Selling a Business

1. Make sure you have a valid reason for selling your business. Don’t decide to sell because you have had a bad week or because moving closer to the grandkids sounds like a good idea. Also, don’t decide to “test the waters” just to see what sort of price your business will command. Before you decide to sell your company, focus on your true objectives. The first thing a prospective buyer will want to know is the reason you are selling. The more valid the reason you offer, the more serious the buyer will be.

2. Don’t wait until you have to sell, for either economic or emotional reasons. You don’t want anxiety to force you into accepting a deal that’s not good for you–or for the buyer. During the two months preceding the new year, sellers always say that they don’t want to sell until the after the first of the year. This delay can be an unfortunate one.

3. Once you have made the decision to sell–and before talking to your business broker– you should gather the information needed to market and subsequently sell your business. Here’s a list of the key items:

• Three year’s profit and loss statements
• Federal income tax returns for the business
• List of fixtures and equipment
• The lease and any lease-related documents
• Copy of the franchise agreement (if applicable)
• List of loans against the business with amounts and payment schedule
• Copies of any equipment leases
• An approximate amount of the inventory on hand
• Names of outside advisors

4. Remember that you are part of the marketing team. Your business broker can’t do it all–and might even ask you to come to an office meeting to tell the rest of the staff about your business. Follow your broker’s advice about dealing with prospective buyers–there’s a right and a wrong time to meet them.

5. Confidentiality works both ways. The broker will constantly stress confidentiality to the customers to whom he or she shows your business. However, as the seller, you must maintain confidentiality about a pending sale in your day-to-day business activities.

6. You, as the seller, should put yourself in a prospective buyer’s position. The next time you go to your place of business, pretend you are a buyer looking at it for the first time. How impressed are you?

7. Just because you are selling, now is not the time to let the business slip. It’s important that prospective buyers see your business at its best: bustling, and showing no signs of neglect. Here are a few areas to focus on:

• Keep normal operating hours. There is a tendency for sellers to “let down” when they put their business up for sale.
• Repair signs, replace outside lights, and do a general spiffing-up for first impression purposes.
• Tidy the outside premises (if appropriate).
• Spruce up the interior as well.
• Repair non-operating equipment or remove it.
• Remove items that are not included in the sale.
• Maintain inventory at constant levels.

8. Engage an outside professional who understands the sales process. David Gumpert, former Harvard Business Review associate editor said, “Inexperienced lawyers are often reluctant to advise their clients to take any risks, whereas lawyers who have been through such negotiations a few times know that’s reasonable.” If you are going to use a lawyer, use one who is seasoned in the business sale process.

9. Be flexible! You need to keep the ball rolling once an offer has been presented. Study it closely. Just because you didn’t get your asking price, the offer may have other points that will offset it, such as higher payments or interest, a consulting agreement, more cash than you anticipated or a buyer that you are comfortable with. You have probably spent years building your business–you want it to continue to be successful. The right buyer may be better than a higher price, especially if there is seller financing involved, and there usually is. If you must counter-offer, do so only on those points that are really important to you. Be willing to “horsetrade” if you must to complete the deal. There is an old adage that the first offer you get is probably the best you will ever get–and it’s true.

10. Remember that most successful transactions are successful because they create a win-win situation for everyone involved.

What is the true income of an independent business? This is a question of interest to many parties–including prospective buyers, investors, and lenders–but nobody is more determined to know the answer than the Internal Revenue Service.

What makes the “truth” about a company’s income so elusive? Isn’t this what financial record-keeping is all about? Yes and no. Business owners have been known to go from minor figure-fudging to major-league cheating, in an effort to lower the amount of income necessary to report to the IRS in any given fiscal year. In fact, the IRS estimates that two out of three business owners regularly under-report income.

“Unreported income” is the official phrase for this practice; however, in the trade, the word often heard is “skim.” It sounds light, healthy, and maybe good for you. But is it? Consider an item from a newspaper in a typical Main Street town, bearing the headline “Business Owners Sentenced”:

Two Myrtle Beach business owners were sentenced in federal court in Florence [S.C.] for not declaring money received from poker machines in their bar on their income tax returns, according to a statement by the US Department of Justice.

Roy Gipson of Charlotte and Ann Willis of Myrtle Beach, former operators of Players, a sports bar in the Galleria Shopping Center, were indicted by the federal grand jury in September. They pleaded guilty in October to filing false income tax returns.

(Sun-News, Myrtle Beach, SC)

This is a depressing story, resulting in the sentencing of one of the defendents to three years’ probation, three months in a halfway house, several months of home detention, and a $5,000 fine payable within six months. The second defendent was sentenced to three years’ probation, two month home detention, and 400 hours of community service. All this for a little poker-machine skimming? How was anyone to know? How did anyone find out?

It’s the story behind the story that should really catch the attention of business owners. And especially of potential business sellers, because the unreported income in this case was discovered by IRS agents who went undercover, in “disguise” as typical business buyers.

