By Heather Endresen
Union Bank, N.A., Senior Vice President, SBA and Government Lending
As baby boomers enter retirement age and begin focusing on securing their nest eggs, a large number of privately owned businesses are expected to be sold and transitioned to new owners, many of whom will require some form of financing. The Wall Street Journal has predicted a $10 trillion wealth transfer by 2020 through the sale of small businesses alone. Uncertainty about the treatment of capital gains is also likely to spur sales of businesses, as owners seek to avoid potentially negative tax implications in the future.
This prediction is consistent with what we’ve seen from customers and in the market in general -- many small business owners are beginning to explore the idea of selling their business. At Union Bank, our business bankers help entrepreneurs seeking changes in ownership structure to develop creative strategies to accomplish their specific goals through our Small Business Administration (SBA) business acquisition program.
Selling a business opens up exciting new choices and possibilities. If you’re thinking of selling, it’s never too soon to start planning your exit and succession strategy. The more prepared you are, the more positive a role you can play in maximizing the proceeds from the sale and ensuring a smooth transaction. To begin this process, identify an exit strategy team consisting of legal, tax and accounting, banking and SBA loan specialists, and then follow these steps to help ensure a smooth transition:
- Learn what your business is worth
Receiving a preliminary valuation will help you understand what your business might be worth in today’s market. An early valuation and consultation with your accounting, banking and legal advisors may help you identify opportunities to maximize the value of your business before the sale. Having a strong exit strategy team is also prudent. Different industries use different valuation methods – some industries base valuations on assets, while others look primarily to income – so, for an accurate assessment of value, ask your business banker to recommend a business appraiser with expertise in your industry.
- Understand your tax consequences
The tax implications of selling a business can be complex. The tax liability will depend on the type of business entity you have as well as the type of assets being sold, such as equipment, inventory or goodwill. Speaking with a tax advisor early in the process can help you understand these intricacies so you can plan to structure the sale appropriately.
- Research prospective buyers
Be sure potential buyers have the financial means to complete the transaction. Information to request includes previous employment and business ownership experience, funds available for down payment and sources of financing, and the intended timeframe for completing the transaction.
It’s common for sellers to finance at least part of the transaction. If you expect to do this, the research you have conducted will give you peace of mind by confirming that prospects have the experience, skills and dedication to manage the business successfully for the long term.
The most accessible capital for many buyers will be the SBA 7(a) loan program. It requires less of a cash down payment and less collateral than other forms of financing. It also provides for a lower monthly payment because it allows up to a 10-year amortization. These favorable terms may increase the universe of qualified potential buyers and make it easier for you to sell your business. It is very important to work with an SBA lender with specific experience in business sale financing because this process is generally more complex than standard SBA loans.
- Gather key records and documents
Your ability to show that your business is well-run and organized will help you maximize its value. To prepare for this process, gather your financial statements and tax returns for the last three years, along with your current balance sheet and a year-to-date profit-and-loss statement.
Be prepared to provide additional documentation later in the process, such as leases, insurance policies, employment agreements, licenses and customer contracts. Written business procedures and policies will also be very helpful to the buyer’s transition plan.
- Anticipate questions
In addition to having thorough financial records, preparing written explanations for any unusual financial trends or expenses that will be eliminated after the sale, will help keep the process moving forward, as it is likely the buyer and their lender will ask these questions. Preparing a report that lists all clients, along with the percentage of sales each represents and the type and length of the business relationship, is very helpful to assist the buyer and their lender in the due diligence process. Having your accounting advisors available may also help the buyer and lender during the loan approval process, especially if there are complex issues.
- Plan your transition well in advance
As the owner, you’re clearly an important component of your business. But make sure you aren’t too important – your business must be able to continue running successfully after you leave. To make sure the business isn’t completely dependent on you, consider delegating certain responsibilities to other employees. Sharing roles with employees who will be staying on after the sale is an important step toward readying yourself and your business for sale. This will also make the buyer’s lender comfortable that the new owner will be able to operate the business within a reasonable transition period.
The foregoing article is intended to provide general information about budgeting and is not considered financial or tax advice from Union Bank. Please consult your financial or tax advisor.
Heather Endresen is a senior vice president and head of SBA and government lending for the Business Banking group of Union Bank, N.A. Union Bank, N.A., is a full-service commercial bank providing an array of financial services to individuals, small businesses, middle-market companies, and major corporations. The bank operates 407 branches in California, Washington, Oregon, Texas, New York and Illinois, as well as two international offices. UnionBanCal Corporation is a wholly-owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, Ltd., which is a subsidiary of Mitsubishi UFJ Financial Group, Inc. Union Bank is a proud member of the Mitsubishi UFJ Financial Group (MUFG, NYSE:MTU), one of the world’s largest financial organizations. Visit www.unionbank.com for more information.