The Buy-Sell Agreement: No Business Should Be Without One

In the day-to-day activity of making a business work, many owners overlook the importance of the buy-sell agreement. This document (also referred to as a business continuity agreement) is like a will; no one thinks about it until it’s too late. However, it may just be the most important written agreement or document you ever create.

If your business has more than one owner, either partners or stockholders, what happens if one or more of them dies or “wants out”? The same thing holds true in family-owned and operated businesses. A buy-sell agreement can dictate the transfer of business ownership under certain events as described within its specifically-written language.

The well-drafted buy-sell agreement is designed to prevent the following:

  • The sale of the company because one of the partners or stockholders desires to exit the business and no one can agree on the price or the terms;
  • The necessity to sell or dissolve the business due to the lack of a written agreement determining ownership/management of the business in case of a partner’s, stockholder’s, or family member’s death; (Or, what might prove even worse than a precipitous sale, an heir might decide that he or she is going to get involved in the operation of the business.)
  • A lack of agreement on who should take control when an active partner, stockholder, or family member becomes disabled and can no longer run the business;
  • A serious dispute on any key issue among the partners, active family members, or stockholders that cannot be resolved; and,
  • Questions about business operations following a legally-complicated divorce (or other legal entanglement) involving one of the partners, family members, or stockholders.

The buy-sell agreement can help prevent these situations, as well as many other problems that can befall a business enterprise. In a small business, one of the areas frequently overlooked is the buy-out provision, in the event one of the active partners decides to exit. The buy-sell agreement normally, and properly, provides for the partner, family member, or stockholder to have the first right of refusal in this case. But at what price? If two partners are in disagreement over how to run the business, they will most likely never come to an agreement about its value. A method or formula for valuing the business should be included in the buy-sell agreement; otherwise, the first right of refusal would be no right at all.

In larger businesses, especially those that are incorporated, it is important that the buy-sell agreement specify how the stock of the business should be valued. The agreement should also specify whether the stock must be purchased by the company or its shareholders, or if it can be sold to an outsider. In many cases, life insurance coverage is used to purchase the interest or stock in the business, in the event that one of the partners or majority stock holders dies.

The buy-sell agreement is really the key to the continuation of the business. You can see that the buy-sell agreement, if executed properly, can solve problems surrounding retirement, disability, termination, divorce, bankruptcy, death, and business disputes. Given all the benefits of such an agreement, why doesn’t every business have one?

The answer is simple; most business owners are too busy trying to get the work done and the bills paid. Creating such a document means that the owners must stand back from the business and decide what should happen under a variety of serious situations. The process is time-consuming and also expensive. There are no pre-printed forms; it isn’t possible simply to fill in the blanks and come up with an instant agreement. A lawyer must do the drafting to get a document that will have legal authority in the event that it is ever challenged.

If your business already has a buy-sell agreement, perhaps it is time to review the document, checking for the need to update or amend it. If your business doesn’t have a buy-sell agreement, you should seriously consider creating one. It may be the most important business decision you ever make.

Buy-sell agreements, as well as all of the important documents pertaining to the sale of a business, should be handled by an attorney experienced in such matters. It may seem expensive in the short run, but the careful preparation of any agreement that can affect the rights of the buyer or seller will be a bargain in the long term.

Although business brokers cannot provide legal advice, they are familiar with the intricacies of the business sale. They are also familiar with local attorneys who specialize in the details of these transactions. These attorneys will usually be more efficient, and therefore more cost effective than the attorney who handles a general practice.

Business brokers–because of their knowledge and experience–are a good source of information concerning the buying and selling of businesses. They are conversant with the local marketplace, business prices, and terms. In sum, they are an excellent resource.

What Makes a Deal Close?

For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully. What does it take for the sale of a business to close successfully? Certainly there are reasons that a sale might not close that are beyond anyone’s control. A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado. There might be an environmental problem that the seller was unaware of when he or she decided to sell. Aside from these unplanned catastrophic events, deals abort because of the people involved. Here are a few examples of how a sale closes successfully.

The Buyer and Seller Are in Agreement From the Beginning

In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale. If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line. However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close. This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made. The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business. Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when. The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them. Too many sales fall apart because of a misunderstanding on one side or the other.

The Buyer and Seller Don’t Lose Their Patience

Both sides need to understand that the closing process takes time. There is a myriad of details that must take place for the sale to close successfully, or to close at all. If the parties are using outside advisors, they should make sure that they are deal-oriented. In other words, unless the deal is illegal or unethical, the parties should insist that the deal works. The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves. The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing. Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule. However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.

No One Likes Surprises

The seller has to be up front about his or her business. Nothing is perfect and buyers understand this. The minuses should be revealed at the outset because sooner or later they will be exposed. For example, the seller should consult with his or her accountant about any tax implications prior to going to market. The same is true for the buyer. If financing is an issue it should be mentioned at the beginning. If all of the concerns and problems are dealt with initially, the closing will be just a technicality.

The Buyer and Seller Must Both Feel Like They Got a Good Deal

If they do, the closing should be a simple matter. If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.

Secrets to Closing the Sale Successfully

There are several things to consider when buying or selling a business. The most important is to listen to the other side. There are always reasons why someone wants something – even if you don’t agree at first. Find out where the other side is coming from, then make a decision on whether you can live with it or not.

Next, whether you are the buyer or the seller, you can not have everything your way. You can’t win on every point or issue. Be prepared to give in on those areas that are not as important as those you feel most strongly about. If you are a seller, you may not be able to get a real high price and a real high down payment. You will have to decide which is more important. The same is true for the buyer. You can’t have it both ways.

Always enter the purchase or sale of a business with a spirit of cooperation rather than one of confrontation. The buyer or the seller, as the case may be, is not the enemy. If the seller wasn’t interested in selling, the business would not be for sale. If the buyer did not like the business there would be no negotiation or eventual sale.

The secret of a successful negotiation is laying out all the points on the table for discussion. It is key to understand where everyone is coming from and to understand what is and what is not important to each party. When there is a sense of cooperation among all of the players, a successful deal will usually result.

Don’t Sell Before You’re Ready

The buyer and seller have both agreed on the sale price and the terms of the transaction. Everyone appears satisfied. As the day of closing approaches, the seller seems less cooperative and more apprehensive about selling the business. Ultimately, the sale falls apart. Who’s to blame? The buyer was ready, willing and able to buy the business, and the seller appeared ready to sell.

The decision to sell one’s business is a serious step – a milestone in one’s life, both personally and professionally. Selling represents the end of ownership. It means, for many sellers, heading into uncharted waters. For others, it is the end of a dream — they built the business, or perhaps even started it. A part of them will always be in the business. So, to the seller, selling the business, represents the end of something and the beginning of something else – pretty dramatic stuff. Often, selling the business means parting with one’s biggest asset – the bulk of one’s wealth. The business can be a very personal thing, like a child is a part of the family.

Some sellers, in the middle of the selling process, suddenly realize just how important the business is in their life. Others realize that after the sale they will have nothing to get up for on a daily basis. This sounds good at first, but upon reflection it really doesn’t sound good at all. These are some of the reasons sales of privately-held businesses may not close. Sellers won’t admit their reason, so they masquerade the real reason behind another.

Perhaps, one of the most critical elements necessary for the successful sale of a privately-held business is the willingness of the seller to sell and move on. In some cases, the owner and the business have grown into one – the business becoming his or her alter ego. Before sellers decide to sell, they should make sure they can separate themselves from the business and are prepared to leave it. Sellers should not attempt to sell before they are ready!

