Selling a Business

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.

Answering services, message machines, voice mail, “on hold” music, speaker phones . . . where would a business be without them? Perhaps–in some situations–a lot better off! In the small to midsized business, where every call should count, owners and managers need to ensure that the telephone is an efficient, effective sales tool instead of a handicap. It’s important to remember that the caller’s first impression of your company is from the voice answering the phone. That first minute or less will help form the caller’s lasting opinion of your business, so why not take the opportunity to make that opinion the best possible? Here are a few ideas for improving the way your business says hello.

Call Your Office

Give your office a call–just don’t let them know it’s you. Have someone whose voice your employees won’t recognize place the call, with you standing by waiting to listen. This may sound like cloak-and-dagger tactics, but it’s one that successful managers use to monitor the quality of their telephone service. What to listen for:

• A pleasant salutation (“Good morning, Jones and Jones”), followed by a name, if appropriate, and offer of assistance.
• An unhurried, interested response to queries, or the offer to connect the caller to someone else who can provide information.
• A reasonable on-hold time. And, if the time seems longer than normal, is there an apology for the delay?

Check Out Your Service

Conduct a “test” of your answering service similarly to the above; however, you’ll be listening here for that extra level of care an answering service should take in personalizing its service. Be sure the following standards are met:

• Answering service operator answers with the name of your company, not just a generic “May I help you.”
• Operator should know pertinent facts about your business: times of operation, key names of personnel, etc.
• Check message you give operator against the message that he or she transmits to your company.

If you aren’t satisfied, take the time to educate your answering service about your standards and expectations. If the service can’t–or won’t–comply with your request, engage another organization to do the job.

Tune Up Your Message

When was the last time you listened to your own company’s voice mail message? When you do, turn a careful ear to the following checkpoints:

• Are you satisfied with the voice that represents your company? It should be upbeat, but also well-modulated and pleasingly-pitched. Do a test of several voices and choose the one that sounds best “on tape.”
• If your voice mail system has background music, or if your company has a call sequencer with on-hold music, be sure the sound is welcoming and soothing.

Take High-Tech Down a Peg

Does your company have automated voice mail? Speaker phones? Conference-call capability? All well and good in this era when communication is king. Just keep in mind the advantages of the “live” human voice–when you make a call, business or personal, isn’t this what you prefer to hear? Although the person in your business who answers the phone may well be your lowest-paid employee, remember that this human voice is vital to the image of your company.

Buyers are expected to perform a thorough due diligence on both the business and the seller(s). However, many sellers don’t do an extensive due diligence on the buyer(s). Deals do not always close; many are aborted in the very early stages, and others tank somewhere along the way to what was hoped to be a successful closing. So, what happens that prevents a deal from closing, especially one that began with such positive signs? Obviously, in many cases, the buyer’s due diligence turns up some items that were not revealed by the seller, and others that can’t be resolved.  Some of these items probably had early-sign red flags; other red flags occurred somewhere along the way, and unfortunately, the result was that there were pre-closing red flags.

The Early-Sign Red Flags

Sellers should seriously look at who the buyer is. This may be a corporate buyer who is just looking. On the other hand, some sellers may overlook a strong individual buyer for fear that he or she may be inexperienced in the acquisition process or might be too cautious. In both cases, the seller may want to ask questions such as the following: What companies have you already looked at? How much equity are you willing to commit? What experience do you have in what my firm does?

Some sellers have that sixth sense that allows them to size up a prospective buyer. No one wants to waste time with someone who really isn’t a buyer. The deeper a seller goes into the due diligence process with a potential buyer, the more red flags may appear. If there are too many, if the ones that get raised seem too difficult to resolve, or even if they might be resolved, if that sixth sense says “no” anyway, it is probably time to move on.

Red Flags Along the Way

Once the Offering Memorandum has been given to the potential buyer, the next stage of red flags may occur. For example, if your intermediary informs you that he or she has not heard from the prospect after receiving the memorandum, it could mean that the buyer prospect is not as interested as you might have thought. Also, if the next step involves a junior member of the prospective buyer’s management rather than the CEO or COO, the red flag should go up. If the prospect, corporate or individual, refuses to provide, or delays providing, information showing their financial capability to do the deal, the red flag should be raised. One recommendation is to set up a social event, a dinner or extended lunch between you and the buyer prospect. Visiting at a social event allows the buyer and seller to get to know each other, establish a cultural understanding and build a working relationship. If this meeting goes badly, the red flag should go up, at least half-way.

Red Flags Just Prior to Closing

The Letter of Intent has been drafted and signed. One area that may cause several red flags to go up is if the buyer’s attorney is inexperienced in the deal process, is overly aggressive, or just won’t bend. This is such an important issue that if changes aren’t made, the deal is probably in serious jeopardy of collapsing.  The seller’s attorney may be able to gather some insight on this matter.

Both sides are taking some risks in any buy-sell process, but both sides should take their due diligence efforts seriously. If a deal has arrived at “a just prior to closing” status, it is certainly vital that both sides can resolve their red flag issues. It could be tragic if the deal has gone this far without serious red flags being raised.

The whole purpose of recognizing the red flags is to try to resolve them before the deal “craters”. A positive attitude by both sides is almost always the answer, and this attitude is best accomplished by the use of a professional intermediary who has been there, knows the red flags, and knows how to resolve them.

Sellers have to ask this question and give it serious thought prior to making the decision to sell. In too many instances, sellers get to the proverbial altar and then back down the aisle. In most cases, this happens because the seller’s decision to sell has not been considered carefully enough.

There are the obvious event-driven reasons such as failing health, partnership, marital issues or because the business is going downhill. In cases such as these, business owners generally don’t have a lot of options. Selling the company is the easiest and most obvious one.

In too many other cases, the owner claims retirement, “burn-out,” or some other reason, none of which is necessarily a permanent state of things. Take the example of the owner of a company who is also the founder, and after a lot of hard work and probably years of financial hardship on his part, the company is now quite successful. It is, as they say, the owner’s “baby.” The first question that needs to be asked is: Do I really want to sell? The second question is: If so, why? And the third is:  What am I going to do after the company is sold? These questions involve not only business decisions, but important emotional issues as well.

Attempts to formulate answers should not be made until the owner has discussed these questions with family and personal professional advisors. There are books on exit strategies and consulting firms that deal with these issues. A professional business intermediary is also someone that has experience in this area and can provide a good idea of current pricing issues and market conditions.