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for Companies with $500,000 to $50 Million in Revenue

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Sell a business: How will you Invest the money from the Business Sale

Selling a business may seem like the end of a long, long journey, but what are you going to do with the sale proceeds?  You could put all of that money under your mattress, put it in a low-earning savings or IRA account, or even invest in the stock market. I have many financial  planners do a really good job investing your proceeds from the sale.  While I firmly believe that you should use “take money off the table” at closing and invest it in a very safe and secure place.  But we must all admit that the stock market is volatile, the bank (while semi-secure) doesn’t pay much interest on their CD’s….how do you achieve good returns in a fairly secure manner? Well, the best answer may surprise you. Before I tell you the answer, let me provide  you with some context. 

dallas business broker “Controlled planned risk” is a term I hear every day from business sellers about business buyers. Sellers say, “The buyer has to take a risk.” You took a risk when you started your business.  Investing with the crowd will only get you what the crowd gets and these days, that could easily mean that despite all of your hard work, you may end up working as a greeter at Wal-Mart to supplement your income during retirement. There is nothing wrong with working at Wal-Mart, per se, but the reasons underlying your decision to start a business in the first place was because you are not the type of person who does things the same way as the “crowd.” You are an entrepreneur. An entrepreneur is someone who knows that they can do it better on their own.

What do you plan to do with the sale proceeds from your business to ensure they can fund your retirement, whether immediately or at some point down the road?  You cannot assume that if you take your retirement funds and place them at the feet of financial planners, that you are NOT taking a risk. They cannot (and do not) guarantee a secure financial future. I am not saying financial planners are all bad. I think they are very useful for a portion of your retirement and the majority of your employees’ retirement.

However, one only needs to watch the evening news and have watched developments in the financial markets over the past few decades to see the lunacy of treating publicly traded stocks as a valid investment opportunity for the just-liquidated business owner.

I mean, are these the types of businesses that you are going to turn your retirement dollars over to? What got you here to this place (i.e., the owner of a successful business that you can sell) is the same thing that will get you to the next stage in your life.

Because you are good in business, because you are ready to sell and because, and because as a skilled and careful business owner, you want to consider every option affecting protection of your investment and optimizing return from this major transaction, you must give a careful look at the option of seller financing of your business sale.

As I see it, you have four general categories of places to put the money you receive from your business sale: (1) stuff the money in your mattress or a safe deposit box (relatively risk free, complete control, no reward and pray that the house doesn’t catch on fire); (2) place it in a savings account or CD (low risk, little control, low reward); (3) invest in the stock market or similar investments managed by others (higher risk, little control, higher reward possible); or (4) invest in your own business (carefully controlled risk, high control, even higher rewards).

I sell businesses in Dallas and all over Texas.  Owning a business business brokerage M&A firm in Dallas gives me a perspective where I see the good bad and ugly. Let me assure you that as you prepare to sell your business, remember that the sale of a business is an end to one type of investment of your time and money, but also a stepping stone to your next investment in your future.

Business Valuations: How Much Does a Business Owner REALLY Make?

One of the most difficult aspects of valuing a business is understanding how much money the business owner is truly making. There are a dozen terms to describe the profit of a business – Cash Flow, True Owner Net, Seller’s Discretionary Earnings (SDE), Seller’s Discretionary Cash Flow, Owner Benefit, EBITDA – these terms all pretty much answer the same question … how much money does the owner really make?

How do you value a Small Business
How do you value a Small Business?

What we understand and accept, even before we look at your financial statement or report, is that your objective is to make as much money and pay as little tax as possible, and that “good” accountants and CPAs find ways to help business owners accomplish this goal. This can make our attempt to determine true profit or cash flow of the business a little more difficult, but always keep one thing in mind – the money is there … we just have to find it. In fact, over the years of selling businesses most business owners are shocked at the “benefits” that they have received each year. 

Recasting

The first step we take in determining a business’ cash flow is to recast the financials. Recasting financials is a fancy term that simply means we “correct” them, or adjust them, to provide a more accurate picture of what the business is truly producing in regards to profit. When we recast financials, we are looking for expenses to “add back” into the net profit of the business – we call these items add-backs, or fringe benefits. This isn’t to say that you should have reported them differently to the IRS but rather these are expenses that a prospective buyer wouldn’t consider as necessary for the operation of the business.

Personal Expense

As a rule-of-thumb, anything that is a personal expense is an add-back. This commonly includes items such as family cell phone plans, family health insurance coverage, personal vehicles and meals. Keep in mind that some of these items could be a combination of both personal and business expenses, so we must be careful only to add back the portion of the expense that is truly for personal use. Please note that we also can only “add-back” expenses that were expensed on the Profit and Loss statement and/or tax return.

Discretionary Spending

In addition to personal expenses, we also have discretionary spending to account for. These expenses can include charitable donations, excessive legal fees or season tickets to a local sporting venue. What we are looking for here are specific items, although they are often legitimate business expenses, that are not mandatory to operate the business – hence, discretionary, meaning a new owner can choose not to spend this money and the business will not suffer.

Non-Recurring Expense

Another major add-back can be the one-time, non-recurring or extraordinary expense. Maybe a business owner paid cash for a new piece of equipment, maybe there was a major repair that had to be done to the building after a storm, or maybe the business owner hired a consultant to evaluate his operational processes. These are all examples of legitimate business expenses that were unique and only appear once in several years of financial records. We add those items back in because they skew the “normal” cash flow picture of the business.

