Targeted Business Plan

Business - How To Be Set Free From Delays, Difficulties and Dead Ends

When I talk to potential business owners and even those who have been in business for at least 3 years it's interesting to hear them say how challenging business ownership is and that they thought it was going to be easy. Even though they have heard the statistics that start-up businesses don't survive the first two years of business and that data shows that only 5 out of 10 new businesses survive for 5 years, many are still convinced that it's a pretty easy road to tow. What they fail to realize is that ALL businesses, start-ups and existing, will face 3-D (delays, difficulties, and dead ends). One characteristic you must have as an entrepreneur is PERSEVERANCE because you will face many unexpected challenges in business and you must be prepared to handle them and set free.

Let's look at some examples of 3-D that businesses face and some ways they can be delivered.

DELAYS: You have been diligent in putting your business plan together and ready to take it to the bank for funding. Eager to get the business up and running the bank is requiring additional paperwork, financials, etc. So the funding process has been delayed from 2 weeks to 6 weeks.

DELIVERY: Be proactive and eliminate the delay. Make sure you have all your financial documents prepared. Ask the bank their requirements beforehand so you are not scrambling to find the information. Usually, they request the following:

Balance Sheet

Income Statement

Cash Flow Statement

Business Documents

Detailed list of assets and proposed collateral

Personal Financial Statement

Credit Reports

3 years of personal tax returns

Business Tax return (existing businesses)

Business Plan and Marketing Plan

Sources and Uses Plan

Loan Request Package

DIFFICULTIES: A common problem for many business owners is that they think they can do everything on their own. They use the excuses of "I can't find qualified people" or "Nobody can run my business like I can. I don't trust anyone with my baby" or "I can manage this alone until business grows". This "one-man band" strategy may seem like a way to keep costs low at first, but it's not the smartest way to ensure long-term success. They become the little rat on the wheel that is going nowhere. Business operations become more difficult to control as time progresses. Plus being a "one-man band" does not give you the opportunity to work outside the business because you are inundated with handling the day to day operations.

DELIVERY: Utilize your network of contacts or social media to find referrals for qualified, professional employees. If you cannot afford to hire a lot of employees contact trade schools, colleges or universities for interns. They may be available for free or a small stipend.

DEAD ENDS: The business is at a standstill, sales have declined and the need for your product or service has diminished. Your business has come to a dead end.

DELIVERY: A few options come to mind. First, revisit your business plan! It is your roadmap and could offer suggestions on next steps. If you don't have a business plan-WRITE ONE! This may be the reason your business is in the situation it is because there was no plan of action. Second, consult with a business advisor to assist in identifying the problem and consider solutions. Do you need to target different customers, change your pricing structure, leverage the existing infrastructure, etc.? Third, see if there is an opportunity to change directions and create a derivative (a specialized company created out of a broader company). For someone who has a computer sales business the derivative might be a computer repair and maintenance business.

Use Key Performance Metrics to Run Your Business

Do you use Key Performance Metrics to run your business? One of the truisms I've come to believe wholeheartedly is that no business owner is good at every aspect of owning and operating a business.

To be a little clearer, the skills to own and operate a business are many and varied. What tends to attract a business owner to operate their own business is a self belief that they can do one or two aspects of running a business very well and either hire the skills they lack or learn these with time.

I have also firmly come to believe that too many business owners do not understand well enough how their business is performing and more importantly, what they could do to make this task easier for them.

By law, every year a business must submit a tax return to the IRS to state how the business performed. Most business owners outsource this task to a professional such as a CPA or Enrolled Agent. Some choose to create and file their own tax return which is perfectly fine as long as it is done correctly; especially if at some point they want to sell the business. It will almost be impossible to sell a business if the tax returns are not accurate as a bank will not consider lending against the business to the buyer/borrower and the buyer will not take the risk of buying the business if they are not comfortable with the quality of the tax returns of the business.

What's important, though, which I see many business owners missing, is that the financial data of the business provides a gold mine of information. Tucked in the Profit and Loss or Income Statement is critical information about the gross sales, the gross profit, the net profit or net income before taxes and taxes to pay the government to arrive at the net income. However, this document often has other documents that collect and manage the data that rolls into the Profit and Loss and this is where the gold mine exists.

