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IRS Revenue Ruling 59-60 provides the fundamental rules for business valuations of closely held business. It is the most cited source regarding business valuation.

Source: Entrepreneur.com

The IRS came up with eight factors that it promotes consideration of to help achieve a fair market value on a business. The eight factors listed below are not intended to be all-inclusive. Other factors may be contemplated, but at a minimum these eight should examined.

1. The nature of the business and the history of the enterprise from its inception.

Getting to know a business is critical for a valuation. Understanding and considering the history, current state, and future potential of a business will give some indication as to its stability and pattern of growth. Items considered include where the business has been located, who is running it, what the customer base is, products/services sold, ease of operation, desirability of the business and its competitive strengths and weaknesses.

2. The economic outlook in general and the condition and outlook of the specific industry in particular.

Both current and prospective economic conditions, national and the particular industry condition, need to be considered. A comprehensive industry report is very useful. Whether your business is more successful than competitors is important in placing a value on the business. Industry risk is calculated and needs to be considered.

3. The book value of the stock and the financial condition of the business.
The ruling requires looking at comparative financial statements for at least the two years preceding the valuation. We like to look at 5 years. The book value is a good starting point for determining fair market value.

4. The earning capacity of the company.

We look into detailed profit-and-loss statements. The ruling suggests obtaining profit-and-loss statements from at least the previous 5 years, containing the following information:
We “normalize” the income statements by accounting for non-operating, non-recurring and extraordinary expenses. The more stable and predictable the earnings are, the less risk is found in the business and thus the business can be given a higher value.

5. The dividend-paying capacity.

This basically is an inquiry into whether there are enough remaining funds, after paying expenses and accounting for future growth, to issue dividends to shareholders. The issue is potential dividends rather than actual dividends.

6. Whether or not the enterprise has goodwill or other intangible value.

Goodwill refers to the concept of earnings in excess of a normal rate of return based on certain intangible factors. Relevant intangible aspects of the business are the prestige and renown, the ownership of a trade or brand name, and successful operation in a particular location over a prolonged period of time.

Intangibles are relevant to a valuation of a business because they can help provide context for future earnings and growth.

7. Sales of the stock and the size of the block of stock to be valued.

We investigate market transactions to see if the transactions were at arm’s length or maybe were isolated sales, to see if the price reflects the true fair market value of the stock.

8. The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.

We look into market “comps”, similar companies that have similar revenues and SDE (Seller’s Discretionary Earnings).

So what does this mean to me?

Clearly walking through those eight factors is not something that can be done casually with an untrained eye. When it comes to valuing a business for purposes of equitable distribution, more often than not an expert is called upon.

While you may have an expert come up with your business valuation, it is still important to understand this IRS Revenue Ruling. Knowledge of these factors will help you understand why the expert is asking for certain information from you, why the valuation process may take longer than you expected, and ultimately how the expert comes up with the fair market value of your business.

Due to its importance in determining how closely held businesses are valued, we provide Revenue Ruling 59-60 for your review.

Headnote:
Rev. Rul. 59-60, 1959-1 CB 237 — IRC Sec. 2031 (Also Section 2512.) (Also Part II, Sections 811(k), 1005, Regulations 105, Section 81.10.)

Reference(s):

Code Sec. 2031 Reg § 20.2031-2

In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock. However, the general approach, methods, and factors which must be considered in valuing such securities are outlined.

Revenue Ruling 54-77, C.B. 1954-1, 187, superseded.

1. Purpose.

The purpose of this Revenue Ruling is to outline and review in general the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes.

The methods discussed herein will apply likewise to the valuation of corporate stocks on which market quotations are either unavailable or are of such scarcity that they do not reflect the fair market value.

2. Background and Definitions.
.01 All valuations must be made in accordance with the applicable provisions of the Internal Revenue Code of 1954 and the Federal Estate Tax and Gift Tax Regulations. Sections 2031(a), 2032 and 2512(a) of the 1954 Code (sections 811 and 1005 of the 1939 Code) require that the property to be included in the gross estate, or made the subject of a gift, shall be taxed on the basis of the value of the property at the time of death of the decedent, the alternate date if so elected, or the date of gift.

.02 Section 20.2031-1(b) of the Estate Tax Regulations (section 81.10 of the Estate Tax Regulations 105) and section 25.2512-1 of the Gift Tax Regulations (section 86.19 of Gift Tax Regulations 108) define fair market value, in effect, as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.

.03 Closely held corporations are those corporations the shares of which are owned by a relatively limited number of stockholders. Often the entire stock issue is held by one family. The result of this situation is that little, if any, trading in the shares takes place. There is, therefore, no established market for the stock and such sales as occur at irregular intervals seldom reflect all of the elements of a representative transaction as defined by the term “fair market value.”

3. Approach to Valuation.
.01 A determination of fair market value, being a question of fact, will depend upon the circumstances in each case. No formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases. Often, an appraiser will find wide differences of opinion as to the fair market value of a particular stock. In resolving such differences, he should maintain a reasonable attitude in recognition of the fact that valuation is not an exact science.

A sound valuation will be based upon all the relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.

.02 The fair market value of specific shares of stock will vary as general economic conditions change from “normal” to “boom” or “depression,” that is, according to the degree of optimism or pessimism with which the investing public regards the future at the required date of appraisal. Uncertainty as to the stability or continuity of the future income from a property decreases its value by increasing the risk of loss of earnings and value in the future.

