How to Transfer Your Business to a Family Member
Are you thinking of transferring your business to a family member? This occurrence is fairly common, especially among small businesses. Here are some considerations that will help with your planning and decision making.
Do You Have a Good Contract?
Sometimes close family members are tempted to skip a contract, but it’s always a mistake not to have things in writing. When you create a buy-sell agreement, it helps keep things clear between the parties involved. Make sure that your documentation is thorough. It should cover a wide variety of details including the amount being paid, your continued involvement, and the business value.
Does Your Family Member Need Financing?
When it comes to selling businesses to family members, seller financing is common. You could even consider agreeing to a private annuity. This will allow payments to be spread out over many years. One benefit to providing financing assistance is that you will receive a steady stream of income along with interest on the loan as well.
You could also consider a self-cancelling clause on your installment note. This would allow debt to attach to your will in case of your untimely passing before the payments were complete.
Are You Selling or Gifting Your Business?
Gifting a business takes place more often than you might think, due to the tax benefits involved. Also, when you gift a business, you can still maintain some level of control.
The federal gift tax exemption changes every year. In 2022, the annual gift tax exclusion is $16,000. The lifetime gift exemption limit is $12 million. While you may owe some federal gift taxes if the amounts exceed the exemption limits, the good news is that after you have transferred your business, any future growth of the business won’t affect your financials.
Is Everything Accurate?
Unfortunately, many business owners have acted unethically when it comes to transferring their business to their family members. As a result, the IRS tends to give this kind of transaction extra scrutiny. You will want to ensure that all your paperwork is in proper order and highly accurate.
You may very well want to hire the services of a lawyer and accountant to assist you with this matter. Of course, a business broker or M&A advisor will also help you with the details of this agreement and figuring out what benefits you and your family members.
Copyright: Business Brokerage Press, Inc.
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How to Accurately Value Your Restaurant Business
If you’re thinking of selling your restaurant, one of the first steps you’ll need to take is to have your business appraised. This will give you a better idea of how much your restaurant is actually worth and what kind of return on investment you can expect from a sale. However, valuing a restaurant business is not as simple as looking at its revenue or profit margins.
There are a number of factors that must be taken into account in order to arrive at an accurate valuation. Most people would agree that the restaurant business is a gamble. So when it comes time to sell your restaurant, how do you ensure that you are getting a fair price for all of your hard work?
Determining the Value of Your Restaurant Business
There are a number of different methods that can be used to value a restaurant business. The most common method is to use a multiple of the business’s annual sales. For example, if a restaurant does $2 million in sales per year, it could be valued at $4 million (a multiple of 2).
Other factors that can be considered include the profitability of the business, the level of debt, the location and condition of the property, and the long-term prospects for the industry.
When valuing a restaurant business, it’s important to use comparable sales data from recent transactions in order to arrive at a realistic figure. It’s also important to consult with an experienced appraiser who understands the nuances of the restaurant industry.
With accurate information and professional guidance, you can arrive at a fair valuation for your restaurant business. Let’s look at some specific valuation approaches.
Market Valuation Formulas
Business valuation is the process of determining the economic value of a business or company. There are many factors to consider when valuing a business, but the three most important are usually the market approach, income approach, and asset-based approach.
Market Approach
The market approach looks at similar businesses that have recently sold and uses those sale prices to value your business. With this approach, you first need to find comparable businesses that have sold in your area.
This can be a challenge, but it’s important to find businesses that are as similar to yours as possible in terms of size, type, and location. Once you have found a few comparable sales, you can use those sale prices to estimate the value of your business.
Income Approach
The income approach looks at the potential earnings of a business and discounts those earnings back to present value. This approach is often used to value businesses that are not yet profitable, such as start-ups.
With this approach, you need to estimate the future earnings of the business and discount those earnings back to present value using a suitable discount rate.
To help you estimate the future earnings of your business, you can use financial projections. Financial projections are a forecast of a company’s future financial performance. They usually include income statements, balance sheets, and cash flow statements.
Asset-Based Approach
The asset-based approach simply adds up the value of all of your business’s assets (property, equipment, inventory, etc.) and subtracts any debts or liabilities. By taking this approach, you arrive at the book value of your business, which is often different from the market value.
When valuing a restaurant business, the market approach is usually the best option. However, all three of these valuation approaches can be helpful in arriving at a fair price for your business.
Factors to Consider When Valuing a Restaurant Business
There are a number of factors that can impact the value of your restaurant business. Some of these include:
The Size of the Business
It goes without saying that larger businesses usually sell for a higher price than smaller businesses. There are a few other factors to consider when it comes to the size of your business, however. For example, businesses that have a large number of employees usually sell for a higher price than businesses with fewer employees. This is because businesses with more employees tend to be more stable and have a lower risk of failure.
The Location of the Business
Another important factor to consider is the location of your business. Restaurants that are located in busy areas with a lot of foot traffic usually sell for a higher price than restaurants in less desirable locations. This is because businesses in busy areas have a built-in customer base and tend to be more profitable.
