Can My Business Run Without Me?

Can My Business Run Without Me?

 

LUTZ BUSINESS INSIGHTS

 

can my business run without me?

bill kenedy, LUTZ consulting and m&a shareholder

 

One of the main issues that we see in a business sale transaction is a lack of management depth. Meaning, without the business owner, the company couldn’t run properly. This is a big red flag for buyers. This blog will show you the warning signs that you, as the business owner, are too involved in the daily operations, and will teach you how to ultimately transition out of that role.

 

Problem #1: Business Owners Are Overly Involved in Daily Operations

Oftentimes buyers will become less interested if the selling owner(s) is overly involved in the day to day operations, or if they have too much influence over customer/vendor relationships.

Example: Think about it this way. Say you were looking to purchase the best professional sporting team. However, the purchase agreement means that the coach will retire, leaving you with a team of star players, but no leader. With no back-up to take the retired coach’s place, your team ultimately becomes less effective. As the buyer, you can see how this deal wouldn’t sound very appealing.

 

Solution

Sometimes in this situation, the buyer will make a portion of the sale price contingent on the owner staying in the business for a period of time. This helps them keep things operating as normal, while they work on transitioning the owner out of the business over time.

Ideally, having a transition plan in place is something all business owners should work on before considering a business sale. With the right help, you can find and train the replacement you feel will best fit your company moving forward. Having these critical steps already accomplished when deciding to sell your company will not only give you peace of mind, but will prove to be a more attractive deal to potential buyers.

 

Problem #2: Management Team Replacements Have Not Been Trained/Hired

Another related issue we often see happens when the existing management team members are close to retirement, and replacements have not been trained or hired.

Most Private Equity and Family Office buyers are looking for companies that have solid management teams and are not reliant on the business owner looking to retire.  These buyers are focused on that issue as much as they are the financial performance of the company.  If you go to sell your company without building a solid management team, the buyer pool will be limited as most of the Private Equity and Family Office buyers will pass on the opportunity and you may be left with only being able to sell your company to a competitor that has their own management team in place.

 

Solution

It’s important to make sure everyone is on the same page. Addressing this issue with the management team well in advance of a sale can be very important to a successful transaction. Place a priority on getting the right replacements, in the right chairs, at the right time. Once you have the right people, set up a system to have your experienced professionals train these new members on everything they will need to know in order to be successful.

You can never be too prepared. Hiring a qualified M&A professional, like Lutz M&A, can help you organize and set up your leadership team in a way that will appeal to buyers and get you to that successful deal closing. If you have any questions or would like to learn more about our merger and acquisition services, please contact us.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Past Board Member

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

2019 Nebraska State of Owner Readiness Report

2019 Nebraska State of Owner Readiness Report

 

LUTZ BUSINESS INSIGHTS

 

nebraska state of owner readiness report

76% of business owners plan to transition their business over the next 10 years (representing 4.5 million businesses and over $10 trillion in wealth). Unfortunately, 49% of them have no transition plan.

Selling your business will be one of the biggest financial decisions you ever make. Did you know that more than 70% of businesses that are put on the market do not sell? In addition, only 30% of family-owned businesses transition to the second generation, and only 12% survive the third.

Lutz, in collaboration with the Exit Planning Institute and other local firms, recently conducted a survey to help determine how prepared business owners are to transition their business in the state of Nebraska. The Nebraska State of Owner Readiness Report details the survey findings, as well as describes the business transition options that are available to business owners.

RECENT POSTS

Financial Market Update + 2.18.2020

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The U.S. dollar has been appreciating relative to other currencies, and it is nearing the highest levels since 2017. Currency movements have both direct and indirect impacts on investors…

read more

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Toll-Free: 866.577.0780  |  Privacy Policy

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Finding the True Value of Your Business

Finding the True Value of Your Business

 

LUTZ BUSINESS INSIGHTS

 

finding the true value of your business

bill kenedy, LUTZ consulting and m&A shareholder

 

In a recent survey of business owners, 56% of those surveyed thought they knew what their business was worth, yet only 18% had a valuation analysis prepared. We have found that often, business owners have a perceived value of their business based simply off conversations they’ve had with a peer or confidant.

Oftentimes, this method of valuation will not give you the accurate numbers you need. Since every business is different, there is a lot more than just numbers that help in determining a business’s true value. In this blog, we will explain the process some business owners go through when valuing their business vs. how a proper business valuation should be completed.

 

How Some Business Owners Value Their Business

Usually, the business owner has heard that a similar business sold for a multiple of “X.” They then apply that multiple to what they think their own “X” is and BINGO! – They know the value of their company. Unfortunately, it is rarely that simple. 

