Step #2 Valuing Your Business & Preparing for Sale
(multi part series)
Recap from the last issue
Add-backs can go both ways, increasing or decreasing value
Doubt=Risk=Lower Valuation
IRS hates hobbies
Find previous issues here
Once you have a reasonable estimate of the value of your business, it's time to consider what price and terms you may be willing to accept based on that valuation.
100% cash up front would be wonderful, but it’s not always the case. In fact, something like 60% of business sales involve at least a portion of seller financing. When I bought my tax practice, it was ALL seller financing. So was the deal I made with my partner when I bought him out. And we sold the pizza pub on 100% seller financing. Actually, that deal was seller financing plus a big privacy fence job. (A story for another day.)
Seller financing is perfect for the buyer and though it can be risky for the seller, it also has great benefits, including:
Lower taxes, because mostly, you are only paying taxes on the money as you receive the scheduled payments
The ability to earn interest income above and beyond the agreed upon sales price
You may be able to negotiate for a higher sales price in exchange for acting as the bank
TAX WARNING--Be careful with seller financing if your business is equipment heavy. Even in an installment agreement, you will have to pay taxes on the equipment part of your sale right away.
There’s a saying- You pick the price--I pick the terms. What if there was a little shop you’ve had your eye on, and it finally comes on the market for $500K. You think it’s only worth about $400K. Would you pay THEIR PRICE of $500K if you could negotiate YOUR TERMS to be $1 per day until it’s paid off? Your price=my terms. Both items are equally important in the negotiation. And the opposite is true as well. As a seller, wouldn’t you prefer to get $200K instead of $1 a day until you get to $500K? (That's almost 1400 YEARS!)
Are you willing to take Small Business Administration backed financing when you sell? This takes longer, sometimes deals break down (ours did on the pizza pub), interest rates don’t get locked in, among other extra challenges, but maybe half of small business deals involve SBA loans.
When pricing your business, you’ll need to look at it from the bank’s perspective as well. Is your business worth the risk they are taking? Is there enough profit to cover the bank loan, pay the owner and run the business? If your buyer is getting SBA funding, then they’ve also pledged their home and any other real estate they own as a stipulation of the government guarantee.
Having reasonable expectations upfront will prevent a lot of heartache down the road. Going into the sales process knowing both your value and the terms you're good with puts you ahead of the game:-)
Next time we'll touch on the differences between a stock sale and an asset sale. Exciting stuff!!