The Type of Business
The type of restaurant you own can also impact its value. For example, fast food restaurants usually sell for a lower price than full-service restaurants. This is because fast food restaurants have lower operating costs and tend to be less labor-intensive.
The Condition of the Business
Another factor to consider is the condition of your business. Restaurants that are in good condition usually sell for a higher price than restaurants that are in poor condition. A business in good condition tends to be more profitable and has a lower risk of failure. They are ready to go and in less need of renovation and major overhauls before they can be up and running.
The Financial Health of the Business
Of course, the financial health of your business is one of the most important factors to consider when valuing your restaurant. Businesses that are profitable and have a strong financial history usually sell for a higher price than businesses that are struggling financially.
Growth Potential and Profitability
A business that is not yet profitable but has high growth potential may sell for a higher price than a business that is already profitable but has little room for growth. This is because businesses with high growth potential are seen as being more valuable because they have the potential to generate a lot of revenue in the future.
Master the Food Industry
While there is no one “right” way to value a restaurant business, the three most common methods are the market approach, income approach, and asset-based approach. By taking into consideration all three of these methods, you can get a well-rounded understanding of what your restaurant is worth and ensure that you are getting a fair price for your hard work.
When you’re ready to sell, book a consultation with Fusion Business Brokers. We have a team of experienced restaurant brokers who will guide you through the process of valuing and selling your business. We’ll help you determine the best asking price for your business and market it to a wide range of potential buyers.
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Why Is Confidentiality So Vitally Important
When it’s time to sell a business, you will want to keep confidentiality first and foremost in your mind. The reality is that many deals do not succeed when confidentiality is breached and others learn that your business is for sale. Let’s take a look at why this is the case.
What Can Occur When Confidentiality is Compromised?
If vendors or suppliers find out that your company is for sale, it can negatively impact your business in different ways. One common occurrence is that vendors begin to change the terms they have established with you. Even a small change might end up not being minor at all, as it could impact cash flow. The same can be said for word of your business being for sale reaching your creditors, as they could also suddenly change their terms.
Another major issue that could be caused when confidentiality is breached is that your employees and customers might begin to worry. Employees could even start looking for new jobs. Your customers might worry about the new ownership and preemptively stop patronizing your business.
It goes without saying that you won’t want your competitors knowing that you are selling your business. This might make them more aggressive, and they could even start using this knowledge to take your customers.
On some occasions, business owners set out to sell their business on their own. Unfortunately, this decision can put them at higher risk for confidentiality breaches to occur, which start to cause things to go wrong. When you are in the process of selling your business, you will want everything to appear as steady and reliable as possible.
Keeping Up Appearances
When a buyer is carefully vetting your business for a potential acquisition, you won’t want anything showing up on the radar that could give them pause. It’s important to show that the business is continuing to operate in a successful manner and there have been no recent changes.
The good news is that business brokers and M&A advisors have proven strategies that will keep the news that your business is for sale confidential. Your brokerage professional will be sure to vet all prospective buyers, and they will use the most reliable confidentiality agreements that will protect your best interests.
Copyright: Business Brokerage Press, Inc.
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How to Do Due Diligence Before a Company Sale
When a company is about to be sold, it is more than worth taking the time to make sure you do it right. It is rare in life that the stakes are as high as when someone buys or sells a company. In the largest tech acquisition in history, Facebook paid $19 billion to acquire WhatsApp!
Although most company sales do not involve stakes that are quite that high, it is still vital to do your due diligence as a sale approaches. Some people wonder if taking the time to do their due diligence is truly necessary, but there are decades of business experience that show the importance of following this business practice.
So what is due diligence all about, and what do you need to do before finalizing a company sale? Read on to learn all about the most important steps to focus on as a company sale approaches!
What Is Due Diligence?
Many buyers and sellers alike dread the due diligence process that proceeds a business sale. Doing your due diligence is notorious for being tedious and at times it can even feel pointless.
The process itself does not fascinate many people. However, the tedium can get even worse when you realize that doing your due diligence is not supposed to affect any part of the sale. By the time you are arranging to do your due diligence, everyone is already agreed on the intended outcome of the process.
If everything goes well, nothing will change about the sale as the buyer gets the last few necessary details about the company they want to buy.
The Importance of Following Due Diligence Guide Tips
On the other hand, there is always some chance that a vital piece of information will transform the nature of the sale process. That is why doing your due diligence before a company sale is a little bit like doing your taxes.
Almost nobody enjoys it, but there are overwhelmingly good reasons to take the time to do so, anyway. The important thing is to figure out how to do so with efficiency and as little stress as possible.
So what does the due diligence process consist of? The due diligence process consists of the seller providing the buyer with the tiny details that make up a company.
The buyer needs to confirm that everything is in order and that there are no surprises before they seal the deal. In practice, that means that going through the due diligence process consists of providing detailed documentation and descriptions of every relevant aspect of the business.