Adding Value to Your Business

If you are considering selling your business, remember that there are positive factors that influence value and those that detract from it. Looking at your business from a buyer’s perspective is important since a prudent buyer will be adding and subtracting these various factors when arriving at an asking price. It is perhaps more important to recognize when the buyer arrives at a price at which he or she will leave the negotiations. Buyers naturally try to buy the business at the lowest possible price possible, however most also have a top price over which they are probably not willing to go. Here are some of the “high value” indicators as well as some of the “low value” indicators to consider when evaluating your business.

Indications of High Value

  • High sustainable cash flow
  • Room for the business to grow
  • Anticipated industry growth
  • Competitive advantage – location, area, etc.
  • Business niche
  • History and reputation
  • Low failure rate in industry
  • Modern, well maintained facility

Indications of Low Value

  • Customer concentration on a few major customers/clients
  • Reliance on owner
  • Poor financials
  • Distressed circumstances
  • Few assets
  • Product or service sensitivity
  • Poor outlook for industry – regulations, foreign competition, price cutting, discount stores, etc.

Considering the above factors and how to address them can help a seller look at the business through the eyes of a potential buyer. A professional business broker can help the business owner sort through the many areas that buyers consider when looking at a business and trying to arrive at an initial offering price.

The Small Business Market: Reading Between the “Negative” Lines

Experienced buyers of large businesses have tended to spurn the smaller business, citing traditional “negatives” involved in this type of transaction. Now big-time buyers are throwing away the don’t-buy-small book; or at least, they are beginning to read between the lines. The so-called shortcomings of the small business acquisition can actually be opportunities in disguise.

Let’s take a look at these small-business negatives and see the possibilities or (improvements) inherent in each:

A Good Small Business Is Hard To Find

Experienced buyers often complain about the difficulty of locating a viable smaller business. Furthermore, when a business of possible interest is found, the owner/seller is often trying to manage the transaction single handedly, foregoing the advice of professionals. This negative issue can be resolved instantly by the use of a business broker. For the seller, the business broker will offer the support and expertise needed to launch and consummate the sale. For the buyer, the business broker will pinpoint appropriate businesses for sale, using a knowledge of the marketplace and extensive databases to shortcut the search process.

Business brokers will also be able to present the buyer with small businesses that are not “shopworn,” as can be the case when a business sale has floundered–again and again–in the inexpert hands of the seller. The bigger-time buyers will especially appreciate this, since they are always on the lookout for the unusual and first-time seller.

One Person Is Key

When the owner is also the key employee, what happens after the business is sold? How can the new owners/investors hope to replace the one person who has essentially been the business? This traditional concern paints a far too gloomy–and, in fact, inaccurate–picture. Too many small business owners only think that they are irreplaceable. In most cases, they are not. In fact, new management can bring with it the fresh enthusiasm and energy essential for significant growth. For example, viewed from the outside, the quaint gift shop that is an extension of the personality of its owners might have become just that–too quaint, a clutter of Aunt Susie’s jams, somebody else’s painted beach rocks, aged potpourri. The new management clears out a space to serve gourmet coffees, stocks gift items from an endangered rainforest made by third-world peoples, and the business takes on a whole new life.

Casual Company Structure

Lines of responsibility often blur in the small-business management structure. This problem is compounded when, as in many cases with the small to mid-sized business, the owner is also the manager. Daily concerns override long-term planning, and decisions tend to be driven by instinct rather than by in-depth analysis. The typical informality of small business management is not an insoluble problem by any means. The use of expert, highly specialized consultants and the instituting of an enthusiastic board of directors are two possible initial steps to take. Both groups–consultants and board members–will be invaluable resources to support the existing management and to help formalize the company’s structure. With the burden of managing the business more clearly defined and more equably distributed, a small business will have better opportunities for rapid change and growth.

An additional tip for those owner-managers considering selling their business: Experienced buyers will be more impressed with your business, no matter what the size, if you prepare an operating manual that details the current operation scheme and charts the responsibilities of each employee.

The Owner Keeps the Books

With many small businesses, the owner keeps track of operations and financial reporting procedures–off the cuff or in the head. Even when careful records are kept on paper or computer, the systems may not have kept up with the business and the times. (The operating manual mentioned above will help owners as they plan to sell their business.) The good news for buyers is that the changes needed to update most small business systems will not call for major overhauls. Simple systems improvements can effect dramatic results.

Goodwill Is What’s (Mostly) for Sale

A small business is not typically rich in assets. The investment in capital equipment is minor, and, in the case of S corporations, the majority of earnings go to the owner or owners. What is left to attract the experienced buyer? Mostly goodwill–just what most buyers don’t want to hear. There are, however, two positive sides to the low-assets “negative.” First, it is possible for the new owner to increase assets by the purchase of equipment and by frugal management decisions. Second, the business with a small asset base might receive a lower valuation, which will naturally appeal to any buyer; the experienced buyer will see the further benefit of using the resulting higher cash flow as a means to grow the business.

Leaving the issue of assets aside, most small businesses, in general, are going to sell for much lower multiples than the larger business. A buyer must “buy into” an exit strategy wherein the business will be re-sold on the basis of a higher multiple of earnings as well as simply higher earnings. This strategy has appeal for those buyers who want to buy small businesses at reasonable valuations.

Small Customer/Supplier Base

It is not atypical for a small business to rely on just one customer for 50 percent of its trade, or on a handful of customers for as much as 90 percent. Businesses with such small customer bases (and similarly small supplier bases) survive by cultivating strong relationships and loyalties. This one-on-one way of doing business poses a potential problem for buyers who are doubtful about maintaining these customer-supplier ties.

The seller can alleviate the buyer’s concerns by agreeing to stay on board, as needed, to help maintain key relationships with customers and suppliers. The smaller the customer base–with a few major customers forming the bulk–the more important the seller’s ongoing participation will be. In addition, sellers can use paperwork to their advantage, creating detailed listings of current customers and suppliers, as well as leads to those used in the past or with future potential.

The Uncertain Seller

Is the business really for sale? This is a vital question that any buyer wants answered. In the case of a small business, the decision to sell will involve many emotional factors, including the reluctance on the part of the seller to part with what has been such a large chunk of his life. If the need to sell is caused by family difficulties or by personal burnout, these are fluctuating issues that may leave the seller running hot and cold.

When the seller’s decision-making powers have become skewed, it is wise to enlist the help of a professional. The business broker can assess the seriousness of the seller–as well as that of the buyer. Once it has been determined that both parties are serious, the business broker will keep an eye on the chemistry of each player, fostering patience on the part of the buyer and guiding the seller on a steady path toward a successful sale.

When Selling Your Business, Play to Win

If you are an independent business owner, you are most likely also an independent business seller–if not now, you will be somewhere down the road. The Small Business Administration reports that three to five years is a long enough stretch for many business owners and that one in every three plans to sell, many of them right from the outset. With fewer cases of a business being passed on to future generations, selling has become a fact of independent business life. No matter at what stage your own business life may be, prepare now to stay ahead in the selling game.

Perhaps one of the most important rules of the selling game is learning how not to “sell.” An apt anecdote from Cary Reich’s The Life of Nelson Rockefeller shows a pro at work doing (or not doing) just that:

When the indomitable J.P. Morgan was seeking the Rockefeller’s Mesabi iron ore properties to complete his assemblage of what was to become U.S. Steel, it was Junior [John D. Rockefeller, Jr.] who went head-to-head with the financier. “Well, what’s your price?” Morgan demanded, to which Junior coolly replied, “I think there must be some mistake. I did not come here to sell. I understand you wished to buy.” Morgan ended up with the properties, but at a steep cost.

