Archive for category: Must Knows About Business Sales

One of our watchwords around the office is “have a plan.” The thing is, there are so many items that live in the world of business transactions that a business owner could be forgiven for saying, “What the heck is that?” when we tell them about something. One of those items (that gets that reaction) is depreciation recapture.

Definition

If you have a sinking feeling as you’re considering the self-explanatory term, you’re not alone. But bear with us as we spell it out: depreciation recapture is the monetary gain from the sale of an asset at the ordinary income tax rate. 

This could be less than you think, because, after all, we are usually talking about a used asset here. But in other circumstances, as with collectibles or real estate, we’re often talking about appreciation, and all that profitable gain beyond what was written off in depreciation is taxed at the capital gains rate.

Depreciation

To clarify for those who aren’t entirely clear on depreciation, it’s the wear and tear and operating expenses of a capital asset necessary for your business. It can be something as simple as a printer or as complex as a CNC machine.

There isn’t one way to calculate depreciation, though the one most are familiar with is the no-mystery-there “straight-line depreciation,” in which you take the difference between the original cost of the item and the value at the end of its usable life and divide that by the number of years the item will be in service.

An alternative to this is declining balance depreciation, which uses much larger amounts of depreciation early on in the item’s usable life. This is often used for tech purchases which can sometimes be capital-intensive.

Why

We don’t make the rules, but if you follow the logic, it’s a way for the IRS to recoup a portion of taxable revenue it didn’t receive because of a depreciation declaration against gross revenues.

Is It Avoidable?

Yes, but only for real estate, and only using the well-known 1031 exchange.

“But what if I don’t use depreciation?” We love that line of thinking, but someone must have tried that already because the tax code says that this applies to the depreciation that “was allowed or allowable.” So even if you don’t take it you’re going to be treated as if you did.

How Will This Affect My Transaction?

One of the first lessons new workers learn in the job market is that the amount of their salary isn’t what they get to keep. Business owners can be the exact same way when they talk about valuations and what they want out of a sale. The government is always going to get its take as well. And there’s even more at stake in regards to how all this is calculated, using terms like cost basis and adjusted cost basis and inputs like gross annual income of the business itself. That’s where the accounting part of your dream team comes in to help you calculate what your tax burden will be in relation to these assets and what kind of bite that takes out of your expected take-home from the sale.

Don’t feel bad if you didn’t know about depreciation recapture! There’s all sorts of stuff you might not know about business transactions. That’s where we can help. Give us a call.

Deal fatigue is exactly what it sounds like: negative feelings around a transaction that, in the worst case, can lead to the deal blowing up or not happening. While deal fatigue isn’t always preventable, it is easily treated. We’ve included a few warning signs and corresponding treatments in this article to help you deal with a case of deal fatigue.

Causes of Deal Fatigue

Deal fatigue is most often caused by time delays:

• Communication is poor or inconsistent: parties and counterparties do not have a consistent rhythm or tempo in responding to queries
• Deal points get renegotiated: some parties use the preparation of final legal documents as a time to renegotiate terms of the deal
• No support staff: neither buyer nor seller have access to a subject matter expert to help them through a particular aspect of the transaction
• Complex deal structure causes a “hurry up and wait” effect

These challenges lead to buyers and sellers feeling frustrated, hopeless, and at times, angry.

Solutions for Deal Fatigue

Remember when you are feeling frustrated to take a moment and remind yourself why you are going through this transaction in the first place. Whether you’re a buyer or a seller, whether this is your first transaction or one of many, it helps to remember that very rarely do business sales go off without any hitches whatsoever. 

If you’re still feeling frustrated, call your broker. We’re here to be that sounding board and to hear all your frustrations. But when you’ve finished venting, we’re going to focus on solutions.

• To combat poor communication, set up regular updates to let everyone know what the status of the current work is and what upcoming milestones there are. Be responsive when it’s your turn to deal with a task or query.
• To avoid misunderstandings in communication, don’t overly rely on email. Remember that some things are better said by telephone or video call or in person and a lot more can get accomplished during those types of meetings. Email has its uses, but speed is not one of its virtues when working on a challenging part of the deal.
• To be better prepared for anything that might come up, have your due diligence paperwork ready (if you’re a seller) and have your dream team (accountant, lawyer, tax advisor) ready (if you’re a buyer) to evaluate paperwork and give advice.
• To stave off renegotiation attempts, remind the counterparty of the LOI. That was the time for negotiation. Unless diligence has revealed something substantially at odds with the assumptions in the LOI, there shouldn’t be extra time spent at the end of the deal renegotiating what was agreed at the beginning of it.