With a little initial time and effort, a business owner can have their book-keeper isolate what I call Key Performance Metrics or KPM's and have these provided on a weekly or monthly basis to allow the business owner to know the direction the business is traveling and what, if any, adjustments they need to make. The KPM's will vary with each business and generally fall into specific buckets. Some examples include the total number of calls, the total number of calls to place orders, the total number of calls to cancel orders.

The KPM vary with each business but they only reveal themselves by looking for them and then paying attention to them. There is a great expression - if you cannot measure it you cannot manage it.

And so that's my challenge to you. What are your KPM's? You don't have time to collect this data? If you don't have time then delegate it to someone you trust and just as importantly, put aside a specific date and time each week or month to go over it. The numbers don't lie and will tell you more about your business in the quickest time possible to provide your greatest return on time to manage and run your business.

Andrew is a 5-time business owner that helps entrepreneurs exit or enter business ownership. His services include helping owners sell and/or buyers purchase an existing business or consult on purchasing a franchise. He also provides certified machinery and equipment appraisals and business valuations.

Andrew currently holds the Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA), the highest credential awarded by the IBBA and the Certified Business Broker (CBB) designation from the California Association of Business Brokers. He also holds a Brokers License with the California Department of Real Estate, is a member of the Sacramento Metro Chamber of Commerce and the Chair of the Sacramento Chapter of the California Association of Business Brokers.

Impact of Tax When Selling a Business

What is the impact of tax when selling a business? Most small business owners spend a lot of time wrestling with the decision about when they will put their business on the market and try to sell it. There is no question that selling a business is an important decision for its owner as it touches many aspects of their life. These aspects of their life include their financial security, their perception of how successful the business has been or alternatively, has the owner taken the business as far as they can take it. However, probably the most important aspect of all is what the owner wishes to do with their future and whether or not they see themselves owning and operating the business.

All of the above and many more reasons take time to consider arriving at the right answers. If the owner no longer sees themselves owning and operating the business and wish to sell, there is an important need to consider the tax implications if they sell the business. The tax implications happen at two levels. The first level is the tax consequences preparing the business for sale. The second level is the impact on taxes when the business moves from the current owner to the buyer. If you are considering selling your business, here are some tax consequences to consider as you contemplate whether or not you will sell the business.

Understand the differences between a Stock sale and an Asset sale. Buyers generally prefer an Asset sale as it eliminates legal liabilities and allows the buyer to start depreciating assets all over again.

Consider maximizing the amount of charitable contributions to closely held business interests

Consider receiving some of the purchase price of the business in installments such as through payment of a salary, a management agreement or a consulting agreement, This allows the seller of the business to receive income when they stop working in the business and therefore no income tax for wages or salaries.

The tax benefits of an installment sale. An installment sale allows the seller to be paid some of the proceeds from the sale of the business to later years thereby spreading out or deferring to future years the tax liability the income would generate.

An additional strategy with the last suggestion is to increase the rate of interest the seller is paid on the installment sale once again deferring to future years the tax liability.

Understand that the value the business sells for revolves around the discretionary earnings of the business so all cash that flows through the business is reported, non business discretionary items are no longer run through the business and any unusual one off occurrences are clearly documented so a buyer can see they are not a normal part of the way the business operates. For example, the business may have a settlement with an employee that involves a one-time payment or the owner may be going through a divorce and paying the attorney fees through the business. These one-off events reduce the profitability of the business but the appraiser should not consider these when they appraise the business.

The tax treatment for different types of legal entities is not the same. A sole proprietor, LLC or partnership will have much different tax outcomes to a corporation. The tax treatment may be entirely different for an S Corporation than a C Corporation. If the owner of the business wishes to maximize their tax position it requires an appropriate amount of planning and guidance.

Because the tax impact from selling or buying a business is complex and can create tension in the transaction, a company that specializes in business exit tax strategies to help both buyers and sellers is Walker Advisory Services in Texas. Walker Advisory Services can work directly with you to offer their tax planning suggestions or in conjunction with your CPA or tax agent. Their specialization of tax planning strategies exposes them to this difficult area of tax law and uniquely positions them to support the nuances that relate to the selling of a business or buying of a business.