, I can’t give you one set-in-stone transition plan.
But in our time together today, I will touch on as many transition factors as possible. Some will end up being relevant to your acquisition and some may not. I’ve created four different business transition checklists. Hit reply and send me T-SPOT if you’d like a copy. It’s way more comprehensive than any other transition information I’ve seen.
Once you get a Letter of Intent signed, and you begin due diligence, keep these checklists handy and use them to customize your own transition plan. And of course, come back to me with any questions and challenges you encounter on this grand adventure.
But whatever you do, don’t leave the transition to unfold in a willy-nilly fashion. Multiply your chances of success with a thoughtful transition plan mapped out, negotiated and agreed upon by all parties…Before Closing!
Remember, you bought a money making machine, a business that is already successful - your job is to not screw it up!
So find the spots that need a little WD-40. BUT don’t go in hard or fast. Take your time, learn, fill in any gaps and transition slowly.
To help create your business transition guide, we’ve broken the process into five core areas:
Business Set Up
People, including your seller
Processes
Product or service
Finances
Core Area 1 - Business Set Up
We’ll start with the business setup. Just as when we were talking about deal structure before, knowing if you’re doing a stock purchase or an asset purchase is going to determine the beginning of your transition path.
In a stock purchase, you take over the seller’s entity, that is, the LLC or S Corp. In doing so, you also take over all the existing business components like the EIN number from the IRS, the bank accounts, the credit cards, the payroll tax accounts, and their filing history. In other words, you do not set these up with a stock purchase.
You may want to investigate the strategy of holding this existing entity inside a new entity you create just for this purpose. The new entity is called an SPV or Special Purpose Vehicle. It serves to provide an additional layer of legal protection between you and the entity you’re taking over. Check with your legal advisor to see if this fits your circumstances.
In an Asset purchase, you are only buying the assets, not the entity, so you will need to create everything from scratch, including a new operating entity. Do this prior to closing, because it is your new entity that should be making this purchase. You will probably want an attorney to do this or you.
Once your new entity is created, the next step is to get an EIN number from IRS.gov. (You can do this yourself, or your attorney or accountant will be able to do it for you if you prefer.)
Then, you will open a new “business only” bank account, no commingling of funds, and you’ll open new payroll tax accounts.
Payroll gets pretty complicated so you may want to hire a pro here too. Keep in mind, with an asset purchase, you are hiring the seller’s employees as if they are brand new employees, because they are new. They are new to your new entity. If you need employment contracts to carry over, an asset purchase may not be the right strategy.
Follow all the state and federal new hire rules which probably include:
Reporting new hires to the state, for child support and such
Filling out an I-9 to make sure they are legally allowed to work.
Withholding papers for both state and federal
On the federal side, there is the W-4 for employees.
And a W-9 for contractors.
You’ll need a federal tax account setup through EFTPS. You’ll use this to pay into
Social security
Medicare
Income tax withholding
And federal unemployment
If you’re thinking that you don’t need all this detail because you’re going to hire a payroll provider, then shame on you, Ms. Ostrich! (Picture yourself with your head buried in the sand.) You don’t have to do it all or know it all, but you do have to have an idea of what’s going on in your business.
You may need to collect and pay sales tax. If so, you’ll have to register with the state, or maybe multiple states. This usually requires you to obtain and display a retail merchant’s certificate.
We touched on the bank account already.
And if licensing is involved, you will need to begin that process as well. Maybe you’ll be able to transfer an existing license or secure a new one, but those can be lengthy processes. You’ve got to be pretty limber to get through all those government hoops!
More T-Spot tips in the next issue…
Peace Out!