Each business has its own value drivers, and the ‘X’ the owner thinks they should be applying the multiple to is usually not correct. We’ve asked business owners what they think their business is worth and heard answers that are 100%+ too high. We’ve also had a few instances where the business owner was undervaluing the business. Can you imagine selling your business for less than what it’s worth?! 

A little education and the assistance of a valuation expert can help you avoid under or over-valuing your business, which in the end, will help you sell your business at the best price possible.

 

How a Proper Business Valuation Should Work

We recommend that business owners hire a valuation expert to assist them in determining a reasonable range of value for their business based on the characteristics inherent in their company. Hiring a valuation expert will give you the most accurate data on the true value of your business. These experts will not only take a deep dive into your financial data, but also market trends, company specific strengths and weaknesses, and buyer interest.

We are not saying “hire a valuation person to prepare a 100-page, expensive report.” The valuation analysis required for this purpose does not need to result in a written report and is not a significant expense. 

The type and scope of the valuation is dependent upon the purpose for the analysis.  If you are looking for a value of your business if you were to sell it to a 3rd party, this can be handled with a consulting project or calculation of value as opposed to a formal valuation opinion report.

Getting the best value for your business is a top priority for all business owners who are selling their company. Make sure you are getting the best value by enlisting the help of a valuation expert. If you would like to learn more about our M&A services and how we can help you, please contact us.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Quarter Three Middle Market M&A Report 2019

Quarter Three Middle Market M&A Report 2019

 

LUTZ BUSINESS INSIGHTS

 

quarter three middle market m&a update 2019

“MIDDLE MARKET VOLUME INCREASES DESPITE GLOBAL BUYER CONCERNS”

U.S. deal volume was strong during the third quarter 2019, with volume rising 1.6% compared to the second quarter 2019. Overall, M&A volume is up year-to-date from both 2018 and 2017. Sustaining these levels of activity may be difficult in an economy that some are expecting to slow down.

Average and median transaction values decreased 16.0% and 4.3% from Q2-19, respectively, as a result of fewer megadeals and an uptick in transaction volume. In terms of what is next for deals, consolidation and divestitures are likely to remain in the mix. Geopolitical uncertainty could impact cross-border M&A and the interest among foreign investors for U.S. companies.

RECENT POSTS

Financial Market Update + 2.18.2020

Financial Market Update + 2.18.2020

The U.S. dollar has been appreciating relative to other currencies, and it is nearing the highest levels since 2017. Currency movements have both direct and indirect impacts on investors…

read more

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

How Does the Business Sale Process Work?

How Does the Business Sale Process Work?

 

LUTZ BUSINESS INSIGHTS

 

how does the business sale process work?

bill kenedy, LUTZ consulting and m&a shareholder

 

The sale of a business is usually a long journey. Most business owners have never bought or sold a business and have no reference or understanding of what the sale process entails. For reference, The Exit Planning Institute surveyed business owners, where 66% stated that they were not familiar with their business exit options.

Lack of understanding typical issues often frustrates business owners during a sale. Properly educating yourself on how the business sale process works can greatly reduce this level of aggravation. The following are some of the key areas we’ve seen business owners struggle with during a sale process:

 

#1 Confidentiality of information and how non-disclosure agreements work

Confidentiality is a key component of a business sale. Having important company information leaked can be disastrous. In addition, employees who learn about the sale before it is announced or completed can often get spooked for fear of losing their job under new ownership. So, you can understand why it’s critical to keep confidential information private.

To ensure sensitive information in a business sale is not released to unintended parties, those participating in the transaction are typically required to sign a non-disclosure agreement. This agreement helps protect your confidential information via a legal agreement.

 

#2 The differences in negotiating with one party versus running a full M&A process

Negotiating with only one interested party can be a risky move. Hiring an M&A advisor can expand your sale options and greatly improve your odds of selling your business at the best price. M&A advisors have access to a pool of interested buyers where they can negotiate multiple offers at once to not only find you the best deal, but also provide you with a back up in the event a deal falls through.

Entertaining only one interested buyer can be easily related to say, buying a pair of running shoes. You’re an avid runner looking for the perfect running shoes to help you finish that race you’ve been working towards your entire life. Would you go in to the store and buy the first pair of shoes you see? The answer to that is no. Because you’ve invested so much of your blood, sweat and tears into training for this race, you can be sure you are going to explore all your options. This means get every last detail of information you can, while do multiple comparisons on all the different shoe types, brands and more. The same goes for selling your business.