As this anecdote shows, the best approach to succeeding at the selling game is to be less of a “seller” and more of a “player.” Take a look at these tips for keeping the score in your favor:

Let Others Do the Heavy Pitching

Selling a business is an intense emotional drain; at best, a distraction. Let professional advisors do the yeoman’s duty when selling a business. A business intermediary represents the seller and is experienced in completing the transaction in a timely manner and at a price and terms acceptable to the seller. Your business broker will also present and assess offers, and help in structuring the transaction itself. If you plan to use an attorney, engage one who is seasoned in the business selling process. A former Harvard Business Review associate editor once said, “Inexperienced lawyers are often reluctant to advise their clients to take any risks, whereas lawyers who have been through such negotiations a few times know what’s reasonable.”

Stay in the Game

With the right advisors on your side, you can do the all-important work of tending to the daily life of the business. There is a tendency for sellers to let things slip once the business is officially for sale. Keeping normal operating hours, maintaining inventory at constant levels, and attention to the appearance and general good repair of the premises are ways to make the right impression on prospective buyers. Most important of all, tending to the daily running of the business will help ward off deterioration of sales and earnings.

Keep Pricing and Evaluation in the Ballpark

Like all sellers, you will want the best possible price for your business. You have probably spent years building it and have dreamed about its worth, based on your “sweat equity.” You’ll need to keep in mind that the marketplace will determine the value of the business. Ignoring that standard by asking too high a price will drive prospective buyers away, or will at the least slow the process, and perhaps to a standstill.

Play Fair with Confidentiality

Your business broker will constantly stress confidentiality to the prospects to whom he or she shows your business. They will use nonspecific descriptions of the business, require signatures on strict confidentiality agreements, screen all prospects, and sometimes phase the release of information to match the growing evidence of buyer sincerity. As the seller you must also maintain confidentiality in your day-to-day business activities, never forgetting that a breach of confidentiality can wreck the deal.

Sell Before Striking Out

Don’t wait until you are forced to sell for any reason, whether financial or personal. Instead of selling impulsively, you should plan ahead carefully by cleaning up the balance sheet, settling any litigation, providing a list of loans against the business with amounts and payment schedule, tackling any environmental problems, and by gathering in one place all pertinent paperwork, such as franchise agreement (if applicable), the lease and any lease-related documents, and an approximation of inventory on-hand. In addition, you could increase the value of your business by up to 20 percent by providing audited financial statements for one or two years in advance of selling.

Think Twice Before Retiring Your “Number”

The trend is for sellers to assume they will retire after selling the business. But consider this: agreeing to stay on in some capacity can actually help you get a better price for your business. Many buyers will pay more to have the seller stay aboard, thus helping to reduce their risk.

Keep the Ball Rolling

You need to keep the negotiation ball rolling once an offer has been presented. Even if you don’t get your asking price, the offer may have other points that will offset that disappointment, such as higher payments or interest, a consulting agreement, more cash than you anticipated, or a buyer who seems “just right.” The right buyer may be better than a higher price, especially if there is seller financing involved, and there usually is. In many cases, the structure of the deal is more important than the price. And when the ball is rolling, allow it to pick up speed. Deals that drag are too often deals that fail to close.

By following these tips, and by working closely with your business broker, you can have confidence in being a seller who, like John D. Rockefeller, Jr., doesn’t “come here to sell.” You will play the selling game–and be a winner.

Ten Ways to Cut It

It’s easy to be negative about cost-cutting. “Everything just costs more,” a business owner will say; the subtext being, “What’s the use?”

Don’t give up! There are ways to cut costs. The first step is to identify where the money goes . . . and why. Then look at creative ways to shave off the non-essential while keeping the shape of your business intact.

1. Look Beyond In-House

Outsourcing is the latest word in cost-cutting, and it can mean more than one thing. First–outsourcing labor. Temporary employees or contract workers are the answer for jobs that aren’t included in the daily running of a business. Temps make sense for holiday rush periods or for short-term assignments or campaigns. Outsourcing certain operations, such as photocopying, mailing, and telephone answering, is an increasingly popular way to cut down on carrying these costs in-house. Another, less typical, kind of outsourcing is “hiring” temporary space. If your business needs a conference room only occasionally or only a small portion of a warehouse, consider subletting the space from another business and cut the square footage of your own operation.

2. Don’t Assume Outsourcing Is Always Cheaper

It pays to keep some operations in-house. For instance, if your receptionist can do some on-line bookkeeping while waiting for the phone to ring, or if your warehouse worker can stuff envelopes for a mailing in between delivery deadlines, you should consider these as in-house candidates. In addition, there are some jobs that should stay in-house even if outsourcing may appear to be a bargain–those that involve issues of confidentiality or accounting operations that might help owners and managers to better understand the business.

3. Take Advantage of the “Free Lunch”

It may be food for thought instead of steak, but there are many free offers of benefit to business owners. Continuing education lectures, SBA seminars, informational evenings offered by local banks and corporations are often free or inexpensive ways to hone business acumen. Try these before going the more expensive route via consultants.

4. Go Electronic . . .

If you haven’t yet substituted a voice mail system for a receptionist, you are paying an unnecessary yearly salary. Using e-mail can replace the need for most correspondence–saving the cost of a secretarial salary, or at least full-time. Computer programs for bookkeeping and for riding herd on inventory and payroll can also reduce employee numbers or hours. Selling on-line is cheaper than traditional advertising, and the individual targeting may pay off in more “hits,” further reducing the cost of doing this particular type of business.

5. . . . But Don’t Get Shocked

The cost of sending faxes, using cellular phones, and certain on-line services can get lost in the glow of their convenience. Monitor the use of all such devices. If charges seem unreasonable due to the service provider’s fees instead of employee usage, negotiate with the carrier or provider. When threatened with a loss of business, they will often lower fees or at least negotiate payment schedules. Another electronic cost-saver: run certain equipment during off-peak electricity hours and save up to 30 percent annually in electric bills.

6. Shop Around

Don’t be a slave to recommendations. If your computer consultant has a “pet” equipment source, or your graphic designer has a favored printer, make a few calls to see how the prices stack up. You could end up with big savings for very little effort. The same holds for seeking financing. You should always talk to at least two banks, looking for the best loan terms and interest rates.

7. Offer Discounts; Take Discounts

By offering customers early-payment discounts, you can “borrow” their money instead of the bank’s. Compare the advantage of doing this against borrowing from a lending institution and see which works best for you. You can also be on the other end of discounting by checking out what may be available. It sometimes helps to join a professional organization, in order to get the best discounted rates on anything from advertising to shipping services.

8. Purchase from the Source

If you deal in a product, go to the source whenever you can. For example, the owner of a children’s clothing business specializing in sweaters goes directly to the spinning mill for her yarns. Not only can she specify the exact colors she wants, but she can shop for bargains and negotiate the best prices without any costs added by the knitting factory.

9. Curry Favor

Try to cultivate business favor by patronizing one operation per service. Be loyal to one printer, photographer, designer, or copy service, and they may repay you with reduced fees and/or discounts.

10. Understand that Deductibles Still “Cost”

A deductible expense is still a cost. The only “free” part is whatever your specific tax rate will allow you to deduct, which could be as low as 25 percent, perhaps even less. When tempted to splurge on a deductible expense, always look at your profits and see how much you’d have to earn in order to justify it.

The Entrepreneur: Both Sides

Strong Points

  • Flexible and positive attitude
  • Creative and comfortable with risk-taking
  • Goal-focused and committed to success
  • Organized
  • Energetic

Weak Points

  • Impatient with achieving goals
  • Distractible; tolerant of interruptions
  • Distrustful of “the new” (especially technology)
  • Tendency to stray from business plan
  • Failure to delegate authority and tasks

Success in the 21st Century: Do You Have What It Takes?

