October 2010

Selling a Business: Getting What You Need

We received this wonderful white paper from Bernstein Global Wealth. With their permission we are reprinting a portion. You can download their full paper here.

Selling a private business is best thought of as an ongoing planning process that begins well before the deal is consummated and ends well afterward. But at every point along this continuum, the owner and their professional team are grappling with and resolving both financial and personal issues. Bernstein’s proprietary modeling capabilities can quantify the likelihood that a sale will meet an owner’s critical financial objectives and help evaluate the trade-offs across different deal terms.

You Can Get Satisfaction.

Sir Michael Jagger, better known as Mick, led The Rolling Stones in proclaiming that “You can’t always get what you want…but you just might find you get what you need.” This trade-off applies to all things in life, including investments, and it has special validity when selling a private business. Although an owner’s focus may be on getting their “magic number” for the business up front, they may find that other alternatives offer acceptable, or even superior, trade-offs.

We begin with the premise that business sales are typically complicated, and laden with emotional issues. The owner is selling their means of livelihood, and more—the configuration of their financial portfolio: They’ll have to make the transition from relying on business earnings to living off the pool of liquid investments generated by the sale. The good news is that sellers are not in the process alone, but generally represented by teams of advisors, usually quarterbacked by a Business Broker and including a portfolio-management professional such as Bernstein. The role of the investment manager is not to pass judgment on one or another term sheet, but to place each in the context of the seller’s overall financial objectives. This can be done at any point in the deal—but the sooner the better.

A Thicket of Questions

How much is my business worth?
What’s the best deal structure for me?
Will I get enough to meet my needs?
Is all-cash-now better than staged/contingent payments?

Do I want to stay involved in the business?
Do I have a plan for my life after the sale?
What effect will the sale have on my family and employees?
Do I have the risk tolerance to accept contingent deal terms?

These questions parse some of the interconnected financial and emotional issues that arise when selling a business. For example, whether the owner receives “enough” for their business depends on how much it generates in earnings and how much the market is willing to pay for those earnings. But directly connected are issues like whether now is a good time to sell, whether the owner wants to retain an interest in the business for a while longer— often a negotiable point—and how the sale will impact the owner’s family and employees. All of these issues affect owners’ personal lives as deeply as their financial wherewithal—and on both sides of that equation professional planning can identify opportunities and help solve problems.

Further, each of these questions leads to additional questions. Arriving at answers is made none the easier by the blizzard of alternatives often available, and frequently buyers and sellers find themselves in disagreement about deal terms, legalities, and tax-related matters.  The job of the professional teams—the seller’s and the buyer’s—is to satisfy their respective clients, resolve as many issues as possible before the consummation of the deal, and monitor the transaction as it moves forward.  And there are never one-size-fits-all answers.  One seller may justifiably be anxious to consummate the deal before taxes go up in 2011; another may be willing to pay the higher levy if they expect their earnings to increase significantly in the near future, raising the value of the offers they’ll receive. The question is whether the risk of waiting will pay off.

What about the environment? Is this a good time to sell? Evidence of an economic recovery is mounting, but financing is still tight, and there are no assurances about what the future will bring. In addition, the profit dynamics of every industry—and, more important, for every company—are different. That last criterion is the one that truly counts for a business seller: It’s their company and their livelihood that are at issue. The job of their professional team is to keep them from falling into one of two traps: rushing headlong into selling now because the “landscape” looks good, or refusing to budge because it was better several years ago and good times may be around the corner again.

Still, owners need a touchstone for deciding whether to sell, and one metric might be if the proceeds—whether all up front or parceled out over time—are at least enough to provide for the owner’s lifetime spending needs.


Small Business Jobs and Credit Bill Highlights

It’s official! Selected Provisions Affecting 7(a) and 504 Reid Amendment 4594 to H.R. 5297 (Small Business Jobs & Credit Bill). Here is a recap.

SBA Credit Incentives:

• Fee Reductions: extends the authority for 7(a) and 504 fee reductions and 90% 7(a) guarantees through December 31 or until $505 million in appropriations is obligated.

• Maximum Loan Amounts: permanently increases the loan maximum on 7(a) loans set at $5 million gross and $3.75 million net (or guaranteed amount) and on 504 loans, including public policy loans, set at $5 million, except small manufacturer loans and energy loans are set at $5.5 million.

• Maximum Loan Amount of SBA Express: temporarily increase the maximum amount of an express loan at $1 million for 1 year.

• Division of Large Loans: upon request of a loan pooler, SBA will divide a large loan into $500,000 increments for inclusion in separate pools.

• Dealer Floor Plan Financing: new financing program for dealers for cars, RVs, boats and manufactured homes, but sunset September 30, 2013.

• Alternative Size Standard: pending SBA establishment of an alternative applicable to both 7(a) and 504, establishes a standard of maximum tangible net worth of $15 million and 2-year average net income after Federal income tax of $5 million which will apply to both programs.

• International Trade Loans: makes numerous changes in international trade loans, including working capital, primarily permanent loan size increases to $5 million and 90% guarantees and making the export express program permanent.

• Debt Refinancing: establishes a temporary 2-year program of business debt refinancing through the 504 program independent of the usually required job creation/preservation goals of one job for $65,000. This enables 504 to be used for refinancing of qualified existing debt without business expansion.

• Guarantees of 1st mortgage loans: extends the sunset on the new temporary program for partial guarantees of the bank portion of 504 financing. The program will expire 2 years after the date the first pool sale occurs.

• Microloans: permanently increases the maximum per small business borrower to $50,000 and per intermediary to $5 million. Also authorizes SBA to waive intermediary match requirements during fiscal years 2011 and 2012.

• Intermediary Lending Pilot: establishes a 3-year pilot program to provide capital to 20 non-profit intermediaries annually to make loans targeted to startup, newly established and growing small business concerns. CDCs should be eligible to participate.

Tax Incentives:

• Zero Taxes on Capital Gains from Key Small Business Investments: Under the Recovery Act, 75 percent of capital gains on key small business investments were excluded from taxes in 2010. The Small Business Jobs Act temporarily puts in place for the rest of 2010 a provision eliminating all capital gains taxes on these investments if held for five years.

• Extension and Expansion of Small Businesses’ Ability to Immediately Expense Capital Investments: The bill increases for 2010 and 2011 from $250,000 to $500,000 the amount of investments that businesses are eligible to immediately write off.

• Extension of 50% Bonus Depreciation: The bill extends a Recovery Act provision for 50 percent “bonus depreciation” through 2010 with the ability to make new investments today and know they can receive a tax cut for this year by accelerating the rate at which they deduct capital expenditures.

• A New Deduction of Health Insurance Costs for Self-Employed: The bill allows self-employed to deduct the cost of health insurance for themselves and their family members when calculating their self-employment taxes.

• Tax Relief and Simplification for Cell Phone Deductions: The bill changes rules so that the use of cell phones can be deducted without burdensome extra documentation.

• An Increase in the Deduction for Entrepreneurs’ Start-Up Expenses: The bill temporarily increases the amount of start-up expenditures entrepreneurs can deduct from their taxes for this year from $5,000 to $10,000 (with a phase-out threshold of $60,000 in expenditures).

• The bill would allow certain small businesses to “carry back” their general business credits to offset five years of taxes: providing them with a break on their taxes for this year – while also allowing these credits to offset the Alternative Minimum Tax, reducing taxes for small businesses.

• The bill would change, beginning this year, the penalty for failing to report certain tax transactions from a fixed dollar amount which was criticized for imposing a disproportionately large penalty on small businesses in certain circumstances to a percentage of the tax benefits from the transaction.