Preparing for Exit

0:05 You have done to censure for you young. This is the pipe Man here on the Adventures pipe Man W four c Y Radio with our Positively pipe Man segment and this is where we talk about some powerful business strategies from Michael Barbarita or Resident Expert, and this week we're going to talk about preparing for exit. That is a very important subject for anybody that's a business owner because you should always have an exit strategy.

0:46 And Michael, why don't you tell them why and how to do right well? Because someday you will be separated from your business. The question is will it be? Will be a great day? And so a lot of and a lot of baby boomers right now, which is a large part of the population, are selling their business. So from a demographics standpoint, a lot of people are looking for the exit. And you know, the exit isn't something it's not like selling a house where you just put a sales sign on it, or or you know, selling some type of asset that you have. It it's totally it's totally different. It involves and you know in my description I talk about how you need to prepare at least two years.

1:33 It's probably close that the three would probably be the optimum amount of time if you're thinking about selling. It's not like you can't think about selling on January first, twenty twenty six and try to sell the business at the best price you can, but at the best price and an opportunity in twenty twenty and try to sell it in twenty twenty six. It's just it's just not the way to go about doing it right. Right, So, uh, some of the things that we have to you have to do is, first of all, you have to keep yourself keep the company focused on growth, because you do want to if you if you're gonna be selling the next couple of years, you do want to maximize your a profit because you know, that's why people buy a business.

2:17 They buy it. They buy a business for two things. Number one, so the business they will pay and they'll pay more money for a business that is a business and not a job. Very important designation there that I'll get to in a moment, but uh, you know, and they and they and they will pay. They want to pay for opportunity. They want to. They don't want to they don't want to buy a stagnant business. They want to buy a growing business. So you have to constantly keep the eye on growth. Also, you have to reduce the reliance on you. The more you reduce the reliance on you, the more valuable the businesses.

2:57 Why because people don't want to buy jobs, they want to businesses. And so if you if if if the if the buyer foresees that they have to do a lot of work, that they have to work eighty hours a week like you do. Uh, that's a problem because that's they're buying a job that that that doesn't work. So that I mean some people would do that, but that's but you get a low nickel, you get a low price. When that happens, it's you know, it's just that the the ebit, the multiple goes down. Mm hmm. You're gotta you're gotta make sure your. Accounting records are in shape because if a buyer, if a buyer goes in there and your accounting records are a mess, I mean, they're just gonna walk away and not even gonna give you remotely an opportunity to make an offer.

3:43 Wow, good, right now, right, it's gonna be in line. The other thing is you you have if you're a seller, you have to understand your tax ramifications of the sale, because that one can blow you right out of the water. Depending upon the structure. One of the worst structures to sell is a C corporation because there's a doubt there's a double taxation associated with that. Yeah, okay, once to the company, they get taxed, and then you want to take the money out of the company and put it in your pocket, it gets taxed again. So uh, you have to really convert that C corporation to a subasse and that can cost you some money for sure, not just in preparation, but also more importantly in there's there's a there's this thing called the built in gains tax, which is a nightmare.

4:34 But but but it's better. If it's better to convert and pay that built in gains tax, Uh, then not convert and pay the double tax when you sell. So if you're if you're a C corporation, get out of it. That's but in the meantime, understand the tax ratifications. You've got to you've got to understand all your state planning ratifications. Okay, you want you want to. Make sure that if there is a sale. And uh, if you're not around, you want to make sure it goes into the right hands, or if there is a sale and you are around, you're now gonna be hopefully, uh, dealing with a pile of money that you have to you know, properly a state planned for, so that that's another important consideration. Strategic buyers are always willing to pay more, even though they don't let on that they will. M okay, So a strategic buyer is somebody who is in the same business or or serves similar customers that.

5:42 Then you do. They already have the overhead base and all all they're doing is piling your sales onto their overhead base, so a lot of that profit falls to the bottom line. They're willing to pay more. They won't let on that they are, but they are are, so looking looking for strategic buyers is a way to maximize the purchase price. You should have evaluation. Done on the company, not. That and by the way, most valuations that have done are definitely overstated the price in my opinion, but it's good to have because it's an overstated price, and it's good to get an overstated price. So usually evaluation is something that you should do. It during that two to three year period, you're going to find a good business attorney.