Now that we crossed that much-heralded bridge to the 21st century and once on the other side, there will be new challenges, but many of the secrets of succeeding in independent business will remain the same. Ask yourself the following questions to see how you measure up to these old-and-new standards of entrepreneurial excellence:

Are you in step with technology?

The 21st century will usher in a brave new world of marketing and financial transactions. The successful independent business person will be in touch with opportunities offered by technology for one-to-one marketing. For example, instead of advertising in print and on radio or TV, businesses can target and reach customers far more directly–through their personal computers.

Marketing on-line will be closely aligned with electronic monetary transactions. This phenomenon will have myriad repercussions on everybody from checkbook printers to the U.S. Postal Service. Many concepts, such as discounts for prompt payment, will cease to have meaning as electronic transactions will narrow and then obliterate the time-lag between receivables and payables. Savvy owners and managers will be prepare themselves now to sign onto these new ways of doing business.

Are you flexible?

A recent survey of successful small business operations revealed that 54 percent of respondents named flexibility as one of the secrets to their success. Today’s great product or service could well be obsolete tomorrow, as it becomes increasingly difficult to forecast the competitive environment, new developments in technology, and consumer trends. Success in the next millenium doesn’t just mean riding the tide of change; it means being the first to get to shore.

And when you refuse to be flexible? Consider this classic bad example from the world of big business: Apple Computer’s failure to foresee the wisdom of licensing rights to its Mac operating system. This failure in flexibility opened the door–and Windows–for Microsoft, thus initiating its own decline.

Are you focused?

Flexibility must be balanced with focus. The readiness to expand or diversify should never threaten the “heart” of the business. As the winds of change blow stronger, knowing the true strengths of a business and having a keen sense of its niche value is essential.

Here’s a good once-small-business example of focus: Krispy Kreme Doughnuts, the North Carolina-based company that began with one small shop in 1942. It’s going stronger than ever with new franchises all over the country, and has seals-of-approval from The New Yorker and other trend-setting publications. Ignoring the concept of multibranding, Krispy Kreme sells only its trademark doughnuts, and they are (literally) hot.

Do you have a plan?

The key to balancing between too flexible and too rigid is a good business plan. Although rapid change may make a five-year plan too long-range, the length of vision is not as important as its intensity. The chief value of a business plan is the hard thinking that it engenders. Planning forces business owners and managers to face issues head-on, examining closely the virtues versus the pitfalls of whatever next steps the business might take.

Although the good business plan will contain, in writing, goals that are specific, realistic, measurable, and time-driven, this document will mean nothing without the correct entrepreneurial spirit behind it. Successful business owners live by their goals. This has never been more important than it will be in an age where variables increase exponentially in every possible area–new competitive products and services, technological advances, industry trends and changes.

Are you prepared for your “next life”?

Once you’ve made it into the land of the successful (or you’re tired of trying to get there), what next? One of the signs of a wise entrepreneur is knowing when to make a graceful exit. Business owners who believe they should consider selling only when business is down are missing another opportunity to be a winner. Good timing is the secret to selling success. Instead of waiting for bad times, either in the business itself or in the marketplace in general, sellers should understand that last year might be too late.

A professional business broker can make selling an educated process, doing everything from accessing national and international data bases for marketplace information, to advertising and qualifying buyers, to handling the complex paperwork necessary for the completion of the sale. The business broker will also present and assess offers and, at the appropriate juncture, will help in structuring the sale and negotiating its close.

Even if exiting your business is a step you won’t take until the next millenium, it’s not too soon to create a strategic exit plan. After overcoming the challenges of making a business successful, the final triumph for the owner is profiting from its successful sale.

When Selling Your Business: Confidentiality Is Key

You’ve make the big decision to sell. Your books are in order, you’ve spiffed up the premises. What are you waiting for?

Many sellers get to this threshold and then become concerned about confidentiality. They do not want the news of their decision to reach their customers, competitors, employees, or creditors. After all, they figure, customers may lose confidence in the business and go elsewhere, competitors might use this opportunity to spread rumors, employees might fear for their future security, and creditors might push for earlier payment. Not all of these qualms are reasonable; however, when selling a business, discretion is definitely the better part of valor. Few, if any, transactions have been wrecked due to excessive discretion. A breach of confidentiality, on the other hand, can severely alter the course of the transaction. What can you do to protect yourself against this possible deal-wrecker?

Your first step is to look for expert guidance. When a business broker is involved in the sale, he or she will channel the process to keep the transaction within safely silent bounds. You can expect your business intermediary to do the following:

1. Qualify the buyer.

Screening potential buyers is one of the most important benefits a business broker can provide for you. Keep in mind that roughly 90 percent of those who respond to business-for-sale ads are either not serious buyers or are not financially qualified. By screening prospects, the business broker will contribute to confidentiality by limiting the exposure of the business to the most promising buyers instead of to the merely curious time-wasters.

2. Use appropriate marketing strategies.

How can you advertise a business for sale without spreading the news too far? The business broker, as intermediary, is in an ideal position to do just that. Brokers place advertising and post listings that contain non-specific descriptions of the business. This \”blind ad\” approach can be phrased to attract interest in the business without revealing its name or exact location.

3. Prepare paperwork designed to promote confidentiality.

After screening prospective buyers and assessing the degree of interest and financial qualification, the business broker will also require prospects to sign a strictly-worded confidentiality agreement.

4. Manage appropriate release of information.

Until a purchase-and-sale agreement has been signed, the business broker can phase the release of information about the business to match the growing evidence of buyer sincerity and trustworthiness.

However, even with the most careful handling, rumors are unavoidable. The wise seller will expect questions from the curious and will be ready with answers. If you find yourself needing to muffle the business-for-sale buzz, aim for a mix of good sense and good humor. You might respond that many buyers have approached you over the years, making \”news\” before it happens. You could go on to say that you never refuse to listen to a great offer, adding that you are, in fact, all ears right at that moment!

No matter how close-mouthed sellers choose to be with the community at large, they might consider being open with their own employees. This is the group most likely to sense what\’s happening, and sharing the news with workers can sometimes be a positive move. Since it\’s often the unknown that causes the most anxiety, including employees in the decision to sell can actually calm over-active imaginations. Once enlightened, workers can be made to understand the need for discretion. Confidentiality will help protect their own future as well as that of the business.

Strong Selling Points: Let Your Strengths Work for You

“Independent business owner” is a phrase with two meanings. Of course, it means being the owner of an independent business. But another way to look at “independent business owner” is to let this phrase define the very personality of the person at the helm. Independent. Confident. Self-assured. Strong-willed. These are vital entrepreneurial attributes, but, ironically, they can sometimes work against the business owner when it comes time to sell.

Since business owners are the type who know about selling — either products or services– and about making deals — haven’t they had to cope with suppliers, customers, and competitors throughout their business careers? — it’s not surprising that owners approach selling their businesses with these tried-and-true tactics and ideas. Sellers who have spent years building a business are often unaware of how completely different the process of selling a business is.

Savvy sellers, realizing the importance of a selling approach equal to this very important task, will depend on the guidance of a business intermediary. With professional guidance, sellers can benefit from their personal strengths instead of letting them get in the way of the selling process. The following “strong” selling points are signposts on the road leading to a successful transaction.

Price Your Business To Sell

Sellers are good “business people;” they naturally are after the best possible price for their business. Realistic pricing is perhaps the most important factor in selling from a point of strength. Understanding the marketplace, up-to-the-minute and not some high mark just past or in the possible future, is key.

The pricing of a business, different from the simpler means of valuing based on goods or services, depends on industry-tested valuation techniques, with intangibles incorporated to ensure that the business will not be underpriced. The price of a business is arrived at by a variety of factors, one of the chief of which is the intensity of a buyers interest in a particular business.