The undercover agents, acting as any savvy prospective buyer would, wanted a close look at the true worth of the business in order to make an informed “offer.” The sellers were happy to comply, and readily admitted that they were not declaring on their tax forms money received from poker machines that had generated more than $120,000 over a two-year period. Truth, in this instance, did not set its tellers free. Business owners are often tempted to have it both ways–under-report to the government, and then, to sellers, reveal that the news is much better than it looks. The Myrtle Beach bar owners are not the only ones who have been tempted to slant the worth of a business in two different directions at the same time. This practice, although illegal, is not uncommon. And when “everybody does it” becomes the perception, even the most reputable, otherwise law-abiding citizens can get caught in their own trap.

As one Delaware restaurant owner of 20-years’ excellent standing in his community says, “I made more than a decent income which I disclosed on my tax return. However, over and above my regular salary, I also skimmed a geat deal of unreported and untaxed cash for myself and some of my employees. I always thought that most people do it and if I got caught, I could just pay the IRS the taxes due plus some interest and penalties.” Instead, when it came time for the restaurateur to sell his business, he disclosed its true worth to prospective buyers who turned out to be–yet again–undercover IRS agents. The restaurateur says, “Without my knowledge, they tape-recoreded everything I said. You have no idea what it is like to hear your own voice on a tape recording. I never knew the IRS conducted undercover operations.” He adds, “I thought that very few people go to jail for committing tax crimes and those that went to jail were mostly organized crime figures and drug dealers. I now find that sixty percent of all the people committing tax crimes go to jail. They generally serve between one and three years. I am now waiting to be sentenced, but whether or not I go to jail, by the time I’m done paying the taxes, interest and penalites, for every one dollar I skimmed, I will have to pay the IRS three dollars.” (This business owner is presently serving a six-year prison sentence.)

Even if a business owner who skims escapes being caught by such a sting operation, he or she will still face a dilemma when it comes time to sell. Whether or not business owners have made the immediate decision to sell, they should prepare for the future by building the image of a successful business. The picture they have painted for the IRS is not likely to be admired by buyers, who will want to pay only for what is reflected on the books, including what is revealed by the tax return. The seller may think it’s possible to set a fresh scene for the buyer–one based on the theme of potential; however, buyers will be far more impressed by proof of a good track record.

Here are some suggestions to sellers for unveiling hidden profits and putting them where they will do the most good–in front of prospective buyers:

• Think Ahead. Remember that the future is now, and set your mind on long-term instead of short-term benefits. Show maximum profits for each quarter.
• Take a Step Back. If necessary, look back on the previous months’ financial records and work toward showing the truest–and hopefully, the best–profit situation.
• Delve Into the Past. Go even further back and reconstruct records (without showing “skim”) that reveal the legitimate profit situation over a meaningful period of time.
• List Tax-Deductibles. Make a separate list of salaries, and of fringes and perquisites that are tax-deductible and that provide a current benefit to the business.
• And don’t forget–it won’t be only the buyer who will be impressed by true profits. Loan underwriters and potential investors will be more apt to show favor. And the IRS will send its agents-in-disguise to somebody else’s door.

“Your salespeople didn’t listen when I placed my order, and when I wrote a letter to complain, they still didn’t get it right. I guess they don’t read any better than they hear.”

Daniel Langley, the owner of a central Massachusetts mail order company, took this call on a recent Monday morning. It happened to be a holiday, or he might never have got this close to a customer complaint. He was glad he did.

“I needed to be reminded,” he said, “that the problems are always out there. I tend to hear a lot from customer service about the record-breaking order or the customer calling from New Guinea. I realized we haven’t been paying enough attention to the everyday, not-so-happy news.”

Langley is typical of many business owners and managers in that respect. A lot of companies–large and small–do much less than they could in dealing with customer problems and complaints. This is an unfortunate omission, and an unnecessary one: achieving good customer service is neither costly nor complicated. What’s needed is a well-considered plan, coupled with a positive attitude.

The following steps can help any business convert problems into solutions . . . and into good PR as well.

Fight fire with anything but fire.

An unhappy customer calls expecting a fight. If they aren’t downright angry, they are at the very least upset and on the defensive. The salesperson should be careful not to echo the customer’s attitude. Instead, the person answering the complaint should aim for just the opposite tone: a calm expression of interest in listening to the problem, followed as soon as possible by the desire to solve it. This is not always an easy task, and salespeople should be trained to realize that customer complaints are not (in most cases!) personal attacks. Short of a free case of Perrier, employee courtesy is the most effective means of dousing customer fires.

Quick action is the best action.

And in most cases, it may be the only acceptable one. What you do in the first minute or two may well determine whether you will lose the customer–and create a ripple effect of ill will–or gain a “friend” forever. Research shows that the sooner the problem is resolved, the more likely you are to end up with a happy, loyal customer. Proper handling will turn around 95 percent of customer complaints, but the statistics get gloomier in proportion to the time that is allowed to elapse. Wait an hour, and you have a tentative customer; wait a day, you have a disgruntled one; wait longer, and you may have no customer at all.