6:36 Without a good business attorney, somebody who understands how to negotiate, somebody who understands business and law, because no matter what the what the case is, there's usually there's usually a couple of crisis points in like every deal, and you need a lawyer who understands the business ratification so they can negotiate on your behalf, because you don't want to sit there and negotiate all that you know, certainly the main the major terms and negotiated, but all the mickey mouse terms that can actually ruin a deal that those are our best served between the attorneys. And if your attorney understands the business concepts, they're going to have a leg up on the other attorney during that type of negotiation.

7:21 So that's critical as well. You've got to understand. You've got to decide what your role is going to be. Some sellers stay with the company in this capacity that they were in when they were the owner. So that's the other components. What role do you want to play? Some are just you know, consultants to the business and they get paid for that. By the way, don't blow that one. If you're a consultant to the business. Uh, you should get paid for that. And by the way, UH, that's earned income versus capital gain on the business, and that might be taxed at a lower rate. So you might be able to allocate purchase price toward a consulting agreement, which is something that you might not do any work on, but you might answer questions from time to time, and you're probably willing to do that at a price, and you should and you should be, but you can allocate purchase price to that. You can also allocate purchase price if you own the building, you can allocate some purchase price to increase rent. That helps because the building will help.

8:32 The depreciation on the building will help offset some of that extra income. So it's just another way to manage it. When I sold my businesses too, I used to allocate price toward telephone numbers and different types of intangible assets. Now these you know. At the time when I did it, it was a five year right off. Now it's fifteen, so it's not as much of an advantage. But the more assets you could allocate purchase price to usually the better you off tax wise. But you should consult your tax attorney or your tax your tax person on that.

9:12 So there's a there's just a bunch of things and my list is even longer. But there's just a lot of things that you need to do to prepare for a sale. It's not one of these things where you just put a sign out or you know, just ask a couple of people if they want to buy. I want to buy, I want to buy, I want to buy. It just doesn't work like that, No, don't, right. Uh. And if you want to use a broker, there's a lot of reputable brokers out there, but you've got to be careful because there's a there's brokers who really don't understand business and uh, because there's really no there's no license to be a business broker per se. There really is, and they love to spam you.

9:54 That's right, they do. Yeah, that's another thing. Uh. But those are those are the main points in terms of if you're going to be selling a business, you've got to prepare for it. And you know, like I said, there's a lot more points you have to think about as well, but those are those are the critical ones that I think if you if you understand those types of things and plan ahead for those types of things, you're going to be in good shape. Very cool, and uh, yeah, it is very important. I think it's very important that somebody consult with an expert on something like this so that they don't make any mistakes. And that's where I think they need to reach out to you, Michael and next Step CFO. How can they reach out to you and get more information on how to do a proper exit strategy or anything else haven to do with any powerful business strategies.

10:44 Well, they could go to next STEPCFO dot net. They could go to the contact page and ask any question they'd like. But they also could take advantage of our AI Business Assessment Diagnostic, which is UH. It's an AI diet gnostic. It takes less than ten minutes, and it will find hidden revenue in your business, and it will identify three key strategies as it relates to your business through the AIH questions that are asked and and uh it will also explain how to go about implementing those strategies. And it's free. UH and it you know, the beautiful thing about the AI assessment everybody everybody says.

11:28 Oh a I I AI. Well, the beautiful thing about it is there's you know, there's there's no no advisor with you or anything like that. It's and there's no judgment. You know, you could you could be right honest, honest engine with it, and uh the results will reflect your honest answers and and you'll find hidden revenue in your business. So it's a great opportunity. It's the orange button on the right. It says find hidden revenue in less than ten minutes and that's the diagnostic. Nice. Well, thanks again once again for your words of wisdom, Michael, and we'll look forward to talking with you next week about cash management.

12:12 Thank you. That's important one too. There you go. Thank you for listening to the Adventures of Pipeman on w for CUI Radio.