Will appear on Seller pages – RECENT SELLER ARTICLES

How Do I Sell My Personal Goodwill?

/in , /by Al Statz

The concept of goodwill in a business sale is familiar to most business owners. The more the better, right? Personal goodwill (versus enterprise goodwill) on the other hand is less familiar, and trickier to deal with. If your company is structured as a C-Corporation, you should know about personal goodwill and how its existence could put more money in your pocket when it’s time to sell. Here’s how this works.

The C-Corp Dilemma

Sellers of C-Corps prefer to sell the stock of their companies because it is more tax efficient than selling assets; yet the reality is that most business sales are structured as asset transactions. Why? Because, for buyers, buying assets reduces their tax bill, improves their cash flow, and reduces potential legal liabilities. Astute buyers that are asked to forgo these important benefits (i.e. when they are asked to buy stock) will expect a substantial price discount. Some will just walk away.

With an S-Corp on the other hand, which is a pass-through entity, selling assets (vs. stock) usually isn’t a much of problem from a tax perspective. In some cases, selling assets can even be to a seller’s advantage.

But for C-Corps, selling assets is a big disadvantage. Here’s a simple example. Assume that the combined federal and state C-Corp income tax rate is 29%, and that the combined individual capital gain tax rate is 28%. In an asset sale, for every $1.00 of transaction price (above book value of assets), C-Corp shareholders net only 51¢. Could this happen to you?

Exit Planning Tip:  

If you own a C-Corp and your expected holding period is 5 years or more, talk to your CPA about electing S-Corp status so that you can avoid the possibility of being double taxed when you sell.

Does the Goodwill Go Home at Night?

Goodwill value is that portion of a business purchase price that exceeds net tangible asset value. Personal goodwill (“PGW” for short) differs from enterprise goodwill in that PGW represents the value of an owner’s personal service to that enterprise, and is considered an asset owned by that person, not the business. PGW value is usually the result of an individual’s outstanding reputation and close personal relationships with customers or suppliers, or exceptional rainmaking or technical mastery, and other unique abilities that produce economic benefit for the business.

When PGW is present, the success and value of a business are largely dependent upon one or two individuals, usually the owner(s) in a small business. Without the key individual(s), the business may have little value. In other words, the goodwill goes home at night.

Personal Goodwill Presents a Tax Savings Opportunity

In asset sales of small owner-operated corporations, there can often be two sellers: (a) the business entity, and (b) an individual selling his or her personal goodwill. Selling PGW creates a tax savings opportunity for C-Corp owner-operators.

Using the same tax rates as above, for every $1 of purchase price that can be allocated to personal goodwill, the seller’s tax savings is 21¢. This is because the $1 allocated to PGW does not get taxed at the C-Corp level (is not “double taxed”). Suppose that in a $2 million transaction, $800K can be allocated to personal goodwill. This reallocation puts $168K more in the seller’s pocket.

NOT an Afterthought

Allocating part of the purchase price to personal goodwill has been an arrow in our quiver for the past decade or so; however, it cannot simply be a post-closing purchase price allocation. Rulings in multiple tax court cases demonstrate that PGW is under attack by the IRS.

When a C-Corp seller is considering allocating a portion of a purchase price to personal goodwill, these are some of the norms for supporting the existence of PGW apart from enterprise goodwill, and making it hold up to IRS scrutiny:

  1. There should be a separately negotiated PGW purchase agreement. As brokers, we plan for this with the seller and buyer, before an offer is made, and coordinate with the parties’ attorneys, CPA’s and lenders.
  2. The amount allocated to PGW should be based in economic reality. An independent personal goodwill valuation should be obtained to finalize the amount. This could cost $6-10k.
  3. There should be a significant and separately paid for covenant not to compete with the seller personally.
  4. The buyer should have a written employment/consulting agreement with the seller, for an extended term (say 18-24 months) with reasonable compensation. Otherwise, how could the seller’s PGW be transferred?

Selling any business with high personal goodwill is challenging. When goodwill goes home at night, valuation and marketability are generally reduced. Having a C-Corp structure adds yet another layer of difficulty and expense because of double taxation. Working with an experienced M&A broker, transaction attorney and CPA is extremely helpful when buying or selling this type of business.

Exit Strategies Group’s professionals dedicate themselves to staying abreast of tax strategies and potential pitfalls for private business owners as they plan and carry out business sale, merger and acquisition transactions. Don’t hesitate to call — the earlier we are involved the more impact we can have.

Al Statz is founder and President of Exit Strategies and is based in Sonoma County California. He can be reached at alstatz@exitstrategiesgroup.com or 707-781-8580.