Place authority where it will do the most good.

It’s one thing to advocate quick action to quell customer complaints. However, if the manager or other superior in a company’s hierarchy is the only one who can “sign off” on problems, delays will be, in most cases, impossible to avoid. If possible, salespeople should have the authority to approve returns and exchanges and solve other problems–up to a predetermined dollar limit.

Approach problems with a can-do attitude.

Obviously, not all complaints can be resolved to the every customer’s satisfaction. However, each problem should be handled with a sincere attempt to make the customer happy. Working within the rules (and financial limits), the salesperson should give the customer the feeling that it is he or she who is important–not the rule book. What should the price tag be on customer contentment? Good business sense says it can’t veer off into extravagance; however, generosity can pay big dividends. The cost of solving one problem may be far less than losing a valuable account, client, or customer.

Measure the quality of your “damage control.”

Many midsized businesses are following the lead of the larger corporation and asking their customers for feedback. If you aren’t already including some form of questionnaire or survey form in your mailings, you might consider trying a simple postcard or product enclosure.

Watch for patterns in customer problems.

Keep a careful record of all customer complaints and determine if there is a particular product or service that generates the majority of problems. If you can detect a pattern, these customer problems will actually have helped you, in the long run, to target company problems of your own. If no pattern emerges, you will be affirmed in treating each case as separate challenge–and, following the steps outlined above, you will have the tools to make quality customer service one of your primary–and attainable–jobs.

How Did We Do?

Here is the follow-up to customer problems Massachusetts one business owner recently implemented. Each customer complaint is tagged in the customer service data base and automatically “personalized” with the customer name and specific problem addressed.

Dear [Customer]:

Our records show you recently [returned/exchanged/had questions concerning] one of our products. To help us continue to offer quality service, please take a moment to answer the questions below:

• When you called [with your question/to advise us of a problem], did you receive a courteous response?
• How much time (approximately) lapsed between your [question, complaint] and our [answer/suggestion as how to resolve it]?
• Did you receive a satisfactory [refund/item in exchange, answer to your question]?

Thank you!

Are your workers independent contractors or employees? This is a compelling question, especially where the Internal Revenue Service is concerned. Every worker claiming status as a non-employee means payroll taxes and social security contributions that won’t fall into the IRS’s pocket.

Now many states are taking a closer look at the question, too. They are increasingly on the lookout for new sources of state revenue, including workman’s compensation and unemployment insurance, both of which can be bypassed when a business uses independent workers.

What can a business owner/manager do to keep on the right side of both federal and state tax patrols? Here are a few precautionary steps to safeguard the status of workers as independent contractors.

• Encourage (or at least allow) the worker to provide his own assistants, including their hiring, supervision, and compensation.
• Allow workers to establish their own schedule of work days/hours.
• Be sure that workers provide their own equipment and most supplies.
• An alternative may be to use an employee of a temporary service. These services can provide personnel experienced in the job required and, since this worker is actually an employee of the temporary service, all federal and state taxes and fees are handled at that end as well. Although you may pay more for this type of worker, you will avoid concerns about meeting government regulations and restrictions that often come packaged with the independent status. When in doubt, always consult your legal and financial advisors.

1. Place a reasonable price on your business. Since an inflated figure either turns off or slows down potential buyers, rely on your business broker to help you arrive at the best “win-win” price.

2. Carry on “business as usual.” Don’t become so obsessed with the transaction that your attention wavers from day-to-day demands, affecting sales, costs, and profits. Since the selling process could take as long as a year, the buyer needs to keep seeing a healthy business.

3. Engage experts to insure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction. Expert intermediaries can channel the process and the parties involved to keep the sale within safely silent bounds.

4. Prepare for the sale well in advance. Be sure your records are complete for at least several years back and do all pertinent legal or accounting “housecleaning”–as well as a literal sprucing-up of the plant or store.

5. Anticipating information the buyer may request. In order to obtain financing, the buyer will need appraisals on all assets as well as information to satisfy environmental regulations (when real estate is concerned).

6. Achieve leverage through buyer competition. This can be tricky; you are wise to let your business broker, as a third party, create a competitive situation with buyers to position you better in the deal.

7. Be flexible. Don’t be the kind of seller who wants all-cash at the closing, or who won’t accept any contingent payments or an asset transaction. Depend on the advice of your intermediaries–their knowledge of financing and tax implications– to keep the deal sweet instead of sour.

8. Negotiate; don’t “dominate.” You’re used to being your own boss, but be prepared to learn that the buyer may be used to having his way, too. With your business broker’s help, decide ahead of time when “to hold” and when “to fold.”

9. Keep time from dragging down the deal. To keep the momentum up, work with your intermediary to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion.

10. Be willing to stay involved. Even if you are feeling burnt-out, realize that the buyer may want you to stay within arm’s reach for a while. Consult with intermediaries to determine how you can best effect a smooth transition.