business sale mistakes

What happens if the company needs to be quickly sold because
of death or disability and it doesn’t make sense to transition your
company to any heir? If this applies to you, your family and your
employees and your customers are counting on you to have an answer.

Buy/sell Agreement if you Have No Co-Owners

Can you have a buy/sell agreement with someone who is not your
partner? You can, and it can be a good idea.

For many years, I had an agreement with another CPA who is in his
own private practice. He agreed to buy my practice if I died, and I
agreed to buy his if he died. We agreed that the purchase would be
one times the amount of revenue collected in the first year of practice,
and that amount would be paid to the deceased’s heirs 25% per year
for 4 years, plus the prime interest rate.

Under this arrangement my employees and customers would be in
good hands and my heirs wouldn’t have the burden of trying to sell
the company themselves and instead have the cash.

We did not “fund” the agreement with life insurance because we
really didn’t need to. We expected the earnings from the acquired
business to cover the payments as agreed. In some cases it may make
sense to include life or disability insurance policies in the buy-sell
agreement in the typical manner, so that those policies could be used
to fund the purchase/sale in case of a qualifying event.

Excerpt from “50 Ways To Leave Your Business (There Must Be) by Sandra Finch. Now available on Amazon.

You want to be a generous person. You put others ahead of yourself.
You have created this business on your efforts which benefited
employees, customers and vendors as a result. You are the one that
took the risk, that had the sleepless nights, that figured out how to get
things done. You probably had a good team along the way, but it was
your money at risk every day. Getting paid fairly for what you have
built is not greedy or selfish, it is responsible. It is also what puts you
in the best place to take care of those you care about.

Selling for the wrong value
When you sell, try and sell for the highest price. Educate yourself
about how to calculate this price. Surround yourself with accountants,
brokers, and/or attorneys who will help you negotiate and
actually receive the value of the business you spent so long building.
This is not the time for sentimentality which often is the situation
when selling to employees or family members.

Example of selling for the wrong value
The most painful thing I see in exits is selling the business for less
than its value.

About a year ago I got a call from an electrical services company. It
was a Mom and Pop company and the call came from Mom. Pop was
a master electrician and had suffered a massive heart attack within
the last few years and was ready to sell to Fred, a long-time employee.

The company had net income of about $250,000 per year, of which
$175,000 went to Mom and Pop and the other $75,000 was paid to
Fred in payroll. According to Mom, Fred was going to buy the company
for $250,000, paid out $50,000 per year over 5 years. Fred was
not a master electrician but was going to use Pop’s license number
(this is allowed, but it supposed include supervision).

Whoa! I explained to Mom that the company was likely worth at least
3 times what Fred was going to pay, but Mom said they knew some
of the customers would leave, that Fred wasn’t that good with money,
and that he had poor credit so he couldn’t get a loan at the bank.

I practically begged Mom to bring Pop to my office for a meeting, or
at least list the business with a broker or contact a competitor electrician.
Perhaps another company could pay full value for the company
and give Fred a job too? All my requests were answered with a firm
“No” because her husband had promised Fred years ago he would sell
it to him when the time came.

All Mom wanted to know from me was how much the taxes would
be on the $50,000 per year they would receive from Fred. I told her
the answer but was pretty worried about Mom and Pop and how they
would get through their retirement years. I also wondered how much
of the $250,000 they would ever see from Fred.

If Mom and Pop had sold their business for the 3X what Fred was
going to pay, they could have gifted Fred $250K dollars to start his
own place and still walked out with double what Fred was going to
pay. Know your end game and a team of professionals are more likely
to get you there…and take care of those you care about along the way.

Excerpt from “50 Ways To Leave Your Business (There Must Be)” by Sandra Finch now available on Amazon

business sale mistakes

Way #16: Get A Partner And Create A Buysell Agreement

Way #49: Selling For The Wrong Value