The value of shares of stock of a company with very uncertain future prospects is highly speculative. The appraiser must exercise his judgment as to the degree of risk attaching to the business of the corporation which issued the stock, but that judgment must be related to all of the other factors affecting value.

.03 Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal. As a generalization, the prices of stocks which are traded in volume in a free and active market by informed persons best reflect the consensus of the investing public as to what the future holds for the corporations and industries represented. When a stock is closely held, is traded infrequently, or is traded in an erratic market, some other measure of value must be used. In many instances, the next best measure may be found in the prices at which the stocks of companies engaged in the same or a similar line of business are selling in a free and open market.

4.Factors To Consider.
.01 It is advisable to emphasize that in the valuation of the stock of closely held corporations or the stock of corporations where market quotations are either lacking or too scarce to be recognized, all available financial data, as well as all relevant factors affecting the fair market value, should be considered. The following factors, although not all- inclusive are fundamental and require careful analysis in each case:

(a) The nature of the business and the history of the enterprise from its inception.
(b) The economic outlook in general and the condition and outlook of the specific industry in particular.
(c) The book value of the stock and the financial condition of the business.

(d) The earning capacity of the company.
(e) The dividend-paying capacity.
(f) Whether or not the enterprise has goodwill or other intangible value.
(g) Sales of the stock and the size of the block of stock to be valued.
(h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.

.02 The following is a brief discussion of each of the foregoing factors:
(a) The history of a corporate enterprise will show its past stability or instability, its growth or lack of growth, the diversity or lack of diversity of its operations, and other facts needed to form an opinion of the degree of risk involved in the business. For an enterprise which changed its form of organization but carried on the same or closely similar operations of its predecessor, the history of the former enterprise should be considered.

The detail to be considered should increase with approach to the required date of appraisal, since recent events are of greatest help in predicting the future; but a study of gross and net income, and of dividends covering a long prior period, is highly desirable. The history to be studied should include, but need not be limited to, the nature of the business, its products or services, its operating and investment assets, capital structure, plant facilities, sales records and management, all of which should be considered as of the date of the appraisal, with due regard for recent significant changes.

Events of the past that are unlikely to recur in the future should be discounted, since value has a close relation to future expectancy.

(b) A sound appraisal of a closely held stock must consider current and prospective economic conditions as of the date of appraisal, both in the national economy and in the industry or industries with which the corporation is allied. It is important to know that the company is more or less successful than its competitors in the same industry, or that it is maintaining a stable position with respect to competitors. Equal or even greater significance may attach to the ability of the industry with which the company is allied to compete with other industries.

Prospective competition which has not been a factor in prior years should be given careful attention. For example, high profits due to the novelty of its product and the lack of competition often lead to increasing competition. The public’s appraisal of the future prospects of competitive industries or of competitors within an industry may be indicated by price trends in the markets for commodities and for securities.

The loss of the manager of a so-called “one-man” business may have a depressing effect upon the value of the stock of such business, particularly if there is a lack of trained personnel capable of succeeding to the management of the enterprise. In valuing the stock of this type of business, therefore, the effect of the loss of the manager on the future expectancy of the business, and the absence of management-succession potentialities are pertinent factors to be taken into consideration.

On the other hand, there may be factors which offset, in whole or in part, the loss of the manager’s services.

For instance, the nature of the business and of its assets may be such that they will not be impaired by the loss of the manager. Furthermore, the loss may be adequately covered by life insurance, or competent management might be employed on the basis of the consideration paid for the former manager’s services. These, or other offsetting factors, if found to exist, should be carefully weighed against the loss of the manager’s services in valuing the stock of the enterprise.

(c) Balance sheets should be obtained, preferably in the form of comparative annual statements for two or more years immediately preceding the date of appraisal, together with a balance sheet at the end of the month preceding that date, if corporate accounting will permit. Any balance sheet descriptions that are not self-explanatory, and balance sheet items comprehending diverse assets or liabilities, should be clarified in essential detail by supporting supplemental schedules. These statements usually will disclose to the appraiser

(1) liquid position (ratio of current assets to current liabilities);
(2) gross and net book value of principal classes of fixed assets;
(3) working capital;
(4) long-term indebtedness;
(5) capital structure; and
(6) net worth.
Consideration also should be given to any assets not essential to the operation of the business, such as investments in securities, real estate, etc.

In general, such nonoperating assets will command a lower rate of return than do the operating assets, although in exceptional cases the reverse may be true.

In computing the book value per share of stock, assets of the investment type should be revalued on the basis of their market price and the book value adjusted accordingly. Comparison of the company’s balance sheets over several years may reveal, among other facts, such developments as the acquisition of additional production facilities or subsidiary companies, improvement in financial position, and details as to recapitalizations and other changes in the capital structure of the corporation.

If the corporation has more than one class of stock outstanding, the charter or certificate of incorporation should be examined to ascertain the explicit rights and privileges of the various stock issues including:
(1) voting powers,
(2) preference as to dividends, and
(3) preference as to assets in the event of liquidation.

