Parental Guidance

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selling a business in NJWhen selling a business in NJ or NY,  it is important to know all of your options. Many business owners are unfamiliar with all of their options for an exit strategy or the best way to maximize value. Depending on your needs, there are a number of exit strategies available. However, the exit strategy you select can have a direct impact on how your business is valued by the prospective buyer.

Knowing your buyer, what purpose they are placing on the valuation and who determines the value can help you to position your business. Selling a business in NJ or NY can be made easier once you understand the motivation and needs of your buyers.

Exit Strategy

When computing your business valuation, it is important to keep in mind your exit strategy. Who you sell to plays an important role in how you position your business and the valuation you seek. Your exit strategy can include a number of options:

  • Selling to a third party – A third party sale is ideal when the goal is to receive the monetary value for all of the assets in the business. There are two types of third party buyers – strategic and financial.
    • Strategic buyers typically provide higher payouts and expect a quick transition in ownership.
    • Financial buyers will generally provide a lower payout and a transition that is longer in duration.
  • Transfer of ownership to a family member – This exit method is typically more about passing wealth down than receiving compensation for equity. The payout received here will generally be lower so that the equity stays in the company in order to build wealth for future generations.
  • Selling to the management team – When this exit option is used, the business is sold to the existing management team, allowing them to become business owners. This type of exit typically does not receive the highest payout.  However, the existing management method is often seen favorably by banks, making the financing process easier and help the selling process move along faster.
  • Initial Public Offering (IPO) – With this option, the company moves from being privately held to becoming a publicly traded company. The option allows owners to receive a large payout but is not an option for all businesses. The income of the business must be able to support the high fees that are associated with having an IPO and continuing to run as a publicly traded company after the stock offering.
  • Liquidation – Liquidation is often the last resort for those wishing to exit their business. This exit strategy occurs when a business is unable to be sold, and instead liquidates assets. The outstanding debts are paid first, with any surplus being retained by the owner

Each of these options will have a different purpose in how they look at business valuation. Furthermore, each of these exit strategies will have a different value authority, or parties who have the final decision on what they are willing to pay for a company.

Value Authority

There are a number of individuals who have authority in a buying a business. When selling a business in NJ or NY, it is important to understand who has the authority on the buyer’s side of the transaction.

  • Buyers – These individuals will have ownership of the business once the transaction is complete. They likely have their own ideas about the business, what the business valuation should be and how the business will run once the sale is complete.
  • Sellers – The seller is a key player in the valuation process for the buyer as well. The seller’s due diligence, their asking price and how they position their valuation can have a large role in how the buyers look at the sale.
  • Capital Providers – Many business transactions require the use of capital from outside sources.  Even if a buyer has the financial means to purchase a business with cash, it may not be in their financial interest to do so. In order to understand the inherent risk in the transaction and to protect their bottom line, the capital providers will also come to their own valuation.  Even if the buyer and seller agree on a price, if the capital provider is not satisfied with the valuation they may not finance the sale.
  • Government Authority – Depending on the type of business transaction, the government – specifically the IRS and tax courts – may be involved in determining the valuation of a company. This is especially true when the exit strategy is to sell to family members or employees. The government looks to ensure an accurate valuation is used so that individuals are not able to use business sales as a way to avoid paying income taxes.

Value Conclusion

When looking at selling a business in NJ or NY it important to understand the true value of the sale once the transaction is complete. How the transaction is structured can have a significant impact on what you, as the business owner, walk with after the transaction is complete.

Aside from the actual business valuation, business owners must look at what they will walk away with after the sale. This number is commonly referred to as net proceeds. Net proceeds may be calculated by looking at:

  • The price of the offer.
  • Adjusting for the cost or value of items that are not including in the sales offer.
  • Adjusting for any benefit being received from the seller providing the financing for the agreement.
  • Making a reduction for the administrative costs associated with selling a business in NJ or NY including recording, legal and accounting fees.
  • Accounting for all taxes that will arise as a consequence of the business transaction.

The remainder provides the net proceeds. Business owners may find that they accepting a lower offer with lower fees is more financially advantageous than accepting a higher offer with high fees. The difference in the offers may be eliminated when the administrative costs are determined. Therefore it is important to fully investigate all of your options.