One of the ways we as brokers prepare our clients at the start of the process is by reminding them that this isn’t our first rodeo and that we’ve had to deal with deal fatigue ourselves at times. But as long as you follow a process set around reasonable expectations with parties acting in good faith, you can get to the finish line, even with a bit of deal fatigue. If you don’t deal with deal fatigue when you spot it, the likeliest outcome is the deal dying before closing.

Want to prepare for a transaction with minimum deal fatigue? The Apex team is here to help. Reach out today.

Interest rates, buyer confidence, inflation…these are statistics that don’t care about a new year. They will continue whichever way they want whether a ball drops in New York at midnight or not.. But humans do see a lot of significance in a new year, and that invisible line between December 31st and January 1st can be an accelerant for a seller to get a deal closed or a final push for a buyer to finally get serious about buying a business in a new year.

Interest Rates

Interest rates are on a trend line up, which means that the cost of operating a business is going up. So, unless sales are up and margins are staying the same, profitability will be down which means valuations will be down…unless proper steps are taken.

Remedies: work with your bank on strategies to deal with interest rates, whether it be on your line of credit or even a loan you might have.

Buyer Confidence

Before the rain comes you can often smell it or sense it. Market forecasters don’t entirely agree about what is going to happen or when it’s going to happen. That uncertainty translates into “feels like rain” so that is leading to a dip in buyer confidence.

Remedies: Sellers need to continue to stress their fundamentals and brag about their performance in 2020 or 2021, if there’s braggable material there. Unless buyers think whatever is coming next will be worse than extreme Covid lockdowns, they may be able to see through their feelings to the hard, cold numbers.

Inflation

Prices are going up in almost every sector. That means if you haven’t raised prices, you are likely making less money, because your costs have gone up. Some businesses have held the line on pricing in part not to shock customers, in part not to lose market share. But two years on with inflation continuing on, those businesses are seriously considering a price change.

Remedies: raise prices. Raising your prices periodically is a healthy business practice anyway, but even more so when inflation is not a secret. You can also find creative ways to offer customers more perceived value, whether that might be offering a discount on a larger advance purchase than they are used to or asking them to renew a contract for a longer period before you raise prices. Remember that keeping a solid profit margin isn’t just about your business surviving and thriving in the short-term, it’s about a narrative of value in the medium and long-term, particularly if you want to sell.

Seller Fatigue

When we look back at this period in years to come, we might lead the narrative in this way, “And then this happened, and then this happened, and then this happened.” We saw in the last two years that some business owners were already contemplating a sale, but Covid made them tap out sooner. As the issues we mentioned above continue on, many are looking at 2023 with the thought that they don’t want to be in this same position this time next year.

Remedies: explore selling. It’s okay to admit that you’re tired and want to give up. Nobody is supposed to run a business forever. That doesn’t mean we’re going to be able to list and sell your business before the new year (though stranger things have happened) but you should talk to us now so that we have a plan for the new year. When everyone comes back from the holidays you will be ready to go with your listing and be energized that an exit plan is in place.

Pondering other trends we didn’t mention here? We’d love to talk to you about them. Give us a call.

Every business is going to have its own particular set of documents that it’s going to need at closing. But there are a few that need to be on everyone’s checklist and a couple that often get forgotten or don’t get due consideration. In this article we’ll share those items and what you should know about them.

But before we get to them, you have to realize that a closing date is an expression of intent. It’s not a guarantee. There are things that both buyer and seller can do to move that date around. Whether you’re a buyer or a seller, you don’t want your actions to be the reason a transaction is held up. Make sure these items are handled so that closing can happen as scheduled.

Work in Progress (WIP)

The reality is that sellers are going to be delivering goods and services to your customers right up until and beyond the moment of the transaction. Both buyers and sellers will want there to be as little interruption as possible to normal business operations. This means creating a document of work in progress and figuring out how that WIP is incorporated into the sale price.

For example, if you have taken in work that the seller has already received payment for, but the employees or contractors will not complete (or get paid for) until after the sale, you have to work out who is going to pay. Will the seller make separate payments to those employees and contractors for that WIP, or will it be deducted from the sale price, leaving the new owner to take care of it? That’s one way of looking at it, and there’s no “correct” answer, but it’s not something you want to leave to the last moment.

Building Lease

We can’t tell you how often business transactions have been held up (or blown up) because of failure to deal with a lease issue. If you have a lease, you need to make sure long before closing that a new lease can be contracted with the buyer or that the seller can pass on the lease. 