(d) Detailed profit-and-loss statements should be obtained and considered for a representative period immediately prior to the required date of appraisal, preferably five or more years. Such statements should show

(1) gross income by principal items;
(2) principal deductions from gross income including major prior items of operating expenses, interest and other expense on each item of long-term debt, depreciation and depletion if such deductions are made, officers’ salaries, in total if they appear to be reasonable or in detail if they seem to be excessive, contributions (whether or not deductible for tax purposes) that the nature of its business and its community position require the corporation to make, and taxes by principal items, including income and excess profits taxes;
(3) net income available for dividends;
(4) rates and amounts of dividends paid on each class of stock;
(5) remaining amount carried to surplus; and
(6) adjustments to, and reconciliation with,
surplus as stated on the balance sheet. With profit and loss statements of this character available, the appraiser should be able to separate recurrent from nonrecurrent items of income and expense, to distinguish between operating income and investment income, and to ascertain whether or not any line of business in which the company is engaged is operated consistently at a loss and might be abandoned with benefit to the company. The percentage of earnings retained for business expansion should be noted when dividend-paying capacity is considered.

Potential future income is a major factor in many valuations of closely-held stocks, and all information concerning past income which will be helpful in predicting the future should be secured. Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five-or-ten-year averages without regard to current trends or future prospects will not produce a realistic valuation.

If, for instance, a record of progressively increasing or decreasing net income is found, then greater weight may be accorded the most recent years’ profits in estimating earning power.

It will be helpful, in judging risk and the extent to which a business is a marginal operator, to consider deductions from income and net income in terms of percentage of sales. Major categories of cost and expense to be so analyzed include the consumption of raw materials and supplies in the case of manufacturers, processors and fabricators; the cost of purchased merchandise in the case of merchants; utility services; insurance; taxes; depletion or depreciation; and interest.

(e) Primary consideration should be given to the dividend-paying capacity of the company rather than to dividends actually paid in the past. Recognition must be given to the necessity of retaining a reasonable portion of profits in a company to meet competition. Dividend-paying capacity is a factor that must be considered in an appraisal, but dividends actually paid in the past may not have any relation to dividend-paying capacity. Specifically, the dividends paid by a closely held family company may be measured by the income needs of the stockholders or by their desire to avoid taxes on dividend receipts, instead of by the ability of the company to pay dividends. Where an actual or effective controlling interest in a corporation is to be valued, the dividend factor is not a material element, since the payment of such dividends is discretionary with the controlling stockholders.

The individual or group in control can substitute salaries and bonuses for dividends, thus reducing net income and understating the dividend-paying capacity of the company. It follows, therefore, that dividends are less reliable criteria of fair market value than other applicable factors.

(f) In the final analysis, goodwill is based upon earning capacity. The presence of goodwill and its value, therefore, rests upon the excess of net earnings over and above a fair return on the net tangible assets. While the element of goodwill may be based primarily on earnings, such factors as the prestige and renown of the business, the ownership of a trade or brand name, and a record of successful operation over a prolonged period in a particular locality, also may furnish support for the inclusion of intangible value.

In some instances it may not be possible to make a separate appraisal of the tangible and intangible assets of the business. The enterprise has a value as an entity. Whatever intangible value there is, which is supportable by the facts, may be measured by the amount by which the appraised value of the tangible assets exceeds the net book value of such assets.

(g) Sales of stock of a closely held corporation should be carefully investigated to determine whether they represent transactions at arm’s length. Forced or distress sales do not ordinarily reflect fair market value nor do isolated sales in small amounts necessarily control as the measure of value. This is especially true in the valuation of a controlling interest in a corporation.

Since, in the case of closely held stocks, no prevailing market prices are available, there is no basis for making an adjustment for blockage.

It follows, therefore, that such stocks should be valued upon a consideration of all the evidence affecting the fair market value. The size of the block of stock itself is a relevant factor to be considered. Although it is true that a minority interest in an unlisted corporation’s stock is more difficult to sell than a similar block of listed stock, it is equally true that control of a corporation, either actual or in effect, representing as it does an added element of value, may justify a higher value for a specific block of stock.

(h) Section 2031(b) of the Code states, in effect, that in valuing unlisted securities the value of stock or securities of corporations engaged in the same or a similar line of business which are listed on an exchange should be taken into consideration along with all other factors.

An important consideration is that the corporations to be used for comparisons have capital stocks which are actively traded by the public. In accordance with section 2031(b) of the Code, stocks listed on an exchange are to be considered first.

However, if sufficient comparable companies whose stocks are listed on an exchange cannot be found, other comparable companies which have stocks actively traded in on the over-the- counter market also may be used. The essential factor is that whether the stocks are sold on an exchange or over-the-counter there is evidence of an active, free public market for the stock as of the valuation date. In selecting corporations for comparative purposes, care should be taken to use only comparable companies. Although the only restrictive requirement as to comparable corporations specified in the statute is that their lines of business be the same or similar, yet it is obvious that consideration must be given to other relevant factors in order that the most valid comparison possible will be obtained. For illustration, a corporation having one or more issues of preferred stock, bonds or debentures in addition to its common stock should not be considered to be directly comparable to one having only common stock outstanding.

In like manner, a company with a declining business and decreasing markets is not comparable to one with a record of current progress and market expansion.