What is my best exit option?

/in , /by Al Statz

The answer to this question is different for every business owner depending on goals, facts and circumstances. When deciding the right way to exit business ownership, owners should understand and weigh all of their options. This article summarizes eight common exit options and their pros and cons. Some are more common than others. All options should be put on the table when selecting your exit path.

Eight Common Exit Options

  • Option 1.  Transfer to Family
  • Option 2.  Sell to Other Shareholders
  • Option 3.  Sell to Management
  • Option 4.  Sell to Employees using an ESOP
  • Option 5.  Sell to a Third Party
  • Option 6.  Recapitalize
  • Option 7.  Go Public
  • Option 8.  Liquidate

Click here to read the details.

Another option is to not exit ownership and scale back your hours, and either hire and retain capable managers to run the company for you, or milk the company to support your lifestyle while it naturally declines in profitability and value. For some businesses and some owners, this is a perfectly good exit strategy. In the end, you decide what’s best.

However, from my perspective having worked closely with business owners for a long time, the failure of many California business owners to adequately plan their exit often yields tragic results. Misinformation, procrastination and poor planning lead to missed legacy, wealth and retirement goals. Whereas, thoughtful preparation and implementation of an exit plan increases shareholder value and allows owners to exit on their own terms and time frame. The process can be fairly complicated and requires specialized expertise that few owners have.  If you want to exit your business in the next five years, now is the time to plan.

If you’d like help assessing your business and circumstances and creating an exit roadmap, or want help carrying out a sale or other exit option, connect with Exit Strategies’ president Al Statz at 707-781-8580 or email alstatz@exitstrategiesgroup.com.

Protect your Trade Name and Protect your Business Value

/in , , /by Adam Wiskind

From my experience as an M&A Broker, I can tell you that your company’s trade name will be a valuable asset to most prospective buyers of your business.  Your trade name, which identifies your company’s brand and distinguishes its reputation with customers and suppliers, is worth strengthening and protecting if you plan to sell your company some day.

It may surprise you that the name of your business, even if it’s not officially registered, receives some legal protection as a trademark. Protection for unregistered marks is based on common law and the federal Lanham Act. Generally the first documented use of a trade name within a geographic area receives some measure of protection.

But the value of your trade name can be threatened if you don’t safeguard it. When a competitor starts to use a name similar to yours it can cause confusion in the market place and impact your business. For an asset as valuable as the name of your business, it’s wise to proactively protect it.

In California, any company doing business in the state under a fictitious name must register that name in the county where the business operates. Once registered, you as the owner will be able to sign contracts and engage in financial transactions under the fictitious name (also known as Doing Business As or DBA). California follows the first use rule when determining the ownership of a trademark. Fictitious name registration can also be useful to document how long you have been using your business name, in case it’s ever contested. However, fictitious business name registration does not necessarily protect your trade name throughout the state or in other states where you are doing business.

Registering your business’ name as a trademark at the state or federal level is the surest way to shelter it from unauthorized use and provide assurance to potential acquirers that they too would be able to benefit from the goodwill that the name generates.

The Secretary of State maintains the trademark registry for the State of California. Registering your trademark at the state level is generally easier and less expensive than a federal registration. However, there are some real benefits to registering through the United States Patent and Trademark Office. Federal registration is a more robust protection because it:

  • Makes it easier to bring infringement matters to federal courts
  • Increases remedies for trademark infringement
  • Has priority over state registration. If a federally registered trademark was in use before a state registered trademark, the federal registrant can stop the state trademark owner from using the mark. If the state mark was in use first, the mark’s use may be restricted to the state where it was registered.

Possibly the most attractive benefit of registering a trademark at the federal level is that after five years of not being challenged the trademark can become eligible for “incontestability”. Incontestable trademarks are, under normal circumstances, immune from being challenged.

To protect the value of your trade name (and your brand) it is worth considering federal trademark registration, especially if you plan to sell your business someday.
Most businesses also have an online presence. It is equally important (and in some cases far more so) to protect your trade name through marketing channels on the web and social media. At minimum you should acquire through Google or GoDaddy any domain names associated with your business.

Even if you don’t choose to utilize them, many owners will also want to claim their trade name and related monikers in Facebook, Instagram and other social media sites frequented by their clients. As with trademark registration, when you are looking to sell your business a prospective buyer will appreciate that you have diligently protected your business’ trade name and that you can transfer those protections as an asset of the sale.

For more information on protecting and maximizing the value of your business in a sale, email M&A broker Adam Wiskind at awiskind@exitstrategiesgroup.com or call 707-781-8744.