In some cases, merely providing the buyer with all of this information displays enough competence that the buyer may not review every scrap of data they receive. However, the buyer can only have that kind of trust because of the possibility that they will scrutinize everything about the company they are considering buying.
That means it is important to be thorough and provide the buyer with anything that might have any bearing on the sale.
Follow Due Diligence Tips With Financial Information
Perhaps the most important information to prepare for the buyer is everything related to the financials of the company. This will include things like revenue for as much of the history of the company as possible to provide.
The buyer will need more than the total revenue or net revenue numbers, though. Make sure to provide as much relevant data as possible. This can include total revenue along with total costs.
You should also specify what kind of accounting process you are using to calculate revenue. The buyer will also need all other information contained in monthly financial statements.
In the ideal case, you will have all of this information on a single platform. However, if necessary, provide the buyer with all relevant financial information even if it is scattered across a variety of platforms and documents.
The buyer will probably want to figure out what kind of customer retention your company has achieved in the past. Any other information you can provide relevant to this dynamic will therefore also be helpful.
Make sure to include information about the customers behind every source of revenue. The numbers associated with company transactions alone may not be enough.
Provide Clear Information About Human Resources
Buyers buy companies with the idea that they can improve them in some way. In many cases, buyers think that they may be able to round out deficiencies in company talent. For that reason, it is important to provide them with all the information they need to assess their ability to do so.
That includes a company census that lists every employee, including past employees. You will also need to provide information regarding the salaries, benefits, and start and end dates of each employee.
Provide a company employee organization chart. If you want to be helpful, you can highlight any areas where a potential employee or company leader is missing.
Gather Relevant Information About Products
The buyer needs to have access to all relevant information about whatever product or service your company provides. They need to have enough information that they could recreate your product or service from scratch if they wanted to do so.
Not only that, but they need to know how to market your product and price it. Make sure that they know everything about how you provide your product or service and how you present it to potential customers.
The best due diligence advice emphasizes doing more than necessary if you can. Taking the time to thoroughly follow due diligence tips can help a company sale go as smoothly as possible.
Due Diligence Before a Company Sale
As a company sale comes up, it is always essential to take the time to do your due diligence. The more experience people have with company sales, the more they appreciate the value of this established business practice. Doing your due diligence is an investment that will more than pay for itself in the future.
To learn more about how to do your due diligence before a company sale, reach out and get in touch with us here!
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Selling a Business Means You Should Expect the Unexpected
No one ever said selling a business was predictable. However, the truth of the matter is that every sale is different. Even the reasons behind a business owner deciding to sell his or her business vary tremendously. If you are getting ready to sell, it’s important to be aware of the various aspects that could catch you off-guard. If you are prepared for the unexpected, you’ll be mentally ready for the sales process, which often does not go as planned. Even the smoothest and most streamlined sales encounter a few road bumps along the way.
Price Considerations
When it comes to the price structure for a potential sale, many business owners have numbers in their minds that do not meet with reality. As a result, a potential offer could be far less than what they expected, and this causes conflict and delays. Your brokerage professional will prepare you with a thorough valuation so you can have a clear idea of the fair market price of your business. Be sure to ask any questions that you might have so that you feel fully informed when it comes to prices.
Confidentiality
Throughout the sales process, confidentiality must be carefully guarded. Otherwise, this too can interfere with a sale. Your business broker or M&A advisor will have effective strategies to help maintain the highest levels of confidentiality. Even with the best safeguards in place, there is a small chance that a rumor could begin to circulate and word could get out to your employees, customers or supplies. In the case of this incident, it’s important to have a contingency plan in place to quell the rumors.
Your Stockholders
Oftentimes, business owners of privately owned companies forget that their minority stockholders have rights too. You will not be able to sell your business without dealing with all parties involved. When you get a “fairness opinion,” it can go a long way to convince your shareholders of the best price and terms. Even if your shareholders are members of your family, they will have to be successfully dealt with before the sale goes through.
Expect to Allocate Time
You may have hired an experienced business broker or M&A advisor, but you should still be prepared to spend some time dealing with the sale of your business. You’ll be expected to do everything from prepare documents to meet with prospective buyers. This fact that selling will take up your time is particularly true if you haven’t begun making preparations years in advance. That’s why we advise clients to start working with us early on.
You’ll want to make sure that despite your need to focus on elements pertaining to the sale of your business, it is necessary to keep your business running smoothly. Otherwise, any signs of weakness could interfere with your potential sale and your efforts could backfire. This issue just stresses the importance of preparing to sell years in advance.
Through the sales process you must still run your company as well as ever. You’ll want to make sure things are progressing nicely, even if you don’t plan to own the company in the near future. Obviously, your buyer will want things to look reliable and any dips can trigger a red flag.
Copyright: Business Brokerage Press, Inc.
The post Selling a Business Means You Should Expect the Unexpected appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