5. Weight To Be Accorded Various Factors.
The valuation of closely held corporate stock entails the consideration of all relevant factors as stated in section 4. Depending upon the circumstances in each case, certain factors may carry more weight than others because of the nature of the company’s business. To illustrate:

(a) Earnings may be the most important criterion of value in some cases whereas asset value will receive primary consideration in others. In general, the appraiser will accord primary consideration to earnings when valuing stocks of companies which sell products or services to the public; conversely, in the investment or holding type of company, the appraiser may accord the greatest weight to the assets underlying the security to be valued.

(b) The value of the stock of a closely held investment or real estate holding company, whether or not family owned, is closely related to the value of the assets underlying the stock. For companies of this type the appraiser should determine the fair market values of the assets of the company. Operating expenses of such a company and the cost of liquidating it, if any, merit consideration when appraising the relative values of the stock and the underlying assets.

The market values of the underlying assets give due weight to potential earnings and dividends of the particular items of property underlying the stock, capitalized at rates deemed proper by the investing public at the date of appraisal. A current appraisal by the investing public should be superior to the retrospective opinion of an individual. For these reasons, adjusted net worth should be accorded greater weight in valuing the stock of a closely held investment or real estate holding company, whether or not family owned, than any of the other customary yardsticks of appraisal, such as earnings and dividend paying capacity.

6. Capitalization Rates.
In the application of certain fundamental valuation factors, such as earnings and dividends, it is necessary to capitalize the average or current results at some appropriate rate. A determination of the proper capitalization rate presents one of the most difficult problems in valuation.

That there is no ready or simple solution will become apparent by a cursory check of the rates of return and dividend yields in terms of the selling prices of corporate shares listed on the major exchanges of the country. Wide variations will be found even for companies in the same industry. Moreover, the ratio will fluctuate from year to year depending upon economic conditions. Thus, no standard tables of capitalization rates applicable to closely held corporations can be formulated. Among the more important factors to be taken into consideration in deciding upon a capitalization rate in a particular case are:

(1) the nature of the business;
(2) the risk involved; and
(3) the stability or
irregularity of earnings.

7. Average of Factors.
Because valuations cannot be made on the basis of a prescribed formula, there is no means whereby the various applicable factors in a particular case can be assigned mathematical weights in deriving the fair market value. For this reason, no useful purpose is served by taking an average of several factors (for example, book value, capitalized earnings and capitalized dividends) and basing the valuation on the result.

Such a process excludes active consideration of other pertinent factors, and the end result cannot be supported by a realistic application of the significant facts in the case except by mere chance.

8. Restrictive Agreements.
Frequently, in the valuation of closely held stock for estate and gift tax purposes, it will be found that the stock is subject to an agreement restricting its sale or transfer. Where shares of stock were acquired by a decedent subject to an option reserved by the issuing corporation to repurchase at a certain price, the option price is usually accepted as the fair market value for estate tax purposes.

See Rev. Rul. 54-76, C.B. 1954-1, 194. However, in such case the option price is not determinative of fair market value for gift tax purposes. Where the option, or buy and sell agreement, is the result of voluntary action by the stockholders and is binding during the life as well as at the death of the stockholders, such agreement may or may not, depending upon the circumstances of each case, fix the value for estate tax purposes. However, such agreement is a factor to be considered, with other relevant factors, in determining fair market value.

Where the stockholder is free to dispose of his shares during life and the option is to become effective only upon his death, the fair market value is not limited to the option price. It is always necessary to consider the relationship of the parties, the relative number of shares held by the decedent, and other material facts, to determine whether the agreement represents a bonafide business arrangement or is a device to pass the decedent’s shares to the natural objects of his bounty for less than an adequate and full consideration in money or money’s worth. In this connection see Rev. Rul. 157 C.B. 1953-2, 255, and Rev. Rul. 189, C.B. 1953-2, 294.

9. Effect on Other Documents.
Revenue Ruling 54-77, C.B. 1954-1, 187, is hereby superseded.

Valuing your company gives you insights into the strengths and weaknesses of the business.


Source: Entrepreneur.com


There are many reasons why having your business valued makes sense; whether it is to inform sale price negotiations, your financial planning or even succession planning. But one, often underestimated outcome of the process is that it can act as an accelerator for enhancing the value of the business itself by enabling it to make better-informed decisions, helping to ensure that it has the right debt structure and identifying areas of strength and weakness which can then be addressed or enhanced.


The process of a business valuation can lead to a more forensic understanding of your business. It can highlight areas where revenues can be improved and expenses reduced, resulting in higher profits and improved cash flow. Equally, better knowledge means less uncertainty, and less uncertainty in business minimizes a company’s risk profile. These two outcomes — higher profits and cash flow, combined with reduced risk — in time equals higher business value.


A valuation isn’t a simple profit and loss “snapshot”; it is a question of the company’s sustained profile over time. Therefore, a valuation can act as a health check; identifying areas of both strength and weakness in the business that can inform strategic planning moving forwards, ultimately enhancing the business’ overall value.


A weakness could be identified simply as an area where the business is not performing at its optimum potential, where, for example, operational costs could be reduced or workforce productivity or effectiveness of sales and marketing functions enhanced. A weakness could equally be an area where the company is losing value, for example through poorly managed inventories or customer attrition.


