Tax Reform. Will The Law Help Me Sell My Business?

Tax Reform. Will The Law Help Me Sell My Business?

January 5, 2018 | Steve Wain

Tax Reform. Will The Law Help Me Sell My Business?

Clients, acquaintances, and friends have been asking us that question since the tax reform became law.

First, let’s review some of the major components of the law that could have an impact.

What the tax reform law does is principally lower taxes. But, since Congress needs to keep spending in line with revenues, the supply side theory also must allow for ‘shortfalls’ in the math, and that is where your business might be impacted.

For example, to ensure that appropriate revenue to pay for the federal budget is in place, certain tax deductions that you’ve been used to have been taken away. One key one is meals and entertainment. You can no longer write-off those sales and marketing events where you brought clients or prospects to say, the PGA golf tournament, or other sporting events. What does that removal do to your bottom line? How does that change your company’s approach to future sales generation?

Since the tax reform will also add to the country’s debt, any tax savings could be eaten away from likely future increases in the prime lending rate. If you invest heavily in capital equipment that could impact your going forward operations.

If you own your company and are a pass-through entity, you may not see any gains to your profits depending on your size and type of business. For many small businesses, there will be a 20% adjustment to your AGI, but that benefit is not available if you are a SERVICE company, or if you earn greater than approximately $315,000. Is that your company? Do you just perform services, or are you a manufacturer, or retailer?

Work with your tax advisor to get a detailed breakdown of the tax reform legislation. Inc. magazine has a summary of relevant point for businesses in this article. Or try this Journal of Accountancy article.

The answer to selling your business though lies in five easy questions.

First, are you mentally ready to sell? Consider your personal situation. Even without tax reform, would you be able to sell your business now? If not, it’s highly unlikely the tax reform will make your company more salable.

Second, are you a “C” Corp? If you own a “C” Corp, you may now gain additional interest from investors since the marginal tax rate has been reduced by 15%. What this will do will bring more interested buyers to the table. It will also allow you to impute a higher value since your free cash flow will be greater and therefore be able to service a higher debt limit that a buyer may need to get you to sell.

Third, do you have a service based pass-through entity like an ‘S’ Corp or an LLC/LLP? If you are an “S” Corp or LLC, the likelihood is that most of the value of your business, as viewed by an outside investor, will likely not change significantly. Yes, if you happen to have a low cash flow and are not a service based entity, there will be that 20% incentive, but for most business owners who’ve built up their business over the years and are now ‘ready’ to sell, their income will likely lead to exclusions or reductions of that allowance.

Fourth, will other personal tax reform changes COST you money? Start with this. Do you live in a high-tax state like NY, CT, NJ, CA? If so, most business owners will likely have new limitations to the deductibility of their yearly earnings related to state and local taxes as well as property taxes. If that changes your lifestyle, you may want to sell now and either retire, or even find/start a new opportunity in a new state, or at least one with a lower tax base.

Fifth, have you considered the future or are you stuck in the present? With all the elation of lower taxes will it improve your life and continue indefinitely? No one knows the future, but the new reforms do have some personal tax adjustments being terminated or phased out in the future years, so what’s a benefit to you today, and what a buyer sees for their personal benefit will not look as rosy in say 5-7 years.

Selling a business is not easy. Continuous changes to the economy, business operations, and your life make planning to sell a business difficult. Consider all your options. Look to the future, but be cognizant of where your company currently is in its lifecycle. If your company is really ‘ready to sell’, then consider it now – these reforms will only have prospective investors more interested!

Steve Wain is the President of Calder Associates. Steve advises companies on strategy, business sale preparation, finance, and process, technology, organizational, and financial improvements.

Considering selling or buying a business? Call the professionals at Calder Associates. Learn what your company is worth, and get educated on the process.

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.

Why You Should Be Offering A Subscription Service

Why You Should Be Offering A Subscription Service

November 9, 2017 | Susan Rosner

Why You Should Be Offering A Subscription Service

Retail markets have been engulfed by a world of subscription services. Anything you can think of, from clothing to groceries, can be had on a subscription basis.

Why? Among other reasons, customers are busier than ever, and prioritize convenient, “set it and forget it” access to goods and services. As business brokers with clients in Philadelphia County, PA, Baltimore, MD, and throughout the States, we’ve been keeping an eye on the national subscription trend and what it means for our clients, especially in terms of annual revenue, value, and company longevity.

A Steady Revenue Stream

First and foremost, offering a subscription service to customers creates a consistent revenue stream. Keep in mind that the benefits may not be immediate: In the case of month-to-month subscriptions, it may take months or years for you to recover the cost of gaining a subscriber. However, as we’ll explain in a moment, the long-term benefits can be huge.

In the meantime, one way to avoid the waiting game presented by month-to-month subscriptions is to charge customers a subscription fee for the entire year. By doing so, you are making an up-front profit from your new customer and won’t find yourself starved for cash.

Long-Term Value

The addition of a subscription service truly pays off when it’s time to seek broker services for the purpose of selling your business. Business owners from New Jersey to California find that when it comes time for a business valuation, the presence of a subscription service increases the value of their business significantly. The dependable revenue stream created by the subscription service translates into long-term value, in turn making it more attractive to potential buyers.

