Double Taxation

Why are you a C-Corp?

 

Every business transfer that I have been involved with has had tax consequences for the seller.  No one likes to pay more than they have to and it is very frustrating to see a seller pay when they shouldn’t.   Specifically, I’m talking about businesses that are incorporated as C-Corps when they don’t need to be.   For those not sure what I’m talking about, when you sell your C-Corp, it gets taxed at regular corporate tax rates, you then have to pay personal taxes, again, on your income from the sale, double taxation.   In an LLC or S-Corp, the income from the sale passes thru to the seller and the initial round of taxes can be avoided.  

As a business broker, I see the effects on a seller when they realize a significant portion of the proceeds from the sale of their business is unnecessarily going to taxes.   It has caused some to pull out of transfers, revamp deal structures, change their post-sale plans and delayed the selling process completely.  It has led to some very frustrating discussions.

Most of the businesses where I see this are long established and the seller relied on the guidance of a trusted advisor or team to establish the corporate identity.  There may have been a good reason 20 – 30+ years ago to be a C-Corp but that reason may have disappeared.  The person who helped them set it up is either long retired or deceased.  The team changed but the Corporation continued on.   Since many small business owners only visit with their accountant during tax season, it is easy to see how the need to change this can be missed in the busy season.

It takes 10 years to completely convert from a regular Corporation (C-Corp) to a sub Chapter S Corporation (S-Corp).  Every business owner owes it to themselves to check with their qualified tax or accounting advisor to make sure their corporate structure is best suited for their current needs.  I have had professionals tell me ‘We should have changed this 10 years ago” or “We could not help this seller but I have another client that we were able to help.”  

It is very frustrating to have the double taxation talk.  Don’t let it happen to you, your friend or your client.

Are you Burned Out?

When Monday is not fun anymore…….

People ask me when they will know what it is time to see a business broker.  My first answer is always three to five years before you need us.  My second answer is “When Monday is not fun anymore.”

Burn-out is the number two reason that small business owners sell their business.  They have reached the point where the grind and challenges make the business a physical and mental drag.  Sadly in my world, many of them wait too long to see a person like me.  The sales and earnings of the business have begun to drop.  Customer service is no longer as important as it once was.  Employee performance has been allowed to diminish. Bad employees are tolerated because it is easier than firing them and starting over.  If you have waited until this point to see a business broker, you have probably cost yourself money on the selling price of your business.  When people buy “fixer-uppers” they generally do so at a discount.

It can be hard to realize that you are becoming burnt-out in your business.  It can be a gradual process that sneaks up on you until the damage is done.  One of the telltale signs we advise people to look for is “When Monday is not fun anymore”.

Kansas Business has a New Owner

Change in Ownership at Mid-West Painting in Wichita, Kansas

Steve Fischer of VR Business Brokers in Wichita, Kansas is proud to announce that Mid-West Painting in Wichita, Kansas has been acquired by BRACE Integrated Services, a BRACE Industrial Group company.

Founded in 1972, Mid-West Painting is a Wichita, Kansas based commercial and industrial painting company providing painting, wallcovering and epoxy floor services. With clients across the region and a strong presence in the aviation sector, the business was a great fit for BRACE.

Equity-owned, the BRACE Industrial Group of companies has a national and international presence providing diversified and integrated industrial services within the power generation, aviation, agriculture, maritime, commercial, petro-chemical and oil & gas markets.

Our office was proud to work with the seller on the preparation, selling and transition of his business. Mid-West Painting is a great addition for BRACE and we appreciated the opportunity to get to work with their team as well.   The additional services that BRACE offers should provide great opportunities for the employees and customers of the business.

We also would like to wish our seller well as he enters into his retirement.

If You Want Me to Buy Your Business: Be Able To Take A Vacation.

Most people in today’s business world value their time off.  Whether it is weekends, days off or vacations, they want to get away. Numerous studies have shown the value of time off as it relates to both health and productivity.  Why would I want to buy and run an existing business that denies me this?

If you are an owner/operator and lose income every time you take time off, your business is your job.  It pays you well (or well enough).  As long as you are working, you make money but when you take off, you don’t.  This makes it very hard for you to step away and relax, even for a day, much less a week.  To a buyer, your business is a very demanding job.  If there is no apparent way for them to improve your situation, why should they proceed?  While it may provide solid income to you, they do not always share the same motivations as you.