As well as identifying areas for improvement, the valuation process will help to determine what is driving value in your business, so that those areas can be emphasized and enhanced to unlock further growth and value. Value drivers can be defined as things that have a significant impact on the performance of your specific business. They can come in many forms such as cutting edge technology, brand recognition, human capital or customer diversity. A regular business valuation can help companies to monitor the health of its value drivers to ensure that they are operationally optimal.


A valuation also offers the opportunity to consider and manage your company’s risk profile. Valuation is not about determining what a company is worth in your hands, but instead its transferable value.


For small and medium-sized businesses, something which is regarded as a value driver by the business owner can represent risk to potential investors or even the business itself. For example, a company’s client base is often regarded as a value driver. It may have deep client relationships, which have taken years to cultivate. However, if 40 percent of a company’s revenue is derived from one client, or if the relationship exists purely with the business owner, then, from a valuation point of view, it represents as much risk as it does return.


The more diverse a company’s client base, the more value it attracts. A diverse client base, even across industries, can help to protect a business and therefore enhance its value. By flagging these areas of “risk,” a business valuation process can help a company to minimize its risk profile and maximize its potential value.


Taking on debt can be a risk, but again, one that can be managed and minimized by knowing the true value of your business. This is because the value of the business determines the “cost” of the new capital. A company which is overvalued can over-leverage itself with debt, increasing its risk of failure. Valuation then can help companies to achieve an appropriate debt structure.

If you are considering having your business valued, there are some simple steps that you should follow to ensure the best possible valuation: Undertake a due diligence health check, maintain a healthy cash flow for several months in advance of the valuation, address any financial irregularities that may exist in the business and have all the accounting records present and correct.


Having ensured that the business is in the best possible state pre-valuation, entrepreneurs may wish to inform themselves more broadly by talking to their financial advisor, getting advice from an accountant or broker — mainly if the valuation is a step toward selling the business — and researching valuations of similar businesses.


To be credible, valuations must be undertaken by impartial third parties. Today, business owners have the choice of whether to undergo an online or offline valuation. Offline or traditional business valuation, however, was not built with the business owner in mind. It is slow, highly intrusive and worst of all, expensive. With today’s technology business owners can gather an accurate understanding of what their business is worth online in a matter of minutes.

Such online tools are democratizing business valuation by making them cheaper and quicker to attain — a desirable outcome given that a valuation can ultimately enhance the value of a business.

 Eliminating bad debt will make your company so much more attractive for sale.

Source: Entrepreneur.com

Having a well-financed business that doesn’t rely on bad sources of debt goes a long way to making a company attractive to buyers and ensuring that it fetches an attractive valuation. But, the choices that produce a good balance sheet don’t happen overnight; it takes years of preparation to ensure the best possible sale years later.

It’s a good time to sell a small business: in the first quarter of 2017, 2,368 deals closed, up 29 percent from a year earlier, according to BizBuySell’s Insight Report. However, only one in five listings on the online marketplace for selling small businesses closed a deal in 2016. Having good financing is among the most important factors that leads to successful sales. At its simplest, attractive businesses are financed by good debt while unattractive businesses are built on bad debt. Often, decisions about finances made early in the life of a business determine whether or not a business can be sold successfully years later.

Good debt falls into three categories:

1. Financing to acquire fixed assets that improve workflow and efficiency or that facilitates more efficient use of labor or assets

2. Debt to acquire real estate that can be sold with the business or held after the sale as an additional source of income

3. Working capital loans and lines that help the business grow.

Start with a review of the financing and utilization of fixed assets.

Companies should have good, permanent financing in place for at least three years to create the most efficient, cash-flow positive organization. That planning starts with a review of the financing for fixed assets.

For example, printing and construction companies are known for buying high-end equipment that is often underutilized. If that equipment is only used 20 percent of the time, it creates a fixed debt cost associated with variable revenues that does the business a disservice by creating a balance sheet where cash flow doesn’t justify debts. Since buyers only care about repeatable cash flow, the end result will be a lower purchase price.

Entrepreneurs that want to sell should review all such balance sheet assets to ensure the company is in good financial health. A business using debt to finance assets that are under-utilized, including machinery and real estate, should rectify the situation. For example, if an asset is being underutilized, it makes more balance sheet sense to sell the asset, retire the debt and sub-contract that work.

Buyers dislike bad debt, which falls into three categories:

1. Debt financing underperforming assets or real estate, as detailed above

2. Significant credit card debt being used as working capital because the business does not have adequate lines of credit

3. High interest rate debts.

While those loans may be convenient and easy to sign up for online, loans with interest rates at 20 percent annually or even higher are a turnoff for a new buyer. While bad debts can be keeping the business afloat, they signal that the business may be difficult to finance.

Having the right type of financing makes sure that the business is operating efficiently and has real cash flow that is repeatable and will continue after the sale. For example, taking on a large loan to upgrade machinery in a way that will boost sales enough to service the debt makes sense for a business as an ongoing concern, but doing it just before a sale will lower the profit of that sale unless cash flows increase accordingly.

Avoid year-end tax and accounting maneuvers that drive down revenue.

Anyone hoping to sell their business should also take care to eschew any tax avoidance schemes such as billing customers after year-end cutoff, paying invoices early, or buying extra equipment or vehicles for the depreciation write-off. Such actions drive revenues down and push costs up artificially, and may make it difficult for the buyer to understand your business and how he or she can make it profitable. That’s never a good thing when trying to sell a business.

