Why You Should Consider Selling Your Business in 2010

The 2010 new year brings with it the time when business owners review their strategic plan and business goals. Many of the owners we talk to are wondering if this is the year to consider selling the business. In Texas, there are five specific reasons why it would make sense to sell in 2010.

There are many factors that determine best timing for selling a small business -- the financial condition of the company, valuation, growth cycle, profit history, and the current market. Usually the best time to obtain the highest price occurs when sales and earnings are good and trending upward with a history of good performance. This gives buyers confidence in projected future earnings.

Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, industry trends, stock market volatility, competition, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value.

Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors.

So how should you determine if 2010 would be the right time for you to sell your business? The following are five factors for Texas business owners to consider.

(1) First, get a business valuation to determine what your business is worth in the current market. This is an initial step in determining if a sale would meet your objectives.

(2) Understand that the current status of the small business market place in Texas is one of the best in the nation and policies are in place for continued prosperity and growth in the State. "Texas is going to pop up on a lot of radar screens as a place to relocate or expand for businesses," reported Bloomberg.com on Dec 23 2009. Texas gained more residents than any other State as the recession deepened in 2008 and early 2009 as job seekers migrated to one of the nation's strongest labor markets. The Houston greater metro area enjoyed the second largest population growth than any other city in 2009 and has the second highest number of Fortune 500 companies. New York has the most Fortune 500's according to Fortune's last list on May 5 2008. Houston has been gaining ground over NYC for the past several years and that trend will continue, especially in light of each States' performance in today's economic climate.

(3) Buyers in every category are looking for alternatives to traditional investment avenues. They are looking for stability, better predictability and control. Business acquisitions offer all of these and can also offer a better return than traditional investment opportunities. Houston, and Texas, as a whole, are prime targets because of future economic expectations and long-term outlook.

(4) The capital gains tax rate is presently at historic lows at 15%. However, effective Jan 1 2011, this rate will increase, possibly by as much as 69%. Therefore, business owners considering a sale should sell by Dec 31 2010 in order to keep more of their proceeds. As reported in the Wall Street Journal Nov 12 2009, Congress is planning "a 5.4% surtax on incomes above $500,000 for individuals and $1 million for joint filers" to fund health care reform, which will affect both capital gains and dividends. If passed, the surtax goes into effect Jan 1 2011, the same day the Bush tax rates of 2001 and 2003 are set to expire. The current capital gains tax rate of 15% would rise to at least 20% -- 25.4% with the surtax. This represents a 69% increase overnight. This does not include any changes that might come from increases in state and local tax rates.

(5) Most importantly, even in our current economy, buyers exceed sellers and we have a robust small business exit market for now. The time will come when the flood of baby- boomer business owners ready to sell will outweigh the ready buyers.

Fueling the market are the different categories of buyers looking to put their money to work by acquiring profitable businesses in areas with a good economic future:

• Early baby-boomer corporate retirees
• Management-level refugees who have suffered a downsize who typically have severance pay or 401Ks to invest, and are looking to go into business for themselves. The stock market, or putting money in the bank, do not look attractive to these corporate refugees at this time in their lives
• Foreign buyers seeing U.S. businesses as investment opportunities while the dollar is valued lower against their own currency
• 30-something up-and-comers aggressively buying and building
• Strategic Buyers, both public and privately-held companies, are actively acquiring smaller firms as part of their strategy for quick growth and innovation. (Merrill Datasite - Dec 2009)
• Investment Buyers, such as private equity groups, "are going down-market" (Merrill Datasite - Dec 2009) and are seeking add-on acquisitions in the lower middle-market for their investment portfolios
• Blue collar workers who have been layed off are also looking to "buy a job."

If internal conditions, both business and personal, are right, 2010 is the time to consider selling a privately-held enterprise. We realize that the decision to sell is neither purely tax-driven, nor even a purely financial consideration. Business sales are usually motivated by personal factors.

However, because it can take anywhere from 4-12 months on average to sell a private company, we suggest that business owners considering a sale prepare now so they can take advantage of this exceptional, impermanent window of opportunity.

With all categories of buyers in play, historic low interest rates with the government working to make credit more readily available, the capital gains tax rate the most favorable in 30 years, and the positive future outlook of the Texas economy, it appears to be an excellent time for business owners in Texas to explore their opportunities for exit.

