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More Gonna Sell - Take Paper? What s Sold?

Copyright January 8, 1996

1996 NAQP Price Survey, cosponsored by Crouser & Associates, is now in the mail. Please return your response as soon as possible. And, make sure you have reservations for NAQP s New Orleans Meeting February 8-10, 1995. Pamela and I will see you there. Tom

Transmitted from Folkston, Georgia

The topic of selling a business certainly has kicked up my email messages. Here are a few more comments and responses. The first message is my response to Margaret on the topic of what is actually sold.

In a message dated 95-12-20 14:31:04 EST, you wrote:

I ve been reading your E-mail on selling a business. A few duh questions. What happens to accounts receivable/payable in such a sale? How about jobs in the pipeline ?

Tom:
Most small businesses are sold via bulk sale where the owner sells the equipment and other capital assets of the business but retains most of the current assets such as accounts receivable, cash, notes to the corporation, etc. Most states require a bulk seller to notify all creditors within a certain period prior to the sale that they are going to sell the productive means of the business to someone else.

Reason for the popularlity of this method lies with the fact that if a person just sold the shares of a corporation to another, some contingent liabilities could pass through - - -> old IRS leans which the former owner didn t pay may become the liability of the new ower; or state sales tax; or the pollution problem caused by the old owner dumping inks and solvents on adjacent property; etc. So, the bulk sale is most popular form of business sale.

You wrote: Since equipment doesn t seem to loom too large in the selling price calculation there seems to be little incentive to upgrade in the last few years (si or no?)

Equipment is one of the assets sold in the bulk sale therefore the equipment, like inventory, is evaluated to reach a price formula similar to: $ business + $ equipment + $ inventory = $ total price. Therefore, generally one would receive more for newer and better equipment than old stuff. However, most buyers, in my opinion, are not enchanted with old equipment and would like to buy a competitive equipment package. (Don t want to finance a business and then have to turn around and buy new equipment, etc.)

And if you ve actually ever achieved the elusive 2 to 1 Current Ratio where does all the working capital go? The answers to these may be self evident but I can be a little dense at times so please bear with me.

Actually, we have seen printers achieve it many times. What happens is once the 2:1 current ratio is achieved, then the excess over 2:1 can go for whatever the owners wish. It can be used for equipment purchases, take it out of the business; go to the Bahamas; whatever.

Later, Tom.
Business owners are usually asked to finance a portion of their selling price. That s one of the reasons I advise owners not to count on cash from the sale of their business to finance their retirement. For that, we put away money now from operations. Here s one recent seller s perspective of taking back paper and his valid concerns about doing so.

From: MEDIATWO
To: TomCrouser

Tom, As one who has already sold his business, I would like to add a point to your excellent discussion of selling businesses.

The problem I had in attempting to sell (along with all the other problems you mentioned) was the many buyers who wanted me take back paper, that is, a note tolend them the money to buy the business. One of them wanted me to put up about 85 percent of the price. He also told me he wouldn t be running the business, but that his brother-in-law, who hasn t been able to find a job, would run it.

This is a big risk to sellers, who are asked basically to finance their own transaction. If the business fails later, even by as much as a month, they now have the business back and probably a whole bunch of wrecked equipment. My decision was to keep this amount to a minimum, and to deal only with a person who seemed to have a good financial background. I would suggest two things: Better yet, let him go to someone else for the cash to buy the business. Great if you can get it.

Thanks for a great column.... Ron Miskoff...The Quick Print News

P.S. Another point that I forgot to mention was that it s a good idea to write your own sales contract because when lawyers do it, they forget to include a lot of things. I wrote my own and had no trouble. Of course the buyer was a very straight-forward guy.
And here s a message pertaining to our discussion I plucked from the internet. It gives a buyer s point of view and illustrates why businesses being sold need to make money. It also reinforces discussions I have had with several owners over the last few weeks about the need to assure their company is profitable prior to the sale.

Subject: Re: Preparing to sell our business
From: dpabich@p05.dasd.honeywell.com (Dennis Pabich)

I ve been looking for a small business to buy over the past year so I can offer a point of view that might help. Most of the businesses that i ve looked at allways seemed to have one major problem. Although they managed their books to minimize tax implications, which is fine, they pictured a very poor perfoming business when a potential buyer starts looking at the financial data for the previous three years. The data that they would typically provide, such as income statements, allways showed losses or very little net profit. There was no way to get any additional financing because the historical financial performance looked pretty poor. The books couldn t support anything even close to what they were asking for the businesses. In cases like that, a buyer will most likely walk away from it. Suggest you manage your finacial data in a way which will portray as good a finacial performance as possible even though Uncle Sam will probably get a bigger share over the next few years. A buyer will also request copies of your tax returns in order to compare to what the books indicate.

In addition, you might want to briefly consult with a Business Broker in your area for suggestions. I highly recommend that you stay away from a normal Real Estate Broker as they usually don t have much experience in understanding the big difference in selling a house versus a business.

Lastly, when you are getting closer to the time when you are going to put your business on the market, it would be a good idea to have a well experienced Appraiser work up a market value for you. Good luck! DSP
Does your shop have what it takes to survive the next twenty years? Reply to this message with the word DETAILS and I will send to you information about our on-site threat analysis. Spring dates being accepted.

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Crouser & Associates Performance Group program includes two on-site evaluations by Tom Crouser each year along with two group meetings. Management training is held during the group meetings along with participation in a meeting with non-competing printers. Join others who have decided to run their business instead of the business running them. Reply to by Email to Tom Crouser for more detailed information or call Clark Workman at (304) 342-5100. Or fax (304) 342-5187 or contact crouser@ibm.net.


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Date inserted: Thursday, February 01, 1996 3:48:39 PM

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