Entrepreneurs who took outside investment too early, either from venture capital or elsewhere, and had to give up too much control of the business in return for that cash may find it hard to get the price they want years later in a sale because they own too small of a percentage of their company. Such companies would have been better off raising a smaller amount of funding from friends and family or angel investors to bootstrap the business and retain control.

Owners who took on partners in return for cash early on should have any agreement in writing to avoid any problems later when it comes to selling the company. Picture, for example, a top chef with a partner that supplied the cash to set up a restaurant. In this type of business marriage, a pre-nuptial agreement can save lots of headaches later.

In the coming decade, about 10 million small-business owners hope to sell their company to retire. Businesses that fetch good valuations will have good processes and methods that create profits and will have financials showing positive equity, goodwill being created, and cash flow that is sufficient to service debts and pay the new owner a good salary

Companies are sold for many reasons: founders break up or burn out, investors force a sale, money runs out or sometimes the dollar signs are just too attractive to ignore.


Source: Entrepreneur.com


If you’ve been approached to sell your business or are considering looking for buyers, it’s an exciting time. Incredible opportunity, both personal and professional, can come from a sale. But you’ve also got to be prepared for what lies ahead. Based on our experience, here are six things I tell any business owner who is thinking of selling his or her business:

1. Determine if you’re ready.

Before you begin the process, ask yourself one simple question, “If someone gave me X dollars for my company, would I walk away today?” Your answer will reveal how passionate you still are about your business. If you answered yes without hesitation, then you know you are mentally ready to move on and should seriously consider selling. Keep in mind that some business owners love what they do so much, no amount of money would entice them to sell — and that’s OK.


2. Find an advisor you trust.

You probably have become very skilled at running a business, but can be complete amateurs when it comes to things such as multiples and determining a valuation.


Some businesses turn to a business broker or mergers and acquisitions adviser. It may seem expensive, but many business owners consider this a sound investment to maximize value, keep the buyer honest and speed up the negotiation and due-diligence process.

3. Find a buyer who shares your vision.

After dedicating years of hard work and emotional energy to the business, it’s hard to just turn it over to anyone. This is particularly true if you have employees that will be staying with the business. The easiest way to overcome the twinges of guilt and doubt is to find a buyer who shares your vision, is willing to invest in the business, and has the ideas and resources to take it to the next level.

4. Make sure your books are in order.

If you think that bankers split every hair when evaluating your mortgage or business-loan application, just wait until you’ve got a potential buyer looking at your business.


You’ll need an up-to-date balance sheet, quarterly statements and at least two to three years of solid tax returns. The more profitable your tax returns are, the more you can typically get for your business. But this can be tricky, since you probably structured your revenue and expenses to minimize your tax bill each year.


In addition, be prepared to answer questions such as how much it costs to acquire a new customer, what’s the average lifetime value of a customer and what’s your market penetration rate, along with details about your back-office infrastructure.

5. Don’t assume anything until the last contract is signed.

The old saying, “don’t count your chickens before they hatch,” may be cliché, but it’s particularly wise here. In his book Walk Away Wealthy, Mark Tepper shares the story of a small-business owner who thought he had an $11 million deal to sell his company, only to find that the seller completely disappeared at the last minute.


Getting interest, even a signed letter of intent, is a great first step, but there’s still a long road ahead of you, with many possible outcomes. Keep your business chugging along as usual until the very last minute.

6. Figure out what’s next.

When you are in the midst of the process, it’s natural to focus all your emotional energy on closing the deal, and you forget to think about what happens the day after the paperwork is signed. Overnight, everything changes: You suddenly go from having a major mission of growing a business to having no mission at all.


Some owners go work for the new company after the sale. Some business owners can make this transition gracefully — some do not.


Think long and hard about what you want to do. If you plan on staying on, make sure you’ll be OK giving up your autonomy. If you don’t plan on sticking around, come up with a game plan for what to do with the cash. For example, you can start a new business, get involved in volunteer work or invest in other entrepreneurs. Just make sure you have a reason to be excited to get out of bed each morning.

Thinking of selling your business someday? Planning on leaving your empire to the kids with a chunk of cash attached? Dreaming of retiring to the sunny beaches of a Caribbean island?


 Source: Entrepreneur.com


Perhaps you’re planning on doing any (or all) of these things from the sale of your business. And, OK, maybe we’re dreaming a little. Even in New York, the median selling price of a small business is a mere $575,000.


But, still, selling your business can be a smart decision. Good reasons to sell include: the market telling you it’s the right time; you’re no longer interested; you have dysfunctional relationships with your fellow business owners; or you’re just plain ready to retire.


So, even if you’re establishing a new business but have visions of someday selling it, there are several things to consider.


Some business plans — especially those that require venture capital funding — need an exit plan from the beginning, whether that plan be selling to a larger company or going public. Other business plans, where no sale is planned in the near-future — at least not within the next ten years — may prompt questions about an eventual sale.


One big question here, of course, is when you should actually start planning to sell, Like almost anything else a lawyer will tell you, it depends. So, before you begin that discussion with your lawyer, here are some important things to consider:


1. What the buyer will want

Profitability. This is the most basic requirement. Is the business turning a profit? Will it continue to turn a profit? Is there room for growth in the industry? Does the business have significant debt service obligations? Does the business require significant capital expenditures in the near future?