Another scenario exists where the business owner is a micro-manager.  “I own this thing and no one else can do it right or I just can’t let go”.  They have built a decent team and are making good money.  They just cannot allow themselves to train, trust or empower the employees to make decisions.  The team, while good, is incomplete. A relaxing week off for this person is impossible.  They have to check in every day, sometimes multiple times daily.  This can be intimidating to the buyer.  If there is no apparent way for them to improve this situation, why should they proceed?

It takes time, energy and resources to “reprogram” a business.  How many employees or customers could be lost during this process?  Unless the solution is obvious and can be implemented, many buyers will decide the challenges and risks of buying the business are too great.  If they do proceed, it probably won’t be at a premium.

Oklahoma Business has a New Owner

Change in Ownership at Kay Office Equipment in Ponca City, Oklahoma

Steve Fischer of VR Business Brokers in Wichita, Kansas proud to announces that Kay Office Equipment in Ponca City, Oklahoma has been acquired by Standley Systems, headquartered in Chickasha, Oklahoma.

Kay Office Equipment founded in 1951 and under the guidance of Dan Stahl since 1981, is a regional fixture in the office equipment and copier supply business in Kay County and north central Oklahoma.

Standley Systems, a family owned business, founded in 1934 has served the Oklahoma office equipment business for over 80 years. With offices in Chickasha, Oklahoma City, Tulsa, Lawton, Ardmore and Duncan, the acquisition of Kay Equipment gives them a physical presence in a part of the state that was lacking.

Our office was proud to work with Dan on the preparation, selling and transition of his business. Kay Office Equipment is a great addition for Standley Systems and we were honored to have the opportunity to get to work with and get to know their team as well.   We look to watching the continued growth of Dan’s former business as it becomes integrated into the Standley fold. We also would like to wish Dan well as he enters into his retirement.

If You Want Me To Buy Your Business: Be Realistic About Selling Price

 

As the owner of your small business you have worked long and hard, and deserve to be rewarded for your efforts.  As a buyer, I am happy to reward you for your efforts.  I might even pay you a premium, but remember it has to make sense.

.

Can I:

– Make a reasonable living wage?
– Service my debt?
– Have sufficient reserve to justify the risk and satisfy the bank’s reserve requirement?

As a buyer I understand that sellers will come to the table with specific wants, needs and desires that must be satisfied when selling their business.  This is the fund with which you are going to start your next venture, pay off your debts, retire comfortably.  You want as much as you can get, who doesn’t?   Unless I can satisfy the three requirements above, or feel the rewards of owning your business justify paying more, why should I buy it?

Just because you have a dollar amount that you need in order to move to your next big adventure, doesn’t mean you will get it.  Listing your business for sale with an unrealistic expectation of selling price can lead to frustration and disappointment.  Buyers will look at your business and move on without even inquiring.  If they do make an offer, you will consider it to be ridiculously low, when in reality it is probably pretty fair.

An owner who waits until the moment they think they are ready to sell, to learn what a professional thinks about the selling price and salability of their business can be making a huge mistake.  Take proactive steps and get a business evaluation done before it is time to sell can better prepare for your next adventure with realistic expectations.  There may be things you can do to enhance the value of your business, adjustments that can be made to your retirement plans, or timetables can be changed to accommodate your end goal.

Sometimes reality can be a cruel thing.  Ignoring it is not wise.  Understanding reality is key to any decision you make.

Is There a Best Way To Value Your Business?

In the past thirty days, I have met with at least two business owners who came to my office with business valuations.  Both were performed by legitimate professionals using established methodologies.  Neither valuation was performed by persons who worked regularly in the business-for-sale market.  Both potential sellers were convinced of the validity of these valuations and were anxious to sell their business at that price they had been given.

I did not pursue listing either of these businesses to sell.  Why?  I did not agree with the results of their valuations.  I felt them too high and did not think it realistic that they would be sold at the price the owners wanted.

The International Business Brokers Association has two separate courses on business valuations.  There is an application for almost every scenario and it is amazing how much a business value can vary based on the methodology used.  It is also equally amazing how the perspective, intent and experience of the person performing the valuation can affect the end result.