Please note that this article does not constitute legal advice on your situation! For legal advice, please contact an attorney with appropriate experience. If you need a referral to an attorney we would be happy to provide a recommendation.

Don’t Let Key Employees Hijack Your Exit Strategy

/in , /by Jim Leonhard

In building a successful company, owners usually invest in hiring and developing managers and key contributors that become vital to the company’s effective operations. These people are considered “key employees”. When the time comes for the owner to exit his or her business, these key employees are usually valuable “assets” in the eyes of potential buyers.  Unfortunately, if a business owner has failed to take certain steps, key employees can derail a successful sale or ownership transfer.

Here are some observations and suggestions with respect to key employees that can help enable a successful exit:

  • Ask all employees to sign a multi-year non-compete and non-solicitation agreement. While not always enforceable, they make employees pause and potential buyers more comfortable.
  • Ensure your key employees are sufficiently incentivized to facilitate rather than undermine your exit. For example, grant minority shares, stock options or stock appreciation rights, or offer them stay bonuses so they would profit from a sale.
  • Cross-train your key people to reduce reliance on single individuals. And if your business can afford it, develop a bench of qualified staff beneath key employees so someone can step up should an unexpected vacancy occur.
  • Carefully decide when and how much of your plans to divulge to key employees. Employees often react negatively to the prospect of a company being sold and may start seeking employment elsewhere. Assuming you’re planning to sell to a third party, most owners wait as long as possible to inform key employees of your plans, and, when you do, give them only the information they need. If possible, assure them they will be valued and wanted by the new owners. If the terms of the intended sale don’t allow you to do that, be ready to offer key employees a stay bonus that extends beyond the sale closing.
  • Involve an exit planning advisor who can help you position your company for a successful management transition. He or she can help you build transferable enterprise value, minimize key person risks and discounts, and avoid many common pitfalls along the way.

Click on this link to read a tragic key employee sabotage story:  When Key Employees Stall Your Exit

Could this happen to you? Don’t take chances with your retirement!

For further information on incentivizing key employees or for help with an exit strategy, M&A or business valuation, feel free to contact Jim Leonhard at 916-800-2716 or jhleonhard@exitstrategiesgroup.com.

Is Your Company an Employee Stock Ownership Plan (ESOP) Candidate?

/in , /by Al Statz

Employee Stock Ownership Plans (ESOPs) have compelling competitive, financial and legacy benefits. For business owners weighing their exit options, a leveraged ESOP may be feasible if the owner, company and employees possess certain attributes:

Owner Attributes

  1. Owns 30% or more of corporate stock
  2. Has a low basis in the stock
  3. Looking to reduce involvement in the company long term (5+ years) or shorter term if successor(s) are in place to take over
  4. Concerned with employee welfare and wants to reward them by transferring an interest in company stock to them
  5. Wants to sell shares on a tax-deferred basis
  6. Willing to sell for fair market value and forgo the possibility of obtaining a price premium through an M&A sale process

Company / Employee Attributes

  1. Mature, non-cyclical business with strong operating performance (revenue and net margins), past and projected
  2. A balance sheet strong enough to absorb ESOP acquisition debt
  3. Adequate cash flow from operations to cover capital spending needs and debt service for ESOP acquisition and other borrowings
  4. Adequate payroll, say $1,000,000 or more per year
  5. 20+ employees
  6. A participatory management culture, and open and effective communications between employees and management
  7. Strong executive leadership and management bench to succeed long term

ESOPs are costly to set up and comply with IRS and DOL regulations. They are not for everyone. ESOP is a complex area that is not well understood by most CFO’s, attorneys, CPAs and M&A advisors. Be sure to work with specialists.

Use these rules of thumb if you are considering transferring ownership of your company through an Employee Stock Ownership Plan. To find help determining the feasibility of an ESOP for your California company, feel free to contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Current Market Multiples for Main Street Business Sales

/in , , /by Louis Cionci

Each quarter, The International Business Brokers Association (IBBA) and M&A Source together with Pepperdine Private Capital Markets Project and the Graziadio School of Business and Management at Pepperdine University publish a quarterly national survey of business brokers and M&A advisors called the Market Pulse Survey. Price multiples and other key metrics in the Main Street Market section of the Q3 2017 survey are presented below.

Main Street businesses are defined as those with enterprise values up to $2.0 million.