The answers to these questions will have a profound effect on whether the business will be attractive to potential buyers.


Competitive edge. What makes your business’ products or services different from those of competitors? Does your business simply provide commodities that can be easily and legally copied by competitors? If the products or services aren’t inherently different from those of competitors, does your business have other assets that help differentiate it? Perhaps it’s a juggernaut brand?


Systemization/management structure. Can your business operate without you? Have you systematized — as much as possible — your role in the business? Is there a management structure in place that will allow the business to operate without you?


Scalability. Can the business grow? Or is it dependent upon and limited by trained personnel or professionals who must interact with customers on a deep level in order to be successful?


Culture. Do the business’ key employees understand the more nuanced intangible bases of the business’ success? Can those be easily communicated to and instilled in them?


Apple is a great example of this: The company has a program, Apple University, that seeks to impart the beliefs and principles espoused by the legendary Steve Jobs to both existing and new employees.


2. What the technicalities will be

Even if a business satisfies all of the preceding criteria, there may be any number of technical hurdles that could make it less attractive to potential buyers. Some of these technical issues could actually stop the sale altogether.


Worker classification. Do you classify important members of your workforce as independent contractors, when they are actually employees? When you misclassify what are actually employees, it’s possible the buyer will be subject to substantial liability, tax or otherwise.


Leases. Do the business’s leases permit their being assigned without the consent of landlords? Is moving the business easy should a move be necessary? Buyers won’t likely be interested if they cannot assume the lease and if moving to a new location is difficult.


Long-term supplier contracts. Does the business have long-term contracts with suppliers that contain terms that are worse than what’s available on the market, or worse than the acquirer can negotiate? By the same token, long-term contracts that contain more-than-favorable market terms might be a selling point to increase the value of the business, or at least make it more marketable.


Inefficiencies. Are there multiple people and processes that are inefficient? Increasing efficiencies without decreasing the quality of products or services is a great way to make a business more attractive to potential buyers.


Taxes. Has the business significantly depreciated its capital equipment? If so, buyers might want to purchase the business via an asset sale, which could force you to recognize significantly higher capital gain than would be realized in a stock sale.


If you’re looking to sell, there are still other technical issues worth considering. Always seek the advice of a competent professional when making important legal decisions.


3. What kind of financial professional you’ll work with

If you’re looking to sell your business, you might choose to work with one of two types of intermediary: a business broker or an investment banker. Business brokers generally assist with the sale of businesses ranging in size from $500,000 to $5 million. Investment bankers often won’t get involved unless the business is worth at least the latter figure.


Brokers are more willing than investment bankers to work on a contingency basis, meaning that they only get paid if a deal successfully closes. Investment bankers typically require an initial retainer, monthly payments and a success fee.

Selling your business is more achievable than you think when you’ve set yourself up correctly.

Source: Entrepreneur.com

Did you know that, for most entrepreneurs, over 50% of all the money they will make from owning their business comes on the day they sell it? Being your own boss is great and all, but there may come a day when you want to move on and find your next adventure.


These days, billion-dollar software companies aren’t the only businesses being acquired. In fact, investors are foaming at the mouth to buy businesses just like yours. Amazon-business acquirer Thrasio just became the fastest unicorn on record, and other acquisition firms like Boosted and Perch are scooping up well-oiled operations right and left. If your numbers are tight and right, a hefty payday could be right around the corner for you.


A record number of trademarks were filed in 2020, which means that more people are establishing businesses and brands than ever before. Some of these companies will go on to become unicorns, whereas many others will fail. But what about the ones in between that build a successful business and eventually get acquired? And what does your business need to have in place to be attractive to investors and get a good offer?


Know how a business gets valued

Dave Bryant from EcomCrew has a phrase: “Revenue is vanity, profit is sanity.” It’s easy to measure top-line revenue in business, and these numbers are often the ones touted in case studies and other fancy marketing assets.


But buyers aren’t concerned so much with revenue. They’re much more interested in profit. And profit takes a lot more oomph to accurately calculate. Buyers will also look carefully at cash flow and seller’s discretionary earnings (SDE). If selling your business is something you’d like to do one day, getting a quality bookkeeper is an absolutely essential piece of the puzzle.


Buyers are looking for four things when they consider purchasing a business — whether they know it or not. These four things, which we call the four pillars, are as follows.


1. Risk
If a business is less than three to five years old or is in a rapidly changing market, it carries a higher degree of risk. This is normal, and investors expect a younger business to be more volatile. If you have a young business and want to make an exit, you’ll want to ensure you have all the other pillars in place so that you can make a strong case. The factors considered in risk include a company’s size, age, competition and defensibility, which refers to how high the barrier of entry is for competitors to enter your market.


2. Growth
Why should someone hand their hard-earned dollars over to you in exchange for this business? Think carefully about your value proposition here. Also think about how you can make life easier for your buyer when they take over the steering wheel. Obvious metrics like top-line revenue and profit margin are important, but other factors like ease of transition receive more weight than you might think. If you’ve lined up new product SKUs that will generate big revenue in the years to come, that positioning is attractive to someone with regard to getting a solid ROI.