Strengthening Brand Loyalty

When customers find themselves committing to an annual subscription, they are more likely to stay loyal to your company, out of a desire to get the most out of their investment in you. This core “fanbase” of dedicated subscribers will be incredibly attractive to potential buyers of your business – and will bolster the long-term success of your legacy after you pass your business on.

Subscription services are an excellent way to give customers what they want and keep them loyal to your brand, all while creating a satisfying stream of revenue that can maximize the value of your business.

Are you thinking of selling your business? Not ready yet, but looking for strategies to maximize value? Our Value Builder Score questionnaire and free e-book can provide invaluable insight. Contact Calder Associates today to learn more about how we can help.

About the broker blog

The Blogger- Susan Rosner

Susan is a Managing Partner in Calder Associates and is responsible for Calder’s Pennsylvania, Delaware, and surrounding area. Susan’s past experience has served hundreds of business owners and buyers in their pursuit to sell or acquire the right business. A past President of the Lower Bucks Chamber of Commerce, business coach, and speaker at local business events and exit planning conferences, Susan has helped thousands of companies and individuals to success!

At What Age Should I Sell my Company?

At What Age Should I Sell my Company?

May 21, 2015 | Steve Wain

At What Age Should I Sell my Company?

That’s a question I hear often. The easy answer… well, there is no easy answer.

A lot can be said about the individual who wants to continue working as they progress in age, but invariably the real question is not about their age as much as it is about their desire to retain equitable value.

I’ve seen business owners who’ve owned and run  their business into their 90’s. I’ve also seen 30+ year-olds tell me that they are “burned out”. So, how do you know if it’s time to go? That depends upon YOU!.

First, lets dispel a myth that says for a business owner to work, they can’t work after they sell their interest. A business owner can work as long as they like, either for the entity they are selling, or if that is not possible, for another entity. Most of these “Type A” individuals have dedicated their lives to their business, and enjoy challenges, being productive, thinking, and working in a team environment to achieve goals. When you sell your company, that is not something that can be easily turned off.

But the key factor, as noted, is not your age. Actually, its a point on the timeline that intersects current corporate value, age  of owner, an owner’s ‘effectiveness’, and a prospective buyer’s perception of risk.

Although no scientific study has determined a magical number, my opinion is that the confluence of those lines becomes much more clear the later in life you work. In fact, I have seen owners take a reasonable tumble in value the longer they wait; in one  instance having someone even pass away right while talking to Calder Associates after they realized they should have sold earlier.

Many times, I use the age of 68 to have owners really think of their “value” factor. It’s true, I’ve seen many 68 year old’s who could win an arm wrestling contest with a 35-year-old. But the issue isn’t just strength, it’s, as I like to think, the ease at which you can push a snowball … up a mountain.

As we get older, and after years in your business, the drive and passion of most business owners is “different” (notice I didn’t say ‘less’) than it was when they first started the company. That is likely true for any business owner at any age after a few years. But there are other factors active.

The most important of those is perception and risk. When an owner sells their interest, the buyer not only buys a going-concern, but they buy the knowledge and usually time of the owner to ensure they receive the value they paid for. As Ben Franklin  said, … “In this world nothing can be said to be certain, except death and taxes”. Because of that forthcoming and likely terminable event, buyer’s understandably know and feel that they are acquiring an asset that is becoming less valuable over each day after closing unless they can understand and transition the company to their new style of leadership. Rome wasn’t built-in a day – neither is a corporate transition.

Accordingly, you will see owners always thinking about that day they will sell all or a part of their equity, and buyers trying to determine when will they start taking on greater risk. For the business owner, it’s an inflection point where the mountain changes its upward angle and rolling that snowball becomes harder. Buyers perceive and believe that.

A company is made up of its people, products, customers, vendors, and processes. It’s also an understanding of how those work together that help define a company’s “secret sauce“. Buyer’s want to understand and know that, and Seller’s usually can’t specifically tell them. It’s second nature.

As age and time creeps up on an owner, the confluence of factors that diminish a company’s growth, effectiveness, and transitional value become ever more prevalent. Owners have asked me why then doesn’t a buyer take out a key-man policy to protect against any downside risk? Although in some cases they do, the cost of that policy could be large and it will be taken out of delivered cash flow in the form of a purchase consideration reduction. More to the point, buyer’s don’t want to get these policies inherently because their goal is to make GREATER CASH FLOW AND PROFITS, not just get a refund on their injected capital. Like you, the only factor they can’t prolong is time.

So, when you start thinking about your future and when you likely would sell your interest (we all do the day after we start or buy our company, admit it!) separate your emotional view from your economic one. Make sure to sell when the value is greatest and the road ahead is not one where you need twice as much effort each succeeding year to push that snowball up the mountain. You  can always work, but its easier to push a snowball up an increasingly steep mountain if you’ve received your money to buy a few $250,000 Snow-Cats!

 

Want to discuss your situation? Call me at 732-212-2999, or email at [email protected].

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.