Know Your Buyer

The seller, although good at “psyching out” customers and vendors, may not be as adept at sizing up potential buyers. Some buyers are professional window-shoppers; talking a good game but never really ready to play. There are also the buyers who would play ball — if they only knew where the action was! First locating and then qualifying buyers is a key function of business brokers. They will use computerized data bases, professional associations and other networks nationally and internationally — all to increase the chances of selling a business at top value.

In addition, the business broker will determine the right buyer for the right business, focusing on those prospects who are financially qualified as well as genuinely (or potentially) interested in the business for sale. As part of qualifying buyers, to take the “fear” out of the likely need for seller financing, the business broker will assess the ability of a particular buyer to run a business successfully. This invaluable work by the broker not only locates the best buyers, it also frees the seller to concentrate on his role in the selling process.

Prepare Your Business for Sale

In addition to the obvious need for the business to appear clean and cared-for, there are important steps the seller must take in advance of putting the business on the market. In most cases, a business will sell based on the numbers. Your business broker will help you create a clear financial picture — in timely fashion — and to prepare statements suitable for presentation to a prospective buyer. Remember that buyers may be willing to buy potential, but they don’t want to pay for it. In fact, sellers should be open to about all aspects of the business that might affect the sale; otherwise, once the real facts are revealed, the deal may self-destruct.

Business owners are accustomed to coping with paperwork, but few have had exposure to the specialized contracts and forms required both before and during the selling process. The business broker, an expert at transaction details, will help guard against delays, problems, and premature (or inappropriate) disclosure of information.

Maintain Normal Operations

Another vital activity for the seller is to keep on top of the day-to-day running of the business. When a business intermediary is on hand to focus on the marketing of the business, the seller can focus on keeping daily operations on-target. Sellers are “people people,” and may have visions of wooing buyers with their great presentation of the business. Even if this were to happen, these sellers fail to visualize the number of buyers they would have to “woo-and-win” if handling the sale on their own.

Confidentiality

An adjunct to maintaining the status quo is the important task of maintaining confidentiality. Until a purchase-and-sale agreement has been signed, most sellers do not want to disturb (or jeopardize) the normal interaction with customers and employees; nor do they want to alert the competition. A business broker helps by using nonspecific descriptions of the business, requiring signed confidentiality agreements, and performing a careful screening of all prospects.

To keep the sale of your business on firm ground, be sure that your “strengths” as an independent business owner aren’t actually weakening the sale. Using these key selling points along with the expertise of a business intermediary will keep the process going strong.

What Every Seller Should Know

Selling your business is a major decision! You have devoted your time, money and energy to building, running and operating your business. It may well represent your life’s work. You have decided that now is the right time to sell, and you want the very best professional guidance you can get. This is when working in tandem with a professional business broker can make the difference between just getting rid of the business and selling it for the very best price and terms. Following are some of the most common questions asked by sellers — and if you are contemplating selling your business, these are questions you should be asking, too.

1. What Can — and Can’t — A Business Broker Do for Me?

Business brokers are the professionals who will facilitate the successful sale of your business. It is important that you understand just what professional business brokers can do — as well as what they can’t. Business brokers can help you decide how to price your business and how to structure the sale so it makes sense for you and the buyer. They can find the right buyer for your business, work with the seller and the buyer in negotiating, and coordinate every step of the way until the transaction is successfully closed. They will also help the buyer with all details of the business buying process.

A business broker is not, however, a magician who can sell an overpriced business. Most businesses are salable if priced and structured properly. You should understand that only the marketplace can determine what a business will sell for. The amount of the down payment you are willing to accept along with the terms of the seller financing can greatly influence not only the ultimate selling price, but the success of the sale itself.

2. Why Is Seller Financing Important To the Sale Of My Business?

Surveys have shown that sellers who ask for cash receive, on average, only 75 percent of their asking price, while sellers who accept terms typically receive 86 percent of their asking price. In many cases, businesses that are listed for all cash just don’t sell. With reasonable terms, however, the chances of selling increase dramatically, and the time period from listing to sale greatly decreases. Most sellers are unaware of how much interest they can generate by financing the sale of their business. What’s more, seller financing tells the buyer that the seller is confident about the ability of the business to — literally — pay for itself.

3. How Long Will It Take To Sell My Business?

It generally takes, on average, between three to four months to sell a business. (Keep in mind, however, that an average is just that.) The sooner the business broker has all the information needed to begin the marketing process, the shorter the time period for selling should be. It is also important that the business be priced properly right from the start. Some sellers, operating under the premise that they can always come down in price, overprice their business, not understanding that buyers often will refuse to look at an overpriced business.

It has been shown that the amount of the down payment may be the key ingredient for a quick sale. The lower the down payment, generally 40 percent of the asking price or less, the shorter the time to a successful sale. A reasonable down payment also — as in the case of seller financing — sends a message to a potential buyer about the seller’s confidence in the health of the business.

4. What Happens When There Is A Buyer For My Business?

When a buyer is sufficiently interested in your business, business brokers will help in the preparation of an offer or proposal, which may have one or more contingencies. Usually, contingencies call for a detailed review of your financial records and may also include a review of your lease arrangements, franchise agreement (if there is one) or other pertinent details of the business. The buyer’s proposal will be presented to you for your consideration. You may accept the terms of the offer or you may make a counter-proposal. You should understand, however, that if you do not accept the buyer’s proposal, the buyer can withdraw it at any time.

Business brokers will submit all offers to you for your consideration. At first review, you may not be pleased with a particular offer: it may be lacking in some areas, but it might also have some pluses to seriously consider. Remember the old adage: The first offer is generally the best one the seller will receive.” This does not mean that you should accept the first, or any offer — just that all offers should be looked at with thought and care.

When you and the buyer are in agreement, the business broker will work with both of you to satisfy and remove the contingencies in the offer. It is important that you cooperate fully in this process; otherwise, the buyer might think you have something to hide. The buyer may, at this point, bring in outside advisors to help them review the information. When all the conditions have been met, final papers will be drawn and signed. Once the closing has been completed, money will be distributed and the new owner will take the possession of the business. Your business broker professional will work with you throughout the entire sales process.

5. Co-Branding: The New Age Business Combo

The store-within-a-store is not a novel concept. The tailor next to the dry cleaner, for example, is a combination that’s been around since the beginning of business time.

Now combining business forces has a new look — and a new name. It’s called co-branding, and the idea is going like hotcakes. Like hotcakes with a side of motor oil. Among franchises, where the concept is most popular, co-branding means selling combined products and/or services at the same place of business. The combinations may sometimes seem unlikely, but any way you slice it, co-branding seems to work.

6. Co-Branding for One-Stop Convenience

This type of co-branding can produce some stomach-churning combos. Fast food and fuel, currently the most popular oddball mix, proves it can be convenience alone that makes the idea work.

For example, it’s lunchtime and you also need gas. Why settle for Nabs and a Coke from the service station machine? Why go to McDonald’s for your fast-food feast and then hit the road again for gas? Instead, while munching on your double-decker Italian at a Subway, your car is being gassed and car windows are being washed. One stop — and two items are off your list.

When the combined franchises are both nationally-recognized big names, each one benefits from the business attracted by the other. And in cases where one member of the combo is better-known, the bigger name draws traffic to the other. There are also real financial advantages when two or more businesses co-brand. They will shoulder equally expenses such as rent, telephone lines, and most utilities.

7. Co-Branding for Synergy

Adding synergy to convenience makes a hard-to-beat selling technique. Business accounting services with a next-door-copy center, an office-supply store with a packing/shipping outfit, the bookshop that houses a coffee bar — when different franchises are placed within one location, each can concentrate on its own special products or services. From the franchisor’s point of view, co-branding increases efficiency and customer satisfaction.