Ultimately a business is worth what a buyer will pay for it.  The two small businesses referenced earlier in this blog were very nice businesses.  Due to their business model, market, size and earnings, an individual buyer would essentially be buying a job.  There is nothing wrong with this but in order for the transfer to work it has to make sense for the buyer and his bank. It has to:

• Provide a reasonable living wage.
• Service the debt.
• Provide enough extra to justify the risk (or satisfy the bank)

At the valuations given, neither of these businesses would allow a buyer satisfy the first two requirements, much less have anything left over to justify the risk or reserves needed for the bank.  One business had assets and the other had potential.  Neither the cash flow needed to justify the seller’s expectations of a selling price.

Unrealistic expectations of a selling price remain one of the top reasons that businesses fail to sell.  Valuations performed by those who do not understand the business-for-sale market or “cherry pick” their methodologies to get a high value for their clients can be doing them a huge disservice. Every business owner should know the value of their business.  They should also have a team in place to corroborate these reports.

Business Valuations: Sometimes It’s Like Calling the Baby Ugly

To many successful business owners, their business is almost like one of the family.  It is their baby, oldest child, comfort zone, refuge.  It defines who they are.  The emotional attachment is huge.

Imagine having to be the person that tells them the business they have spent their life working on is worth a fraction of what they thought.  It’s just about like telling a new mom her baby is ugly.  It is one of the hardest things that I have to do.

Many business owners, especially smaller ones, have built a very nice job; not only for themselves but their employees.  The business has taken care of them financially, provided a sense of worth and stimulated the economy.  They have lived the Entrepreneurial Dream.  When they reach the time to retire or move to the next big venture, they expect the sale of their business to make this possible.  They know what they want, or need, and expect the business to provide it.  I wish it always worked that way.

When you engage a professional to evaluate your business they should be able to support their results.  In our BizNumber Evaluation report, we have a section to justify how and why we arrived at our possible selling price.  If the business owner’s expectations of a selling price and our evaluation don’t agree, we are prepared to show them why.  It doesn’t make the conversation any easier but at least we have data to support our position.  Telling a business owner that I think their business is only worth a fraction of what they want is never easy.  It really is a lot like calling a baby ugly.

I advise all business owners to meet with me or someone like me several years before it is time to sell their business.  Knowing what a trained business transfer specialist thinks can be invaluable in preparing for the day that you will sell your business.  I also encourage people to seek second opinions and to share our reports with their accountant, attorney, financial advisor or other trusted transfer team members.  Selling a business is one of the biggest things a person will ever do.  Proper preparation, sometimes years in advance, can be essential.

Market Pulse Report: First Quarter 2015

The International Business Brokers Association and M&A Source in conjunction with Pepperdine University have released the results of the quarterly survey of members for the first quarter of 2015.

Highlights of the report include:

• The number one reason for selling a business across all sizes continues to be retirement. The smaller the business, the more likely the number two reason to sell is burn-out.
• The higher the selling price, the greater the trend toward a seller’s market. At a selling price of $500,000 or less, 59% of responding brokers deem it to be a buyer’s market. In the $1,000,000 to $2,000,000 selling range, 51% deem it to be a buyer’s market. Above a selling price of $2,000,000 it is deemed to be a seller’s market.

Selling multiples:

Selling price                                                        Median multiple

<$500,000                                                           2 x SDE

$500,000 – $1,000,000                                        2.7 X SDE

$1,000,000 – $2,000,000                                     3.3 X SDE

$2,000,000 – $5,000,000                                    4.5 X EBITDA

$5,000,000 – $50,000,000                                   4.9 X EBITDA

Top mistakes that sellers make to hurt their chances of a sale:

1. Unrealistic expectations
2. Poor financials records
3. Declining business valuesView the executive summary here:See the entire press release below:

View the executive summary here:

_________________________________________________________________________

PRESS RELEASE

Marketplace Confidence, Low Interest Rates Driving Increased Business Transactions, According to 2015 Market Pulse Report

Q1 2015 Survey Indicates Lower Middle Market Heating Up for Buyers;

Main Street Market Shifting to Seller’s Market

 

LOS ANGELES, May 19, 2015 – Business transaction activity increased across all market sectors in the first quarter of 2015, driven by consumer and market confidence and low interest rates, according to the 1st Quarter 2015 Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project. The quarterly report evaluates market conditions for businesses being sold in Main Street markets (values under $2 million) and lower middle markets (values $2 million to $50 million).

