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Traps To Avoid When Preparing To Sell (Part 2)
Last time, we discussed some of the major pitfalls to avoid when preparing to sell some of your accounts or your entire business. Getting a handle on them is a significant step. There can, however, still be bumps in the road when talking to a potential buyer. Here are four more critical factors savvy business owners keep an eye on to avoid stumbling:
Corporate Structure and Tax Ramifications
Before you can understand the importance of negotiating the sale of some or all of your accounts, it pays to brush up on facts about how your business is structured and its significance in terms of taxes. Why? Because the payment structure of a deal affects when and how money transfers from the buyer to the seller and how the payments are taxed.
Knowing some basics will help you understand the advice you’re receiving from those who are trained and up-to-date on the legal, financial, and tax implications of small business sales. You don’t want to wait until a deal is struck before you consider the tax ramifications. Ignoring tax considerations at the outset of a transaction is a big mistake and can put you in an adverse negotiating position.
Make sure you meet with a competent tax advisor who can explain, given your specific situation, where you’ll end up after the deal closes on an “after-tax” basis. You’ll want to make sure you review the following:
- STRUCTURE: Are you a sole proprietorship, partnership, limited liability company (“LLC”) or S corporation? All of these are considered “pass-through” entities and will provide you with the most flexibility in negotiating a sale of your business. On the other hand, if you conduct your business through a C corporation, your flexibility on selling the business may be limited due to a C corporation’s lack of “pass-through” taxation and the possibility that “double tax” will arise (at the corporate and shareholder level) when a C corporation sells its assets and distributes the proceeds to its owners.
- TERMS: Are you getting paid in Installments or Lump sum?
If a buyer is allowed to pay the purchase price over some extended time period, such as five years, you may be able to defer the overall gain on the transaction until payments are actually received (along with applicable interest).
- STATE AND LOCAL ISSUES: In addition to federal income tax, a significant state and local income tax burden may be imposed on you as the seller as a result of the transaction. Different states may be involved depending on how the transaction is structured.
Central Station Issues
The more difficult it is for a buyer to transfer and integrate your accounts into its monitoring system, the less the buyer will be willing to pay for your accounts. Site visits to reprogram panels cost time and money – increasing the burden on a potential buyer to integrate your accounts into its system.
Good installation practices, including setting up panels to receive downloads remotely over the phone or IP, eliminate the need for site visits and manual reprogramming. Using standard equipment on a company-wide basis, (equipment that’s both technologically sound and allows the system to grow to accommodate advances in technology and increased subscriber needs), also makes service easier and less costly down the road. Your buyer will understand this, and will base the purchase price on the ease of integrating your accounts.
For the same reason, contracting with your central station to have clean receiver lines, those that handle only your company’s signals, is essential to ensuring that your potential buyer will not encounter any technical issues in transferring your accounts to its central station.
Billing and Reporting Capabilities
Whether you have what the buyer considers to be clear and appropriate billing practices will be another critical element in your ability to strike a good deal. Cumbersome or non-standardized billing practices put the value of your accounts at risk.
But if you have established a billing process that fits your company’s needs for cash flow, minimizes time and expense related to billing, and reduces the potential for past due accounts and the need to put those accounts into collections or cancel them, you’re in good stead.
Good collections procedures are also critical for maximizing your company’s revenue and maintaining the value of your accounts in a potential buyers eyes, directly affecting the amount of cash you receive for your accounts.
The term “2G Sunset” refers to the process of cellular companies shutting down their second-generation (2G) technology. The telecommunications industry is busy phasing out 2G networks across the country. The effective end date for 2G signals is December 31. Dealers that have completed their 2G conversions will find it far easier to sell their accounts at a higher profit. For those that have not completed their conversions, you may find a buyer willing to take on the project, but you will pay the price.
It’s in the details of these day-to-day operations where you can either instill great value, or find the traps that will most certainly trip up a potential deal. Keep a sharp eye on these critical factors and you’ll stay on track to create a win-win for you and your buyer.
What’s your take? Considering a partial or complete sale and want to make sure you haven’t missed anything that could keep you from netting the greatest return? Contact Alarm Capital Alliance for a no pressure pre-sale analysis. We can help you determine if your business is ready and if not, your exact next steps to increase the value in your business.