These two-for-one operations bank on the attraction of allied products or services. The key here is to predict customer need — and in the case of the bookshop coffee bar — mood. Having fulfilled his/her original shopping purpose, what might the customer be drawn to next? This leads us to the next type of co-branding …

8. Co-Branding for Impulse Purchase

The best example here is the national fast-food vendor, Arby’s. This company also owns T.J. Cinnamons (breads and muffins). How better to introduce a new food concepts than to put them side-by-side with good old established roast beef? After lunch, go ahead and get your breakfast buns as long as they’re right there.

From the point of view of the companies involved, this doubling-up (or even tripling up) means more than just increased sales. It makes good business sense all the way around. The space isn’t all that’s shared — a wise financial move in itself — but also payroll expenses and, in some cases, the workers themselves. After the breakfast rush, the crew can go next door and help set up for lunch. If one business melds better with the summer season and another with winter, employees can be concentrated to follow customer traffic.

So what’s not to like about co-branding? So far, so good. For franchisors everywhere, it looks like a win-win combination.

Be a Winning Seller: Good Negotiation is the Key

You’ve made the big decision to put your business on the market. Your reasons for selling are valid, carefully-considered, and “good” – the kind that won’t make a prospective buyer shy away. Now, you may tell yourself, comes the fun part. You’ll come up with a price – maybe a little high, but why not? – and let gut instinct (an attribute common to successful business owners) lead the way.

Wait just a minute. Or maybe a quarter of an hour; however long it takes you to bone up on your negotiation skills with the following steps as a guide. Being a smart negotiator is tantamount to effecting the successful sale of your business.

Gather Your Forces

The first step is to engage the help of a business broker professional. He or she understands the sales negotiation process as well as tactics for marketing the business. Before sitting down with your business broker, however, you should gather the following information: profit and loss statements (for three years), current federal income tax returns, a list of fixtures and equipment, copies of equipment leases (if any), the lease and any lease-related documents, a copy of your franchise agreement (if applicable), lists of loans (if applicable), with amounts and payment schedule, an approximate tally of inventory on hand, and the names of any outside advisors (attorney, accountant, etc.) you plan to consult.

Be Market-Smart

It’s vital to have a clear and realistic notion about the value of your business. Pricing your business intelligently is as important as impressive financial records. Your business broker will apply industry-tested valuation methods, including ratios based on the sales of similar businesses, as well as the historical data that most closely matches your type of business. He or she will also incorporate intangibles to insure that the business will not be underpriced. At the same time, your broker will make sure you understand how the price is dictated by the marketplace and that realistic pricing is an absolute must. Most buyers won’t wait for an outsized price to drop – they will just go somewhere else.

Know Your Buyer

Finding the right buyer may be more important than getting that extra-high asking price. Your business broker will determine the right buyer for the right business, focusing on those prospects who are financially qualified and are genuinely interested in your type of business. It’s important also to know something about the bargaining power of the buyer and to discover early on how he or she plans to finance the purchase of your business. Your business broker will do that and more: he or she will anticipate the buyer’s concerns and counsel you about being up-front about any problems that might make a buyer suspicious and therefore unnecessarily adversarial during the negotiation process. Steeped in knowledge about negotiating price, terms and other vital aspects of the sale, the broker will guide you each step of the way. During the early stages, while the buyer is still considering making an offer, the broker is the ideal person to follow up and keep the deal running smoothly. Working alone, you could lose bargaining effectiveness by doing the follow-up yourself. And, in general, having someone else negotiate on your behalf is the smartest way to go. The “middle man” can get your thoughts across, keeping you at a distance from the words themselves.

Be Flexible

In negotiating the sale of your business, you need to keep the ball rolling once an offer has been presented. Study it closely, and don’t automatically despair. Just because you didn’t get your asking price doesn’t mean that the offer has nothing to commend it. It may have other points to offset what you feel is a low figure, such as – if the deal is to be seller-financed – higher payments or interest, a consulting agreement, more cash than you anticipated, or the promise of a buyer relationship that will make life easier. In evaluating an offer, take the long view and look for the ways in which the offer just might accomplish your objectives. Above all, don’t think in terms of “punishing” the buyer because of a low offer. This is the worst reason for rejecting an offer – and certainly a self-defeating one for you.

Beef Up Bargaining Power

The best negotiating weapon is to have options available. For the seller, the mightiest one is lack of desperation. With any luck, you have not waited too long to sell and your business is sound. Carry this a step further: be sure, in preparing to sell, that you don’t let the business slip. It’s important that prospective buyers see your business at its best – bustling, and showing no signs of neglect. You should, for example, keep normal operating hours, repair signage and other first-impression areas of the business, repair or remove non-operating equipment, remove items not included in the sale, maintain inventory at constant levels. Make it obvious that you have not been forced to sell, and that – if necessary – you could refuse all offers and carry on the operation of your business. This may be the last thing you want to do, having made the hard decision to sell, but the buyer won’t know that.

Master the Art of Good Timing

Timing is crucial to the successful sale of a business. Any deal has a shelf-life, and it will go stale if it sits around too long. On the other hand, sometimes ideas need extra time to jell – and people sometimes need a little time-and-space to be more objective about their own positions. Your business broker will keep the process moving at the proper pace. He or she will also provide or offer advice about the specialized contracts and forms necessary for the completion of the sale.

In negotiating the sale process, you will benefit many times over from the guidance of a business broker professional. The business broker represents you, the seller, and works toward completing the transaction in a reasonable amount of time and at a price and terms acceptable to you. The broker will also present and assess offers and, at the appropriate juncture, he or she can help in structuring the sale and negotiating its successful close – helping to create a win-win situation for everyone involved.

Ten Steps to the Successful Sale of a Business

1. Make sure you have a valid reason for selling your business. Don’t decide to sell because you have had a bad week or because moving closer to the grandkids sounds like a good idea. Also, don’t decide to “test the waters” just to see what sort of price your business will command. Before you decide to sell your company, focus on your true objectives. The first thing a prospective buyer will want to know is the reason you are selling. The more valid the reason you offer, the more serious the buyer will be.

2. Don’t wait until you have to sell, for either economic or emotional reasons. You don’t want anxiety to force you into accepting a deal that’s not good for you–or for the buyer. During the two months preceding the new year, sellers always say that they don’t want to sell until the after the first of the year. This delay can be an unfortunate one.

3. Once you have made the decision to sell–and before talking to your business broker– you should gather the information needed to market and subsequently sell your business. Here’s a list of the key items:

  • Three year’s profit and loss statements
  • Federal income tax returns for the business
  • List of fixtures and equipment
  • The lease and any lease-related documents
  • Copy of the franchise agreement (if applicable)
  • List of loans against the business with amounts and payment schedule
  • Copies of any equipment leases
  • An approximate amount of the inventory on hand
  • Names of outside advisors

4. Remember that you are part of the marketing team. Your business broker can’t do it all–and might even ask you to come to an office meeting to tell the rest of the staff about your business. Follow your broker’s advice about dealing with prospective buyers–there’s a right and a wrong time to meet them.

5. Confidentiality works both ways. The broker will constantly stress confidentiality to the customers to whom he or she shows your business. However, as the seller, you must maintain confidentiality about a pending sale in your day-to-day business activities.

6. You, as the seller, should put yourself in a prospective buyer’s position. The next time you go to your place of business, pretend you are a buyer looking at it for the first time. How impressed are you?

7. Just because you are selling, now is not the time to let the business slip. It’s important that prospective buyers see your business at its best: bustling, and showing no signs of neglect. Here are a few areas to focus on:

  • Keep normal operating hours. There is a tendency for sellers to “let down” when they put their business up for sale.
  • Repair signs, replace outside lights, and do a general spiffing-up for first impression purposes.
  • Tidy the outside premises (if appropriate).
  • Spruce up the interior as well.
  • Repair non-operating equipment or remove it.
  • Remove items that are not included in the sale.
  • Maintain inventory at constant levels.

