MBB From Brian

Avoid common mistakes that can derail your business sale!

March 03, 2014

Selling a business can be a complicated process, so why risk a potential sale with avoidable issues? Two common problems that often emerge late in the process can be avoided or mitigated:

 

  1. Allocation. While most sellers focus on the final price of their business, the allocation of the price can be just as important-especially for maximizing the after-tax sale proceeds. Generally the buyer and seller will have opposing interests in the final allocation. Buyers want to minimize goodwill and maximize allocations to expense categories (consulting fees, non-competes etc); while sellers want to shift as much of the sale into Long Term Capital Gains to benefit from a low tax rate. Many businesses have fully depreciated their F.F.&E.—unless the seller is willing to take a depreciation recapture much of the value of their business will be in goodwill. Buyers will push back on that and may ask for additional price concessions to offset the reduction in their depreciation tax shield. We recommend that allocation be addressed early, even simultaneously, with the price negotiation. This avoids a dispute later during the finalization of the Purchase and Sale that could kill a deal.
  2. Negative changes in the business. The decisions that you make today can impact the buyers’ initial performance. Unfortunately, many sellers “check out” once the decision to sell their business is made. They may lose focus or interest and performance suffers, new work or sales opportunities are missed or employee morale (and performance) declines. Buyers are wary during the due diligence process and will carefully monitor ongoing business operations for sales and profitability trends. Financing sources will request current YTD financials for their loan packages and expect performance metrics to be maintained. Declining sales or similar negative information can spook a buyer. This can delay a scheduled closing, create an opportunity for the buyer to demand a price concession or at worse, walk from the deal. A successful sale demands that a seller continues to focus on, and run, their businesses. If there is a downturn in the business you need to be able to disclose and explain the situation to the potential buyer quickly. Maintaining effective communication channels with your broker, lawyer and accountant can help mitigate these situations.

Subscribe to Our Newsletter