Business owners planning to fund their retirement by selling their companies may be in for unpleasant surprises, unless they address some critical issues early on, according to some experts.
Most of Marc Blumenthal’s clients build their businesses in order to sell or pass them to family members, said the principal with Clifton-based CPA firm Sax, Macy, Fromm & Co. P.C. But before doing so, the owner must ask why a potential buyer might be interested.
“That’s the first step,” he said.
An honest review may mean redoing the financial statements in a way that gives an outsider a clear picture of the guts of the business — in other words, providing “a realistic look at what the profits are without one-time expenses, without owners’ salaries and perks, and without the wife and the kids on the books,” Blumenthal said.
Prepping a business for a sale also means taking a good look at the company’s internal reporting and other systems to be sure they can meet the demands of the company.
“Can you clean up accounts receivable, accounts payable and get rid of excess inventory and assets?” asked Blumenthal. Those issues can affect a company’s financial ratios, which can help determine whether a seller gets a low price or a high one.
A seller’s business also may have to undergo a certified audit, he said. While it can cost more than the compilation or review they’re used to performing, the size of the sale and the type of buyer may force the issue for an owner, particularly if the buyer is a private equity firm or a publicly held company, or if the seller is transferring a big company.
A seller’s willingness to stay on for six months to a year after the sale, helping to establish relationships between the new owners and key customers and suppliers, also can make a big difference in closing a deal, he said.
Would-be buyers often want to know “that good people will stay” with the firm after the sale, according to Leonard M. Friedman, a partner with the CPA firm Rosenberg, Rich, Baker, Berman & Co., in the Somerset section of Franklin
A bonus that’s tied to post-sale retention may convince key individuals to stay, he said.
“A key manager with a New Jersey-area manufacturer owned a piece of the company and was so important to the operation that the owner couldn’t sell it without him staying on,” Friedman said. “So the seller compensated the manager in order to keep him on.”
The condition of the company’s books and records are a key detail that is often overlooked, he added.
“Buying a business is a risky venture, and investors are generally averse to risk,” Friedman said. “If you can’t prove your income, you can’t sell the business.”
Hidden liabilities and contractual obligations can also torpedo a sale, said Raymond Felton, co-managing partner at the Woodbridge law firm Greenbaum, Rowe, Smith & Davis LLP.
He said companies should self-audit their human resources and other contracts, and environmental and other liabilities, to be sure there are no surprises.
“Look under every rock,” he said. “Sloppiness can get factored into the purchase price.”
Even after a buyer’s identified and an initial deal’s struck, the process isn’t over, Felton added, since the parties still have to figure out how to finance the deal.
A buyer that has trouble getting a bank loan may ask the seller to hold the note, but that carries a number of risks, Felton said. For one thing, if the buyer defaults, the seller’s claim may be subordinate to the claims of banks or other creditors. Also, depending on the way the note is structured, the seller could be exposed to inflation and other risks that could erode the value of the sale.
“You start out asking for all cash,” Blumenthal said. “But if you’ve got to give them a note, ask, ‘How much security can I get?’ for maximum protection.”
In one case, he said, the owner of New Jersey-based building supply company died and his son stepped in as an absentee owner. The son later sold the company and took a note from the buyer in lieu of full payment.
“But two years after the sale, the buyer stops paying,” Blumenthal said. “The son stepped in quickly and ascertained that he had the right to foreclose, determined the business was salvageable — and jumped back in and took it back.”
E-mail to: [email protected]