“Confidence is up across the board, and we’re seeing that reflected in both buyers and sellers markets,” said Craig R. Everett, Ph.D, Director, Pepperdine Private Capital Markets and Assistant Professor of Finance at the Graziadio School of Business and Management. “While this is a welcome development, we remain cautious about short-term trends in a volatile recovering economy. Other variables, such as stabilization of valuations, rising interest rates or less aggressive financing options, may temper that enthusiasm over the next 12 months.”

59 percent of brokers characterized the Main Street businesses under $500,000 as a buyer’s market, while larger companies – those valued at $1 million and above – were characterized as being in a seller’s market. The majority of advisors are still pointing to a buyer’s market in the Main Street sector, but the strength of that sentiment has weakened considerably over a year ago. A year ago, 77 percent of advisors indicated the smallest deals (under $500,000) faced a buyer’s market, but today only 59 percent feel that way—a record low since the survey began.

Valuations for Main Street deals stayed roughly the same or had slight increases. 65 percent of Q1 transactions under $499,999 included multiple SDEs of 1.75 to 3.0, while 76 percent of transactions between $500,000 to $999,000 had SDE multiples of 2.0 to 3.00.

“Buyers looking at buying a company in the Main Street market can still maintain an advantage when buying a smaller firm, but the market continues to shift toward a seller’s market,” says Lisa Riley, CBI, Principal, LINK Business. “Buyers are losing their leverage as time passes and business size increases. If you’re doing a $1 million to $2 million deal, you’re moving into a neutral market.”

Business services led the Main Street market, appearing in the number one (or tied for first) spot for the most businesses sold in each sector. Consumer goods and personal services also held leading positions.

The lower middle market continues to present as a strong seller’s market, and the strength of that sentiment has increased significantly over a year ago. In Q1 2014, 64 percent of advisors indicated business owners for the largest deals ($5 million – $50 million) benefited from a seller’s market, and today 86 percent feel that way—a record high since the survey began.

In the lower middle market, deal multiples grew in both sectors, jumping 0.2 for businesses valued between $2 million to $5 million and 0.4 points for businesses valued between $5 million to $50 million year over year.

“According to a well-respected lender, a good credit cycle only lasts between four to seven years in the U.S. Right now we’re at year five, which means that if historic trends continue, this window will stay open for another two years, tops,” said Scott Bushkie, president, Cornerstone Business Services. “For the baby boomers and other business owners thinking about selling in the next few years, this is definitely the time to have a conversation with an M&A advisor in your market. There may be a significant, and limited, opportunity right now to take advantage of the strong seller’s market.”

Wholesale/distribution, construction, and IT ranked among the leading industries for the lower middle market this sector. Manufacturing and business services also held leading positions.

Other key findings include:

• Expectations and optimism about the future continue to rise. All market sectors showed a growth in new clients, with a mean of 3.2 or better (on a five-point scale) for all deals valued at $500,000 and above for Main Street transactions, a mean of 3.2 for the $2 million to $5 million sector, and a gain of 0.9 point jump in mean to 3.5 in the $5 million to $50 million. Optimism for new client engagements is near its peak since the survey began for all market sectors.
• Retirement ranks as the number one reason to sell across both lower middle market sectors, ranking as 44 percent and 50 percent of in the $2 million-$5 million sector and the $5 million-$50 million sector, respectively. Retirement also ranks as the number one reason to sell across all Main Street sectors. Notably, even though retirement has consistently held the number one spot for several quarters, the trend is still growing. The number of sellers entering the market due to retirement is at the highest levels since the survey started in 2012 for businesses valued up to $1 million.
• The average time to close for Main Street deals rose for every Main Street sector, jumping by as much as two months for businesses in the $500,000-$1 million sector. For lower middle markets, the close to close remained relatively flat, at 7 months in the $2 million-$5 million sector and 11.5 months in the $5 million to $50 million sector.

