companyâs debt load. Ask whether the lender would accept a percentage of the amount owed (60, 70, 80, or whatever) within a certain time period (such as 45 days) and then consider the debt paid in full if you meet those new terms. Tell the lender that if you fail to meet the terms of this new agreement, your deal reverts to the original 100 percent. The lender, if it accepts the deal, gets the benefit of getting part of its money repaid right away (or in the near future), and if that immediate repayment doesnât materialize, the lender hasnât lost anything. Itâs an offer some lenders wonât be able to refuse. If the lender agrees to this gambit, be sure to memorialize the agreement in writing.
Address legal issues
A wise business owner settles any outstanding lawsuits before a sale and is prepared to talk about those lawsuits and their outcomes. Planning to gloss over or omit mention of lawsuits, or simply expecting Buyer to uncover a lawsuit (or criminal investigation) by itself, isnât smart. These actions indicate that youâre negotiating in bad faith, which means youâve just kneecapped your credibility. Ideally, you want to be able to honestly say, âWe are not aware of any pending lawsuits or investigations.â
The other major legal issue for many deals is the legal organization of the company. In other words, is it an LLC or a corporation (and if itâs a corporation, is it an S-corporation or a C-corporation?). These distinctions are important because they affect the taxation of the business.
An LLC and an S-corporation allow for a single layer of taxation, which means the government taxes a sale of assets once, most likely at the prevailing capital gains rate.
The Seller of a C-corporation, on the other hand, gets hit with two layers of taxation. First, she pays on the proceeds of the sale at the corporation level, and then when the remainder of those proceeds is distributed to the shareholders, the shareholders also pay tax, most likely at the capital gains rate. This double-whammy means the shareholders of a C-corporation many be looking at receiving less than 50 percent of the gross proceeds. Ouch.
Sellers should speak with their tax advisors prior to pursuing a business sale and set a plan well in advance of the decision to sell. Depending on the companyâs legal organization, converting to a different legal entity may make sense tax-wise. But starting early enough is key: When converting from a C-corporation to an S-corporation, you may need a full decade before the full benefit accrues. And donât forget to talk to a wealth manager before the decision to go through a sale process. An able advisor can provide you with a structure for a deal that minimizes your tax burden. Donât wait until after the deal closes to talk with a wealth advisor, or you may be unhappily surprised.
Trim staff and cut dead weight
If you want to maximize the companyâs valuation, you need to maximize the companyâs profits. One way is to reduce and eliminate wasteful expenditures, and because the largest expense of most businesses is personnel, you may have to make some difficult decisions.
Please donât read this suggestion as a license to be capricious or cruel. Donât start firing staffers simply for the sake of cutting positions. Make a determination of what personnel you need to run the business and simply execute on that decision.
Donât be afraid to be tough. No one likes to let people go; itâs difficult. But if certain employees arenât pulling their weight or arenât performing up to expectations, you need to lay them off. If an otherwise-good employee is in a low/no value position, either move that employee into a productive role or bite the bullet and let him go.
If some staffers are on the edge, give them a chance to improve. Set realistic goals and give them the tools to succeed. My experience has been people respond to this
Address legal issues
A wise business owner settles any outstanding lawsuits before a sale and is prepared to talk about those lawsuits and their outcomes. Planning to gloss over or omit mention of lawsuits, or simply expecting Buyer to uncover a lawsuit (or criminal investigation) by itself, isnât smart. These actions indicate that youâre negotiating in bad faith, which means youâve just kneecapped your credibility. Ideally, you want to be able to honestly say, âWe are not aware of any pending lawsuits or investigations.â
The other major legal issue for many deals is the legal organization of the company. In other words, is it an LLC or a corporation (and if itâs a corporation, is it an S-corporation or a C-corporation?). These distinctions are important because they affect the taxation of the business.
An LLC and an S-corporation allow for a single layer of taxation, which means the government taxes a sale of assets once, most likely at the prevailing capital gains rate.
The Seller of a C-corporation, on the other hand, gets hit with two layers of taxation. First, she pays on the proceeds of the sale at the corporation level, and then when the remainder of those proceeds is distributed to the shareholders, the shareholders also pay tax, most likely at the capital gains rate. This double-whammy means the shareholders of a C-corporation many be looking at receiving less than 50 percent of the gross proceeds. Ouch.
Sellers should speak with their tax advisors prior to pursuing a business sale and set a plan well in advance of the decision to sell. Depending on the companyâs legal organization, converting to a different legal entity may make sense tax-wise. But starting early enough is key: When converting from a C-corporation to an S-corporation, you may need a full decade before the full benefit accrues. And donât forget to talk to a wealth manager before the decision to go through a sale process. An able advisor can provide you with a structure for a deal that minimizes your tax burden. Donât wait until after the deal closes to talk with a wealth advisor, or you may be unhappily surprised.
Trim staff and cut dead weight
If you want to maximize the companyâs valuation, you need to maximize the companyâs profits. One way is to reduce and eliminate wasteful expenditures, and because the largest expense of most businesses is personnel, you may have to make some difficult decisions.
Please donât read this suggestion as a license to be capricious or cruel. Donât start firing staffers simply for the sake of cutting positions. Make a determination of what personnel you need to run the business and simply execute on that decision.
Donât be afraid to be tough. No one likes to let people go; itâs difficult. But if certain employees arenât pulling their weight or arenât performing up to expectations, you need to lay them off. If an otherwise-good employee is in a low/no value position, either move that employee into a productive role or bite the bullet and let him go.
If some staffers are on the edge, give them a chance to improve. Set realistic goals and give them the tools to succeed. My experience has been people respond to this
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