This is an example of an item that is out of both the buyer and the seller’s control, so the more time that is allowed to deal with this, the better.

New Entity

The buyer is often going to need to create a new business entity and once he/she has that EIN, will need it to open business bank accounts and credit card merchant accounts. That shiny new bank account will also be a good place for the buyer to drop in some working capital.

We’ve also mentioned the need for buyers to make sure they have the proper licensing with the appropriate authorities in order to have a seamless transition. Often a new entity will be needed to obtain those licenses.

Employee Meeting

You need to keep lips zipped when it comes to a business transaction (if you don’t believe us we shared some recent stories on our podcast). Ideally most (if not all) of your employees should find out about the transaction on the day it closes.

How the meeting goes and what is covered is something for buyer and seller to work out, but the three feelings your employees should have coming out of the meeting are:

• Security: they aren’t getting fired.
• Positivity: this is a good thing.
• Optimistic: there are some exciting possibilities ahead.

Find ways to give your employees these feelings at the meeting, and you’ll have succeeded.

Closing Meeting

This might seem like the most obvious item, but there’s a logic to when this meeting occurs as well. Things to consider:

• Make the closing for the morning so that the parties can go to banks or government offices afterwards.
• Scheduling the closing at the end of a quarter, month, or pay period to simplify calculations. Bottom line – close when all parties are able to do so. Any day will work. 

We’re here to make your closings simple. Give us a call to see how we can help you with your next business transaction.

In our social-media conscious age, we might think it’s a perfectly normal thing to announce a new business acquisition to the world. Imagine the humble-braggy LinkedIn post, “I’m honored to announce…” along with press releases and maybe even a shiny new “under new management” sign to drape across the exterior of the business. The problem? These aren’t always the smartest moves. Balancing continuity with change is one of the biggest challenges that any new business owner will face.

Sometimes Change is Good

We shared a success story some time ago of an owner that made pretty dramatic changes right off the bat which led to major financial gains. Short version: the old owner didn’t always send complete orders, but customers put up with it because they liked the owner and there weren’t a lot of alternatives. 

All the new owner did was actually start fulfilling the orders as requested. No more partial fulfillment. Customers were delighted and unsurprisingly, new business followed. 

Other Times, It’s Not

As we recently shared in a podcast episode, one new owner made a change and was bankrupt before the year was out. As in the previous example, the old owner could have improved a part of the business before the sale. In this case, his products and services were underpriced for the market.

The new owner, dreaming of dollar signs, immediately implemented a dramatic price change when he took over the business. The customers were unhappy and it was only 60 days later that the new owner had driven the old business into the ground.

Were the prices outdated? Definitely. They hadn’t been changed in over a decade.

Could they have been changed gradually, with explanations and context? Of course.

Did the customers save any money by switching? Probably not, but they got to vote with their feet, which is one of the most powerful muscles that consumers like to flex.

But the new owner thought revenue was just a matter of flipping a switch. Unfortunately for him, it was the off switch.

We Resist Change

We may not like to admit it, but we are creatures of habit. That’s why you see companies spend untold millions getting you to simply try a new beverage or toothpaste or even a type of “burger” made with beets. They know that at least trying something is a gateway to possibly making that product a willful future purchase.

The same is true with businesses we deal with. We develop relationships with them and just like employees, we fear that the new owners might mess everything up. We might stay away from the business for a while “waiting to see what happens” but that in itself can create a self-fulfilling prophecy in which fewer people go and the business hits a revenue death spiral, simply because of the perception of change.

Change, But Slowly

This is not an impossible problem. In fact, we’ve seen it successfully negotiated hundreds of times.

Firstly, don’t change anything. The reason you bought a business in the first place is because it works. If it ain’t broke, don’t fix it.

Obviously changes that are not customer-facing can be done right away, whether that’s a change of who the company banks with, or processes credit cards with, or solicits for insurance coverage.

But other things, like what we mentioned regarding pricing, or personnel who are customer-facing and have developed relationships with the customer base, should be left as is.

If there are changes you’re considering, poll employees and customers. Give them a voice.

If there are changes you are definitely implementing, think about how to give context and explanations to customers. They deserve it. They don’t owe you anything, especially as a new owner. Take the time to explain why prices need to change, or the logo is adding a new color, or why you’re adding a new product or service (or getting rid of old ones). People won’t always be happy with the changes, but they’ll appreciate the explanation.

And you’re much more likely to keep them as customers. And keep the business too, instead of losing it in 60 days.

Want more tips on how not to lose a business in 60 days? Give us a call!