3. Transferability
A sale is a transfer of goods. Can the buyer run the business in exactly the same way that you’ve been running it? The obvious snag here is companies built from a personal brand — no one else can be you, so if you are the business, you’ll have a more challenging exit and can expect to stick around and be the name and face of the business long after it is no longer yours.


There are other transferability factors to think about here, such as staffing, supply chain and workload. If it takes you 80 hours a week to run your business, a buyer probably won’t be up for that, which means they’ll have to outsource more of the work and increase cost and risk along the way. Make your position in the business as transferable as possible if you want to sell someday.


4. Documentation
Every entrepreneur who aspires to be an EXITpreneur can start working on this today. A buyer won’t touch a business unless it has clear documentation and reporting. Financial documentation is obviously priority number one, but established standard operating procedures (SOPs) and contracts are also important to have in place.


Remember earlier when I begged you to retain a good bookkeeper? Another reason you need one is because most ecommerce businesses that get acquired use accrual accounting, not cash accounting. Accrual accounting gives a more accurate picture of actual business earnings, which is what investors will look for when they consider buying your business.


Selling a business can be intimidating, and many entrepreneurs miss out on one of the biggest paydays of their lives because they don’t ever take action on their exit strategy. Put these four pillars into action today, and a thrilling sale will soon be on the horizon.

Although a cash sale is usually preferred, seller financing opens the door to buyers who don’t have the funds for a cash purchase. With a bigger buyer pool, you stand a better chance of selling at the right price, at the right time, and to the right buyer.

Source: Entrepreneur.com

When it’s time to sell your business, you know it in your gut. You might feel burnt-out, anxious or long for a fresh start. However the feeling manifests, you must act on it quickly. Things move at warp speed in startup land. If you want the best acquisition deal, you need to move equally fast.

But not all potential buyers have the capital for an acquisition or the means of raising it. They might be waiting on bank financing, a loan from the SBA (Small Business Administration) or simply for their coffers to fill. So what do you do? Trade a sale now for one in the future when your valuation might not be so secure?

Although a cash sale is usually preferred, seller financing opens the door to buyers who don’t have the funds for a cash purchase. With a bigger buyer pool, you stand a better chance of selling at the right price, at the right time and to the right buyer. So let’s take a look at what seller financing means and how it could help you.

What is seller financing?

In some ways, seller financing is just like any financing. Instead of selling your company for a lump sum, you agree to let the buyer spread the payment over a number of years after they put down a down payment.Where seller financing differs from, say, a mortgage loan, is that the repayment term is much shorter — typically five to seven years maximum — and instead of handing over money you hand over your business.

How does it work?

Your buyer might ask for seller financing, or you can use it as a bargaining chip in negotiations. Either way, hire a lawyer to act as intermediary and to ensure the deal is to your advantage. You’re taking all the risk here, so ensure there are safety measures in place that protect you from buyer default.

Seller financing usually works like this:
You and the buyer agree the terms of financing. This includes the down payment, interest rate, term, collateral, and so on. Usually, the business is the collateral, so if the buyer defaults you can reclaim the business in its entirety. However, you can ask for additional collateral — especially if their credit rating is poor — in the form of property or other assets.

Buyer makes a down payment. Because the repayment terms are shorter, the buyer must put down at least 25 to 35 percent of the purchase price. Then a larger installment payment at the end, called a balloon payment, settles the debt.

Buyer signs and files a promissory note. The promissory note is the legal contract that binds the buyer to the installment repayment plan. Ask them to file this for you so you don’t have to do it yourself (like I said, you’re taking the risk, so the buyer should be doing most of the administrative legwork).

Buyer makes their regular payments. While the buyer repays, the business is under their control. This is where things can go awry. If they run your business into the ground or don’t make as much money as they thought they would, they might be unable to repay. You’ll then have to go through the courts to reclaim your business and assets. That said, if you did your homework before agreeing to seller financing, the chances of this happen
ing are low.

Buyer makes the final balloon payment. Hurrah! It’s done. The buyer has paid you the purchase price in full, and you can draw a line through this stage of your entrepreneurial career and focus on the future.

Why seller financing can change your life (for the better)

Ninety-nine percent of an acquisition is finding the right buyer. This is no easy task. When you’ve poured years of blood, sweat and tears into a business, you don’t let it go to just anyone — you want someone who’ll do great things with it.

Unfortunately, finding someone that is both well-funded and the right fit can take months — perhaps years — and in that time your business is exposed to all kinds of threats. Think market changes, consumer changes, technology changes — all of which can hurt your valuation (granted, they might boost it too, but who wants to take that chance?).

A seller financing deal, however, attracts more buyers. This boosts your chances of finding the right one and justifies a higher sale price. There are taxation benefits, too, because seller financing results in per year capital gains tax, so you’ll pay less to the IRS than if it had been an all-cash purchase.

Perhaps the biggest benefit, however, is how a quick sale helps your career. When you’re stuck on a train with no enthusiasm for its destination, life is glum. You might be moving forwards, but not in the direction you’d like. But if you can sell quickly, and at the right price, you can switch tracks and take your career anywhere you want. Seller financing, then, rather than being a last resort, could be your key to entrepreneurial freedom, a springboard to better things — so keep it up your sleeve when you’re ready to sell.