 

MEDIAN MULTIPLES PAID FOR MAIN STREET BUSINESSES

 

 

 

 

SDE is Sellers Discretionary Earnings, which is defined as earnings before owner/GM compensation (one full-time working owner), depreciation and amortization, non-operating income & expenses, nonrecurring income & expenses, interest income & expenses, and taxes.

 

PORTION OF SALE PRICE RECEIVED AS CASH AT CLOSE

 

 

 

 

WHY SELLERS WENT TO MARKET

 

 

 

WHAT WAS MOTIVATING BUYERS

Help! I Need a Broker to Sell My Company

/in /by Exit Strategies

I was recently talking with a business owner who is considering selling his California company. He had found my contact information online, and while he was interested in getting started, he really didn’t know how to evaluate a business broker’s credentials for a sale engagement. Sellers are often unsure what questions to ask. For this reason, I like to spend 15 minutes to share my relevant M&A experience, my career history, our firm’s processes and resources, and our capacity to get a deal done for the prospective client. In this blog post, I’ll focus on pertinent questions that a seller should ask when interviewing a prospective business broker or M&A intermediary.

Many sellers base their selection strictly on how well they like the broker, or on “gut feel.” While it’s vital that a seller and business broker get along well together, a seller should consider this “Likeability Quotient” along with more objective criteria.

Factors to consider when selecting a business broker:

  1. How long has the broker been selling businesses?
  2. How many transactions has the broker completed?
  3. What is the broker’s closing success rate?
  4. Does the broker’s firm have exceptional valuation expertise?
  5. How extensive is the offering memorandum that the broker prepares?
  6. Does the broker have specific domain knowledge in your industry?
  7. What size deals does the broker’s firm typically work on?
  8. How many client engagements does the broker work on at any time?
  9. Does the broker work full-time on deals, or is business brokerage a side-business?
  10. How involved does the broker stay during the due diligence and closing phases of a transaction?

Hiring the right broker to sell your business is a critically important decision. Asking the above questions will help you  select a capable, honest and hard-working business broker by objectively evaluating their background, credentials, work ethic, and capacity for successful deal making. With these questions answered to your satisfaction, add bonus points if the broker has a high Likeability Quotient.

When is the Right Time to Sell My Business?

/in , /by Al Statz

BOOK REVIEW —

I don’t recall the last time I recommended a book, but today I feel compelled to tell business owners about an excellent new book titled, “When is the Right Time to Sell My Business?”

This book not only helps you decide when to sell your business, but will also help you understand its value from the perspective of willing buyers, increase its value and marketability, and choose and plan your best exit option. If you are a private business owner; following the recommendations in this book will help you sell for more money, on your terms and time-frame, without regrets.

Expect a great return on the time you’ll invest in reading this book. Mr. Mowrey presents a sensible and proven approach to selling a business. It’s a quick read that covers a lot of important ground at just the right depth for busy business owners, and it’s one that I suspect you’ll take notes in and refer back to as you approach your exit. Mr. Mowrey pours a tremendous amount of valuable insights and sound recommendations into 188 pages. I can’t say that for most of the books on this subject authored by other so-called experts.

CPA’s, transaction attorneys, wealth managers, M&A intermediaries and business appraisers would also do well to read this one.

Purchase this Book on Amazon

Full Disclosure — Not only is Rich Mowrey a four-time business owner and seasoned valuation expert and transaction intermediary, he’s also a colleague of ours who we met through our national business valuation and M&A trade associations.

The process outlined in Rich’s book closely mirrors what Exit Strategies does for our clients. Feel free to contact one of our California-based advisors with any business valuation or M&A brokerage questions or needs.

Forbes Article: Which Is Better, A Financial Buyer Or A Strategic Buyer?

/in , /by Al Statz

Image result for forbes logoI thought would share this brief Forbes article that came across my transom early this morning. I generally agree with author John Warrillow’s comments on Strategic versus Financial buyers. If your goal is to maximize value and liquidity today, and you’re not looking for an equity partner to help you build longer term enterprise value, a strategic buyer generally produces the best outcome. Having multiple strategic buyers at the negotiating table as a result of a structured M&A sale process produces even better results!

The article …

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer. Understanding the different motivations of these two buyers can be the key to getting a good price for your business.

A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make in the future and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay, … READ THE FULL ARTICLE ON FORBES.COM

Is Private Equity the Right Solution for Your Exit?

/in , /by Al Statz

Is Private Equity the Right Solution for Your Exit? Private Equity Groups (PEGs) are disciplined buyers of lower middle-market companies. Most have cash funds and lender relationships in place for the right acquisition opportunities. PEGs often recapitalize a company, where they purchase a majority or minority interest. They bring growth capital and business acumen to […]

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