Valuing Inventory – The Dilemma

Valuing Inventory – The Dilemma

December 27, 2014 | Steve Wain

Valuing inventory – The Dilemma

When you sell a business, invariably, one of the most often asked questions are about inventory. The issue is that most business owners don’t understand how their inventory is to be ‘valued’ by a buyer.

The truth is that there are many ways to look at inventory value. You can say its worth what you paid for it (option 1), or what it is worth today (option 2), or what it should be to continue to run your business efficiently (option 3). these are three options you should consider.

Option 1 seems simple. You buy 1,000 widgets for $1.00 a piece, so logically, it should be worth $1,000, right? What about freight? What happens if you are a manufacturer, and some of your inventory is now in work-in-process? Does it also include the labor cost? These are not only good questions, but sometimes difficult to answer given the variations in business operations.

Option 2 seems somewhat illogical, but you do need to recognize the possibility that variations to inventory can be occurring. Take, for instance the value of highly commoditized stock, like computer memory. You could buy a 1GB inventory chip for $32/each per lot of 100 on a Thursday, and by Monday it may be worth $31.65/each per lot of 100. Since accounting rules require you to value assets at the lower of cost or market, do you continually revalue the inventory to have accurate financial statements? Likely no, but you can be assured that a buyer is NOT going to pay you for inventory that highly fluctuates for a value worth more than it is on the day of closing.

In option 3, you need to be aware of what is necessary to adequately run your business, and maintain it as a ‘going concern’. Although the rationale and details behind this are beyond the scope of this article, consider that many business owners and purchasing managers buy inventory and raw goods that are NOT in optimal quantities. For example, the business owner who purchases 1,000 widgets because he ‘received a  great price’ may make some sense, but on the day they sell the business, the buyer may only NEED 200 to keep the business running well. How much is the excess 800 units worth in that case?

These questions, and a myriad more exist. The challenge is to prepare your business to ensure that you receive the optimal value for your inventory.

Need to know your options, and how to handle it? Speak to an intermediary at Calder Associates that is well versed in inventory and tax requirements who can review the issues YOUR company faces. Get an idea of what is valuable in the marketplace and your role in achieving the greatest return.

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.

Attention to Details Pays Off

Attention to Details Pays Off

May 30, 2013 | Richard Stopa

Attention to Details Pays Off

For both a business owner and prospective buyer, the attention to detail can make the transfer of business ownership easier to achieve.

For those that think this is obvious, think again. Most small business owners do one thing better than anything else, and it’s usually growing the focus of their business – either a product or service. Face it, if none of us had to keep records of anything, would we complain? Probably not. And with the pressures to stay ahead, make a profit, and beat the competition will always trump record keeping, right?

Well, many business owners AND buyers are surprised that when trying to determine whether a business is a good potential for acquisition by a buyer, that the details of how a company operates, and the ability of the business owner to tie the story of their success together in a complete package is not a simple task.

First, you can be assured that other people like accountants, financial planners, attorneys, insurance agents, lenders, and others will be involved – from both sides! Second, their desire for obvious and not-so-obvious information will be far more than you can estimate. They ask for this to poke holes in the story and bear out the true value and potential of the company.

As a Seller, understanding WHAT is going to be asked of you is important so you have time to plan. Prudent business owners seek the advice of professionals, like a certified business intermediary who understands all the aspects of what is needed to prepare for a future business sale. Dont wait, because this process should be implemented years in advance!

For a Buyer, the availability of accurate and complete information can make the decision to buy easier, and help justify a closer offer to value. That will help you get loans in order to close on the business, and give you a level of comfort.

Remember, preparing for a sale helps the owner AND the buyer, and likely will help justify a speedier transaction, and a price that is agreeable to both the seller and the buyer!

Selling Your Business? How Much is Your Equipment Worth?

Selling Your Business? How Much is Your Equipment Worth?

September 24, 2012 | Joe Kerr

Selling Your Business? How MUCH is Your Equipment Worth?

You’ve decided to sell your business. OK, how do you price it? That’s a complicated question, but one part you will definitely need to know – How much is your equipment CURRENTLY worth? You shouldn’t trust just anyone to determine the value of machinery and equipment. Determining the value of machinery / Equipment should be done by a qualified and certified Machinery and Equipment professional appraiser. Having the machinery and equipment valued in accordance with USPAP (Uniform Standards of Professional Appraisal Practice) will assist your sale, as the valuation MUST pass muster with the SBA, IRS, Courts, Lenders, CPA’s and Attorneys..

M&E Valuations are a requirement, not only for business sales, but for other situations too. He are a partial list when getting an M&E valuation will help you accomplish your goals.

Buy / Sell Agreements
Business Valuations
Mergers & Acquisitions
Loans / Refinancing
Insurable Value
Trust / Estate Planning
Gift Planning
Divorce Settlement
Partnership Dissolution
Converting C Corp to S Corp
1031 Exchange
Foreclosure
Bankruptcy
Retirement Planning
Mergers & Acquisitions

If you find you need an valuation, call Calder Associates, as we know Machinery and Equipment, have professional and certified appraisers on staff, and are respected and sought out by other professionals in their fields!