8. Engage an outside professional who understands the sales process. David Gumpert, former Harvard Business Review associate editor said, “Inexperienced lawyers are often reluctant to advise their clients to take any risks, whereas lawyers who have been through such negotiations a few times know that’s reasonable.” If you are going to use a lawyer, use one who is seasoned in the business sale process.

9. Be flexible! You need to keep the ball rolling once an offer has been presented. Study it closely. Just because you didn’t get your asking price, the offer may have other points that will offset it, such as higher payments or interest, a consulting agreement, more cash than you anticipated or a buyer that you are comfortable with. You have probably spent years building your business–you want it to continue to be successful. The right buyer may be better than a higher price, especially if there is seller financing involved, and there usually is. If you must counter-offer, do so only on those points that are really important to you. Be willing to “horsetrade” if you must to complete the deal. There is an old adage that the first offer you get is probably the best you will ever get–and it’s true.

10. Remember that most successful transactions are successful because they create a win-win situation for everyone involved.

Under-Reporting Comes Under Fire

What is the true income of an independent business? This is a question of interest to many parties–including prospective buyers, investors, and lenders–but nobody is more determined to know the answer than the Internal Revenue Service.

What makes the “truth” about a company’s income so elusive? Isn’t this what financial record-keeping is all about? Yes and no. Business owners have been known to go from minor figure-fudging to major-league cheating, in an effort to lower the amount of income necessary to report to the IRS in any given fiscal year. In fact, the IRS estimates that two out of three business owners regularly under-report income.

“Unreported income” is the official phrase for this practice; however, in the trade, the word often heard is “skim.” It sounds light, healthy, and maybe good for you. But is it? Consider an item from a newspaper in a typical Main Street town, bearing the headline “Business Owners Sentenced”:

Two Myrtle Beach business owners were sentenced in federal court in Florence [S.C.] for not declaring money received from poker machines in their bar on their income tax returns, according to a statement by the US Department of Justice.

Roy Gipson of Charlotte and Ann Willis of Myrtle Beach, former operators of Players, a sports bar in the Galleria Shopping Center, were indicted by the federal grand jury in September. They pleaded guilty in October to filing false income tax returns.

(Sun-News, Myrtle Beach, SC)

This is a depressing story, resulting in the sentencing of one of the defendents to three years’ probation, three months in a halfway house, several months of home detention, and a $5,000 fine payable within six months. The second defendent was sentenced to three years’ probation, two month home detention, and 400 hours of community service. All this for a little poker-machine skimming? How was anyone to know? How did anyone find out?

It’s the story behind the story that should really catch the attention of business owners. And especially of potential business sellers, because the unreported income in this case was discovered by IRS agents who went undercover, in “disguise” as typical business buyers.

The undercover agents, acting as any savvy prospective buyer would, wanted a close look at the true worth of the business in order to make an informed “offer.” The sellers were happy to comply, and readily admitted that they were not declaring on their tax forms money received from poker machines that had generated more than $120,000 over a two-year period. Truth, in this instance, did not set its tellers free. Business owners are often tempted to have it both ways–under-report to the government, and then, to sellers, reveal that the news is much better than it looks. The Myrtle Beach bar owners are not the only ones who have been tempted to slant the worth of a business in two different directions at the same time. This practice, although illegal, is not uncommon. And when “everybody does it” becomes the perception, even the most reputable, otherwise law-abiding citizens can get caught in their own trap.

As one Delaware restaurant owner of 20-years’ excellent standing in his community says, “I made more than a decent income which I disclosed on my tax return. However, over and above my regular salary, I also skimmed a geat deal of unreported and untaxed cash for myself and some of my employees. I always thought that most people do it and if I got caught, I could just pay the IRS the taxes due plus some interest and penalties.” Instead, when it came time for the restaurateur to sell his business, he disclosed its true worth to prospective buyers who turned out to be–yet again–undercover IRS agents. The restaurateur says, “Without my knowledge, they tape-recoreded everything I said. You have no idea what it is like to hear your own voice on a tape recording. I never knew the IRS conducted undercover operations.” He adds, “I thought that very few people go to jail for committing tax crimes and those that went to jail were mostly organized crime figures and drug dealers. I now find that sixty percent of all the people committing tax crimes go to jail. They generally serve between one and three years. I am now waiting to be sentenced, but whether or not I go to jail, by the time I’m done paying the taxes, interest and penalites, for every one dollar I skimmed, I will have to pay the IRS three dollars.” (This business owner is presently serving a six-year prison sentence.)

Even if a business owner who skims escapes being caught by such a sting operation, he or she will still face a dilemma when it comes time to sell. Whether or not business owners have made the immediate decision to sell, they should prepare for the future by building the image of a successful business. The picture they have painted for the IRS is not likely to be admired by buyers, who will want to pay only for what is reflected on the books, including what is revealed by the tax return. The seller may think it’s possible to set a fresh scene for the buyer–one based on the theme of potential; however, buyers will be far more impressed by proof of a good track record.

Here are some suggestions to sellers for unveiling hidden profits and putting them where they will do the most good–in front of prospective buyers:

  • Think Ahead. Remember that the future is now, and set your mind on long-term instead of short-term benefits. Show maximum profits for each quarter.
  • Take a Step Back. If necessary, look back on the previous months’ financial records and work toward showing the truest–and hopefully, the best–profit situation.
  • Delve Into the Past. Go even further back and reconstruct records (without showing “skim”) that reveal the legitimate profit situation over a meaningful period of time.
  • List Tax-Deductibles. Make a separate list of salaries, and of fringes and perquisites that are tax-deductible and that provide a current benefit to the business.
  • And don’t forget–it won’t be only the buyer who will be impressed by true profits. Loan underwriters and potential investors will be more apt to show favor. And the IRS will send its agents-in-disguise to somebody else’s door.

Consumers Voice Complaints: And Business Owners Should Listen

“Your salespeople didn’t listen when I placed my order, and when I wrote a letter to complain, they still didn’t get it right. I guess they don’t read any better than they hear.”

Daniel Langley, the owner of a central Massachusetts mail order company, took this call on a recent Monday morning. It happened to be a holiday, or he might never have got this close to a customer complaint. He was glad he did.

“I needed to be reminded,” he said, “that the problems are always out there. I tend to hear a lot from customer service about the record-breaking order or the customer calling from New Guinea. I realized we haven’t been paying enough attention to the everyday, not-so-happy news.”

Langley is typical of many business owners and managers in that respect. A lot of companies–large and small–do much less than they could in dealing with customer problems and complaints. This is an unfortunate omission, and an unnecessary one: achieving good customer service is neither costly nor complicated. What’s needed is a well-considered plan, coupled with a positive attitude.

The following steps can help any business convert problems into solutions . . . and into good PR as well.

Fight fire with anything but fire.

An unhappy customer calls expecting a fight. If they aren’t downright angry, they are at the very least upset and on the defensive. The salesperson should be careful not to echo the customer’s attitude. Instead, the person answering the complaint should aim for just the opposite tone: a calm expression of interest in listening to the problem, followed as soon as possible by the desire to solve it. This is not always an easy task, and salespeople should be trained to realize that customer complaints are not (in most cases!) personal attacks. Short of a free case of Perrier, employee courtesy is the most effective means of dousing customer fires.

Quick action is the best action.