Owner’s Salary

Don’t forget about your (owner’s) salary, or any payouts to partners or other family members that are shown as expenses on the Profit and Loss statement and/or Tax Return. We add these items back too. They are the easiest expenses to add back because the perspective buyer is able to consider this profit or pay that they are able to take as the next owner of the business.

EBITDA

A note on EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This simply refers to a business’ profit before any interest, certain taxes (such as income), depreciation and amortization are deducted. EBITDA is the most widely-accepted indicator of a business’ profitability, and any CPA will tell you it is universally accepted. EBITDA becomes less relevant as businesses become smaller in size, but nonetheless those items are still added back in our recast. To be clear we add back interest, income tax, Depreciation and Amortization.

We find many business owners that will take the time to go line by line through their Profit and Loss and clicking on each line and drilling down to the actual expense.  This is a tedious task that can result in exponentially great value of your company.

So once we have examined the financial statements and determined what personal expenses, discretionary spending, non-recurring charges, owner’s salary and EBITDA items should be added back, we have completed the recasting of the financials. Now we have a very clear understanding of what the business’ true cash flow is. Think of it as a pot of money at the end of the recasting rainbow – then it’s up to the new owner of the business to determine how they want to run the books of their company.

Seller Financing When selling a business– The Key to Getting 30% More for Your Company (In Half the Time!)

So you are ready to sell your small or mid-sized business and can’t wait to get that great big check in your hand. Let me show you how to make this check the biggest check of your life!  How? Do your sale plans include seller financing as a part of the purchase price?  Hardly. You would rather go to your dentist for a root canal! 

If you are one of those business owners that want to sell your business but one that would rather discover the joys of a root canal over even considering the option of a seller carry or seller financing when selling a business, you’re not alone. In fact, you are in the majority, that is the majority of business owners who have not discovered its benefits to them.

Dallas business broker
The Key to Getting 30% More for Your Company when you sell my business

I want to change your mind.  My name is Scot Cockroft, and I am the founder and president of HBG Advisors, Inc., a business brokerage firm in Dallas, Texas. Our company has sold more businesses in Texas than anyone else. I have seen every type of business sold in every conceivable way to every conceivable buyer over every conceivable timeline with every conceivable result. Trust me when I say that seller carry (or seller financing, as we define it) is the most misunderstood factor in business sales.  Most business owners don’t even want to discuss seller financing options when they first walk through our door, but when they get the facts on seller financing, they often change their minds. You might too.

What if you could get up to 30% more for your company through seller financing than with an all-cash business sale? Might that get you to set aside the the root canal analogies for a little while?

In this, and subsequent blog articles, I will share with you the secrets to getting active with a passive investment, and optimizing the return on investment for your business sale, while minimizing the fears and risks you may have in the process.

The fact of the matter is that seller financing is one of the best investments you will ever make at the crucial juncture of your business sale. After all, you’ve worked hard to get to this point – why not get the most out of this once-in-a-lifetime transaction?

Seller financing of one’s business is by far the greatest passive investment you will ever make. Tell me this: what other investments can you make that are tax deferred? Yes, you can max out your 401(k), but the maximum for the highest earners in 2016 is only $18,000. You can make a contribution to an IRA; as of 2016, the maximum a typical IRA can invest is $5,500-$6,500 (depending on whether it’s Roth or traditional) or, conservatively, 20% of your profit in a SEP IRA (simplified employee pension individual retirement account). Drilling down a little deeper at the IRA or 401(k) investment, what kinds of investments, exactly, are offered? You can invest money in a publicly traded company or fund, leaving your investment success to the whims of the general economy, decisions of corporate executives you now know (and might not trust if you did).  You are someone who worked hard, relied on skill over luck, talent over market whims and ingenuity over lottery tickets, is this really appealing to you at this stage of your life? Now that you’ve earned the money, are you going to turn it over to the Bernie Madoffs of the world to “invest” the cash in a company that has hired a CEO and paid him MILLIONS to lose money? Yes, I realize this is a bold statement, but let’s really look into this claim to make sure I’m not just up here teetering on my soapbox.

What if instead you could make an investment that is equal to a “multiple of your yearly profit,” not a percentage of your profit? After all, you need to decide what to do with the proceeds of your business sale, whatever they are.

Fact is, there are pros and cons, good and bad, in continuing to invest in your own company’s success through seller financing of the purchase price. Yes, there are horror stories of deals gone awry, money, confidence and legacies lost BUT here’s the thing, that rarely happens if you do it right. A skilled Dallas business broker or business sale professional and a series of articles that will be forthcoming on this blog, will teach you how to do it right, leaving you free to sleep at night, rest easy, and, best of all, how to get 30% more for your business – in half the time. We are going to cover every nasty detail of seller financing, why I did it when I sold my business, and why a majority of successful business sales include some type of seller financing.

Scot Cockroft is the owner of Sigma Mergers & Acquisitions a Business Broker in Dallas Texas.  We often prefer the term M&A or Merger and Acquisitions Dallas professional.  But whatever you call it. We have been selling more businesses than anyone in Texas for over a decade.  Stay to tune to learn about Seller financing when selling your business and many other topics. 

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