SBA Update - What's Happening in Congress

On Thursday December 10th, Sens. Landrieu and Snowe introduced S. 2869, the Small Business Job Creation and Access to Capital Act. This new bill contains a series of measures that were separately introduced by Sens. Landrieu and Snowe earlier this year. The Senate Small Business Committee will mark up S. 2869 Thursday, December 17th. Highlights of the legislation include:

• Increase the loan limit on 7(a) loans from $2 million to $5 million.
• Increase the loan limit on 504 loans from $1.5 million to $5.5 million.
• Increase the loan limit on microloans from $35,000 to $50,000.
• Allow the 504 loan program to refinance short-term commercial real estate debt into, long-term, fixed rate loans.
• Extend the authorization to provide 90 percent guarantees on 7(a) loans and fee elimination for borrowers on 7(a) and 504 loans through December 31, 2010.
• Direct the SBA to create a website where small businesses can identify lenders in their communities.
• Increases the maximum guarantee on 7-A loans to $4.5 million.
• Changes the eligibility criteria to (a) a tangible net worth not to exceed $15 million and (b) the average net income after Federal Taxes over the past two full fiscal years is not more than $5,000,000.

The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

11 Knows Before Selling Your Business

1. Know why you want to sell your business. Having a solid reason and a committed resolve to a sale is essential in achieving a successful transaction. In addition, one of the first questions buyers ask is, "Why is the owner selling?" They want to know that it is for a good reason and not because there's something wrong with the business that might be hiding in the shadows.

2. Know what you will do with your time after your business sells. If you don't have a plan in mind, you might find yourself getting cold feet or feeling a little off balance when that first offer to buy the business comes along.

3. Know the value of your business. Get a business valuation by a reputable firm to understand what you could expect in the current marketplace. This is an initial step in determining if the sale would meet your objectives.

4. Know that you are current on all taxes. This includes sales taxes, unemployment taxes, payroll taxes, state income taxes and federal income taxes. Delinquencies in taxes of any kind can stop a deal in its tracks.

5. Know that all your policies, employee records, procedures and controls are documented. This helps a buyer feel confident that operations will continue to run smoothly under new ownership. These documented items will also help during the transition period when you train the buyer.

6. Know that your business can operate without you if necessary. A key employee or a staff who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's personal relationships with customers. This will bring more prospective buyers to the table because of the flexibility it provides. There are buyers who want to play a major role in the daily management of the business and some buyers who do not. Many businesses never get sold if the owner "IS" the business.

7. Know that your financial statements and tax returns are accurate. Deals can fall apart when discrepancies are found or distrust has a chance to percolate.

8. Know that your trusted advisors will be able to assist you in the transaction. A meeting with your attorney and/or accountant, for instance, will play a role in gathering all necessary documents for your business broker before going to market. Your team of trusted advisors needs time for preparation in order to effectively support you in the transaction.

9. Know that you have a business growth and marketing plan that will help a new owner understand where opportunities exist and what could be done to take the business to the next level.

10. Know that your asking price is based on reality...a reality that buyers and their lenders can believe in. The buyer will look at return on investment and their lenders will require that the deal makes sense in terms of debt repayment. A multiple of Discretionary Earnings is one method that can be used to establish a reasonable price range.

11. Know that you are willing to negotiate on price, terms or both, if necessary. Deal structure can make or break a transaction. When each party to the transaction is willing to be flexible, the odds are good that the effort will have the desired result -- a win for both parties.

Retirement Funds Can Finance A Business Acquisition

Qualified retirement accounts such as 401(k), 403(b), Pension, Profit Sharing, and IRA rollovers can put you on the path to business ownership.

You can also use these funds to buy a business with no taxes, no penalties, no loan repayment and no hassle.

Qualified money is money with a tax beneficial wrapper around it because it was accumulated in a tax-benefited plan. Many people have been building retirement accounts with much of their money in qualified retirement vehicles. If these accounts are improperly accessed (unwrapped"), they stand to be hit with up to a 50% tax penalty in state and federal income taxes, depending on tax bracket and state of residence. So, the question to be answered is, "How can a person access their retirement funds to purchase a business without paying a penalty or income tax?"

There are three primary ways to gain access to "qualified" retirement funds for use in a business acquisition WITHOUT incurring penalties and taxes.

1) Self-Directed IRA
This option essentially allows for an unlimited investment in a business but there are limitations on how much ownership the person directing the investment can have in the business.

2) 401(k) Fund with a borrowing provision
This is the most limiting because the IRS Code has maximum amounts which can be borrowed from the fund. This can be a beneficial option when smaller sums are needed.

3) Retirement Program designed to allow for Small Business Investment
This option has unlimited potential. There are essentially no limits on ownership or the amounts which can be used. If integrated into an operating structure properly designed for the specific needs of a business owner, this is an excellent way for a person to acquire a business.

A key consideration when using qualified funds for a business purchase is to maintain compliance with all ERISA (Employee Retirement Income Security Act of 1974) and IRS Regulations. It is extremely important to seek the guidance of Transaction Advisory Professionals experienced in the use of qualified funds for the purpose of acquiring a business.

For more complete information on using qualified retirement funds to purchase a business, visit these websites:

Pension Transfer Advisors
BeneTrends, Inc.
DRDA, P.C.