The Q1 2015 survey was completed by 231 business brokers and M&A advisors, representing 39 states. More than half of the respondents (57 percent) had at least 10 years of experience in the M&A industry. Participating advisors reported closing 143 Main Street market transactions and 20 lower middle market transactions in Q1 2015. The report can be found here: http://bschool.pepperdine.edu/about/people/faculty/appliedresearch/research/pcmsurvey/

 

About International Business Brokers Association (IBBA) and the M&A Source

Founded in 1983, IBBA is the largest non-profit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage, and mergers and acquisitions. The IBBA is a trade association of business brokers providing education, conferences, professional designations and networking opportunities. For more information about IBBA, visit the website at www.ibba.org.

Founded in 1991, the M&A Source promotes professional development of merger and acquisition professionals so that they may better serve their clients’ needs, and maximize public awareness of professional intermediary services available for middle market merger and acquisition transactions. For more information about the M&A Source visit www.masource.org.

About Pepperdine University Graziadio School of Business and Management

A leader in cultivating entrepreneurship and digital innovation, The Graziadio School of Business and Management at Pepperdine University focuses on the real-world application of MBA-level business concepts. The Graziadio School provides student-focused, globally-oriented education through part-time, full-time, and Executive MBA programs at our 5+ Southern California campuses, Northern California campus, as well as through online and hybrid formats. In addition, The Graziadio School offers a variety of Master of Science programs, a Bachelor of Science in Management degree completion program, Presidential and Key Executives MBA and executive education certificate programs. Follow the Graziadio School at http://www.facebook.com/pepperdine.graziadio and https://twitter.com/graziadioschool.

Contacts:

Wichita, Kansas

Steve Fischer, Office Owner

VR Business Brokers of the Plains

316-2632-8722

sfischer@vrbbplains.com

IBBA

Scott M. Bushkie, Marketing Chair

Principal, Cornerstone Business Services, Inc.

920-436-9890

sbushkie@cornerstone-business.com

Pepperdine University Graziadio School of Business and Management

Melissa Mikolajczak, Executive Director, Marketing and Communications

310-568-5585

Melissa.Mikolajczak@pepperdine.edu

Are We Losing Another Group of Entrepreneurs?

 

A version of this blog was published in the Letters to the Editor at the Wichita Eagle today.

I read the article in the Wichita Eagle recently about the attempts to legislate allowing grocery stores to sell full-strength beer, wine and liquor.  The Uncork Kansas group has been working for this for years.  Liquor store owners and their coalitions have been fighting it for years.

To the grocers, the issue represents extra sales and more money on the bottom line.  To the customer, it represents convenience.  To the independent liquor store owner, it represents the loss of jobs, the ability to make a living and to some, a way of life.

There is no doubt in my mind that the law will eventually be passed if not this year, next year or the year after.  If they want to, the grocers could probably just outspend, out lobby and out organize the independent owners.    Sure, there are proposals that will put a moratorium on the issuance of liquor licenses and require the big boys to buy an existing license from an independent store.  I wonder if these owners will be paid enough.

The answer is yes and no.  I’m a business broker by trade.  I’ve met numerous liquor stores owners over the years.  Some can’t wait to get out and will probably accept any offer.  Others are entrepreneurs, hard-working Kansans who provide for their families and give jobs to their employees.  I feel bad for these folks.  Suppose they do get several hundred thousand dollars for their liquor license.  Will it buy-out a lease?  Can they live on this for years?  Can they retire on it?  How will it feel to be forced to give up or re-direct your entrepreneurial dream?

Like many Kansans, I’ll probably take the convenience over the allegiance to independent business at times.  It will be quicker and easier.  It bothers me that liquor stores will be about as common as stand-alone floral shops or an independent grocery store in Rose Hill, Kansas.  I don’t have any particular allegiance to liquor stores.  It just makes me sad to think an entire segment of entrepreneurs might be forced out.

Mr. Liquor Store Owner, Mr. Entrepreneur, thank you for all have done.  I hope you win your battle against the ‘big boys’ but I will be surprised if you win the war.  It saddens me to think that your way of life is going to be forever changed for my “convenience”.

Normally, I write my blogs to educate and share information for business owners and entrepreneurs.  This is just something I thought needed to be said.