And in most cases, it may be the only acceptable one. What you do in the first minute or two may well determine whether you will lose the customer–and create a ripple effect of ill will–or gain a “friend” forever. Research shows that the sooner the problem is resolved, the more likely you are to end up with a happy, loyal customer. Proper handling will turn around 95 percent of customer complaints, but the statistics get gloomier in proportion to the time that is allowed to elapse. Wait an hour, and you have a tentative customer; wait a day, you have a disgruntled one; wait longer, and you may have no customer at all.

Place authority where it will do the most good.

It’s one thing to advocate quick action to quell customer complaints. However, if the manager or other superior in a company’s hierarchy is the only one who can “sign off” on problems, delays will be, in most cases, impossible to avoid. If possible, salespeople should have the authority to approve returns and exchanges and solve other problems–up to a predetermined dollar limit.

Approach problems with a can-do attitude.

Obviously, not all complaints can be resolved to the every customer’s satisfaction. However, each problem should be handled with a sincere attempt to make the customer happy. Working within the rules (and financial limits), the salesperson should give the customer the feeling that it is he or she who is important–not the rule book. What should the price tag be on customer contentment? Good business sense says it can’t veer off into extravagance; however, generosity can pay big dividends. The cost of solving one problem may be far less than losing a valuable account, client, or customer.

Measure the quality of your “damage control.”

Many midsized businesses are following the lead of the larger corporation and asking their customers for feedback. If you aren’t already including some form of questionnaire or survey form in your mailings, you might consider trying a simple postcard or product enclosure.

Watch for patterns in customer problems.

Keep a careful record of all customer complaints and determine if there is a particular product or service that generates the majority of problems. If you can detect a pattern, these customer problems will actually have helped you, in the long run, to target company problems of your own. If no pattern emerges, you will be affirmed in treating each case as separate challenge–and, following the steps outlined above, you will have the tools to make quality customer service one of your primary–and attainable–jobs.

How Did We Do?

Here is the follow-up to customer problems Massachusetts one business owner recently implemented. Each customer complaint is tagged in the customer service data base and automatically “personalized” with the customer name and specific problem addressed.

Dear [Customer]:

Our records show you recently [returned/exchanged/had questions concerning] one of our products. To help us continue to offer quality service, please take a moment to answer the questions below:

  • When you called [with your question/to advise us of a problem], did you receive a courteous response?
  • How much time (approximately) lapsed between your [question, complaint] and our [answer/suggestion as how to resolve it]?
  • Did you receive a satisfactory [refund/item in exchange, answer to your question]?

Thank you!

The Big Question: Independent versus Employee Status

Are your workers independent contractors or employees? This is a compelling question, especially where the Internal Revenue Service is concerned. Every worker claiming status as a non-employee means payroll taxes and social security contributions that won’t fall into the IRS’s pocket.

Now many states are taking a closer look at the question, too. They are increasingly on the lookout for new sources of state revenue, including workman’s compensation and unemployment insurance, both of which can be bypassed when a business uses independent workers.

What can a business owner/manager do to keep on the right side of both federal and state tax patrols? Here are a few precautionary steps to safeguard the status of workers as independent contractors.

  • Encourage (or at least allow) the worker to provide his own assistants, including their hiring, supervision, and compensation.
  • Allow workers to establish their own schedule of work days/hours.
  • Be sure that workers provide their own equipment and most supplies.
  • An alternative may be to use an employee of a temporary service. These services can provide personnel experienced in the job required and, since this worker is actually an employee of the temporary service, all federal and state taxes and fees are handled at that end as well. Although you may pay more for this type of worker, you will avoid concerns about meeting government regulations and restrictions that often come packaged with the independent status. When in doubt, always consult your legal and financial advisors.

Selling Your Business? Follow These Ten Commandments To Avoid Wrecking the Deal.

1. Place a reasonable price on your business. Since an inflated figure either turns off or slows down potential buyers, rely on your business broker to help you arrive at the best “win-win” price.

2. Carry on “business as usual.” Don’t become so obsessed with the transaction that your attention wavers from day-to-day demands, affecting sales, costs, and profits. Since the selling process could take as long as a year, the buyer needs to keep seeing a healthy business.

3. Engage experts to insure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction. Expert intermediaries can channel the process and the parties involved to keep the sale within safely silent bounds.

4. Prepare for the sale well in advance. Be sure your records are complete for at least several years back and do all pertinent legal or accounting “housecleaning”–as well as a literal sprucing-up of the plant or store.

5. Anticipating information the buyer may request. In order to obtain financing, the buyer will need appraisals on all assets as well as information to satisfy environmental regulations (when real estate is concerned).

6. Achieve leverage through buyer competition. This can be tricky; you are wise to let your business broker, as a third party, create a competitive situation with buyers to position you better in the deal.

7. Be flexible. Don’t be the kind of seller who wants all-cash at the closing, or who won’t accept any contingent payments or an asset transaction. Depend on the advice of your intermediaries–their knowledge of financing and tax implications– to keep the deal sweet instead of sour.

8. Negotiate; don’t “dominate.” You’re used to being your own boss, but be prepared to learn that the buyer may be used to having his way, too. With your business broker’s help, decide ahead of time when “to hold” and when “to fold.”

9. Keep time from dragging down the deal. To keep the momentum up, work with your intermediary to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion.

10. Be willing to stay involved. Even if you are feeling burnt-out, realize that the buyer may want you to stay within arm’s reach for a while. Consult with intermediaries to determine how you can best effect a smooth transition.

How Do You Say “Hello”?

Answering services, message machines, voice mail, “on hold” music, speaker phones . . . where would a business be without them? Perhaps–in some situations–a lot better off! In the small to midsized business, where every call should count, owners and managers need to ensure that the telephone is an efficient, effective sales tool instead of a handicap. It’s important to remember that the caller’s first impression of your company is from the voice answering the phone. That first minute or less will help form the caller’s lasting opinion of your business, so why not take the opportunity to make that opinion the best possible? Here are a few ideas for improving the way your business says hello.

Call Your Office

Give your office a call–just don’t let them know it’s you. Have someone whose voice your employees won’t recognize place the call, with you standing by waiting to listen. This may sound like cloak-and-dagger tactics, but it’s one that successful managers use to monitor the quality of their telephone service. What to listen for:

  • A pleasant salutation (“Good morning, Jones and Jones”), followed by a name, if appropriate, and offer of assistance.
  • An unhurried, interested response to queries, or the offer to connect the caller to someone else who can provide information.
  • A reasonable on-hold time. And, if the time seems longer than normal, is there an apology for the delay?

Check Out Your Service

Conduct a “test” of your answering service similarly to the above; however, you’ll be listening here for that extra level of care an answering service should take in personalizing its service. Be sure the following standards are met:

  • Answering service operator answers with the name of your company, not just a generic “May I help you.”
  • Operator should know pertinent facts about your business: times of operation, key names of personnel, etc.
  • Check message you give operator against the message that he or she transmits to your company.

If you aren’t satisfied, take the time to educate your answering service about your standards and expectations. If the service can’t–or won’t–comply with your request, engage another organization to do the job.

Tune Up Your Message

When was the last time you listened to your own company’s voice mail message? When you do, turn a careful ear to the following checkpoints:

  • Are you satisfied with the voice that represents your company? It should be upbeat, but also well-modulated and pleasingly-pitched. Do a test of several voices and choose the one that sounds best “on tape.”
  • If your voice mail system has background music, or if your company has a call sequencer with on-hold music, be sure the sound is welcoming and soothing.

Take High-Tech Down a Peg

Does your company have automated voice mail? Speaker phones? Conference-call capability? All well and good in this era when communication is king. Just keep in mind the advantages of the “live” human voice–when you make a call, business or personal, isn’t this what you prefer to hear? Although the person in your business who answers the phone may well be your lowest-paid employee, remember that this human voice is vital to the image of your company.