 

#3 The level of detail involved in the due diligence process

The due diligence process is a thorough investigation into exactly how your business operates. It takes a deep dive into your financials, how your management team works, the business structure, assets, liabilities and other pertinent information. Buyers typically insist on a due diligence process to identify any concerns or issues that could impact their perception of the Company’s value.

 

#4 When to inform key employees about the transaction

As stated in issue number one, confidentiality is key. Knowing when and who on your team to inform about the sale of your business can be a tricky, yet important step in the sale process. Your M&A advisor can help you get a better understanding of the who and when in this situation.

 

#5 How company performance during the sale process can impact the success of the transaction

Lastly, the performance of your business during the sale process can indeed impact closing the deal. Making sure you are operating efficiently during this time can be difficult if you are distracted with deal related issues. That is why it is important to hire an M&A advisor to work out the details for you so you can focus your time and energy on what’s important; running your business.

In all, a business sale transaction involves many moving parts that work best together with the help of an M&A advisor. You may not fully understand the sale process yet, but your advisor can help guide you through to a successful closing. For more information on our Lutz M&A services, please contact us.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Understanding the Tax Implications of a Business Sale

Understanding the Tax Implications of a Business Sale

 

LUTZ BUSINESS INSIGHTS

 

understanding the tax implications of a business sale

bill kenedy, LUTZ consulting and m&a shareholder

 

Most business sale transactions are structured as ‘asset sales.’ This is where the buyer sets up a new entity that acquires the assets of the selling business. How a business is structured can have significant tax implications to a seller. In addition, how the company allocates its purchase price amongst its assets in the transaction will also affect its tax level. In this blog, we cover a few of the most significant issues we have seen surprise business owners.

 

C-Corps vs. S-Corps Taxation

Because C Corporations are legally considered a separate tax-paying entity, they are subject to a double layer of taxation when selling assets. A C-Corporation will first pay tax at the applicable corporate rate on the gain associated with the sale of assets being sold by the corporation. The shareholders will then pay taxes at capital gains rates when the remaining cash is distributed out of the corporation to the extent these proceeds exceed their basis in the corporate stock. One way C-Corps can avoid this double taxation is by doing a stock sale versus an asset sale. When a C-Corporation owner sells their stock, they only pay capital gains tax on the difference between the sale price and their basis in the stock. 

In contrast, S-Corps are pass-through entities which are not subject to tax but rather pass their tax attributes out to their owners. As a result, S-Corporations only pay taxes once, at the shareholder level, when selling their assets. Because of the single taxation, many small businesses choose to utilize the S-Corporation structure over a C-Corporation.

 

Depreciated Equipment

The amount of proceeds allocated to equipment (any property besides real estate), that has been depreciated for tax purposes, are taxed at ordinary rates, to the extent the asset was depreciated.

Example:

You purchased a machine in 2016 for $10,000 and, over three years, deducted $7,000 of depreciation. Three years later, in 2019, you sell this machine for $8,000. This means that the basis on the machine at the time of the sale would be $3,000 ($10,000 – $7,000 = $3,000). The gain on the sale would be $5,000 ($8,000 of proceeds less $3,000 of basis). All $5,000 of the gain would be taxed at ordinary rates since the $5,000 does not exceed the amount of depreciation deducted on the machine. If your gain is greater than the depreciation deducted for the piece of equipment, there is potential for a portion of the gain to be taxed at the lower capital gains rate.

 

Cash-Basis Companies

Many times, in our initial meetings with business owners considering a sale, they assume the asset sale price would be considered a 100% capital gain. However, this is often not the case, and it can have a material impact on the net proceeds the business owner receives after paying taxes. Aside from the example above for depreciated equipment, another example that can result in an owner paying taxes at ordinary rates we often see is a company utilizing the ‘cash-basis’ method. Using this method means a portion of the sale proceeds is allocated to Accounts Receivable.

For example, as discussed above in an asset sale, the sale price will be allocated to the various assets being purchased as a part of the sale. A portion of the sale proceeds will be allocated to accounts receivable. If the business has been utilizing the cash-basis method, it has not recognized income associated with these receivables. So, 100% of the proceeds allocated to these receivables would be taxed at ordinary income rates.

 

Both the sale structure (asset vs. stock sale) and how the proceeds are allocated amongst the assets, can have a material impact on the amount of taxes associated with the business sale. We recommend that, after gaining an understanding of the value of your business, you also take the time to determine the potential tax implications. Doing this will help you prepare your financial plan and consider if adjustments to the sale structure might result in a tax benefit on the sale. If you have any questions or need help determining the tax implications on your business sale, please feel free to contact us for assistance.

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ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850