Sell

Article Dean Dorton

When planning for the future, business owners often are engaged in forecasting, reflecting on past performance, and setting goals. While budgets, financial statements, and tax returns may be part of this process, it is equally important to devote attention to your business’s organizational structure, corporate governance, and potential sale considerations. Often overlooked, these elements can significantly impact your business’s success and long-term viability.

It is important to begin this process early often years in advance if possible.

In this article, we emphasize the importance of revisiting your organizational structure, delve into the types of buy-sell agreements, and explore considerations for a potential sale of your business.

1. The Importance of Revisiting Organizational Structure

Your business’s organizational structure serves as the foundation for its operations, decision-making processes, and growth trajectory. Outdated structures can impede progress, hinder adaptability, and limit your ability to attract potential buyers. By reviewing and updating your organizational structure, you can:

  • Streamline operations: Assess whether your current structure aligns with your business goals and objectives. Clearly define decision-making authority and accountability within your organizational structure to limit exposure to a key-man discount.
  • Attract potential buyers: A clean corporate structure and buy-sell agreement can make future exits much simpler. Messy ownership structures can scare away potential buyers. If you believe selling to an outside party is a likely exit, planning this process earlier is paramount to ensure you maximize value.

2. Types of Buy-Sell Agreements

Buy-sell agreements are essential for privately-held businesses, especially during ownership transitions or potential sales. Good agreements safeguard the interests of owners and their families, ensuring a fair and orderly process. Poorly structured agreements can create headaches and strip value from your business. In his book, Buy-Sell Agreements for Closely Held and Family Business Owners, Chris Mercer identifies commonly used buy-sell agreements:

  1. Valuation agreements — The business value is determined by one or multiple valuation appraisers. The buy-sell agreement defines key aspects of the valuation process such as the standard of value, level of value, application of discounts for lack of marketability and control, etc.
  2. Fixed-price agreements — Owners agree on a fixed price for the business value. Price remains static over time which may or may not represent a fair and
    reasonable price depending on changes in the business, industry, and economic environment.
  3. Formula agreements — A formula agreed upon by the owners will determine the business value typically based on financial metrics (e.g. stated multiple of earnings or book equity value). Similar to a fixed-price agreement, the formula may or may not result in a fair and reasonable price over time due to the changes in facts and circumstances of the business.
  4. Shotgun agreements — A triggering event results in an owner tendering a price to buy or sell an ownership interest in the business. The owner receiving the offer has the option to buy at the offered price or sell at the same price. A “fair and reasonable price” is anticipated as each owner could be the buyer or seller. However, the financial circumstances and personal employment status of each owner and their family can influence the offering price and related decisions or implications.

Each type of buy-sell agreement has many nuances, advantages, and disadvantages. The “right” type of buy-sell agreement often depends upon the circumstances of the business, owners, and the owner family dynamics.

3. Considerations for a Potential Sale

In addition to reviewing your organizational structure and buy-sell agreements, it is crucial to consider the potential sale of your business. Factors to evaluate may include:

  • Business valuation: Assess the current value of your business, taking into account its assets, revenue, market position, and growth potential
  • Market analysis: Understand the market conditions, industry trends, and potential buyer profiles that may influence the sale process. Identify opportunities to position your business strategically to maximize its attractiveness to potential buyers.
  • Exit strategy planning: Develop a robust exit strategy that aligns with your personal and financial goals. Consider the timing, succession planning, and potential tax implications of the sale. Who is your target buyer? A family member, someone interested in your business’ legacy, or private equity?

Conclusion

Remember to allocate time and resources to review your business’s organizational structure, buy-sell agreements, and potential sale considerations.

Dean Dorton’s business advisory and valuation group has assisted many business owners with transitions and structuring their buy-sell agreements. Let us become part of your advisory team to review your business organizational and governance and help you ensure a smooth and rewarding journey as you navigate the future of your business.

Article Dean Dorton

Putting your home on the market?

As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put their home on the market. After all, in many locales, summer is the best time of year to sell a home. But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.

Gains
If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.

Losses
A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes
If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

Learn more
If you’re considering putting your home on the market, please contact us to learn more about the potential tax consequences of a sale.

Article Dean Dorton

Merger and acquisition (M&A) transaction volume in the healthcare industry is off to a fast start in 2015, continuing the robust trend from 2014.  Many analysts and executives believe M&A activity will continue its strong momentum and may accelerate at an even faster pace for the remainder of 2015.

Participants in the marketplace, both buyers and sellers, are assessing whether future transactions meet their organization’s goals and operational strategies.  Furthermore, management teams are assessing the value of the subject entity to ensure the transaction price reflects the current market and maximizes their long-term return on capital.  Understanding the marketplace of the subject entity can be a daunting task and determining whether the assessed value will enable the organization to meet its objectives can be challenging.  To further complicate the analysis, Stark Law requirements and other regulatory concerns must be addressed.

The approaches to valuation are often implicitly known and performed, but often not formally outlined. The three primary approaches to valuing a healthcare entity (or any closely-held business) are the asset, market, and income approaches.  The asset approach looks to the subject entity’s tangible equity on the balance sheet, but often ignores the intangible assets (e.g. customer relationships, assembled workforce, and goodwill).  The market approach uses known transactions in the marketplace for entities that are comparable to the subject entity to arrive at valuation multiples (often reflected as multiples of revenue or earnings) which are applied to the subject entity’s financial metrics.  The income approach derives value by converting the subject entity’s forecasted future cash flows to present value using a discount rate adjusted for the risks of the forecast, industry, and inherent characteristics of the subject entity.

Dean Dorton’s valuation expertise and experience, combined with its healthcare industry knowledge, has contributed to the success of many M&A transactions.  From guidance in strategy to valuation, Dean Dorton can assist with the challenges involved with M&A transactions.

For more information, contact Adam Shewmaker at 502.566.1054 or ashewmaker@deandortonstg.wpenginepowered.com or David Angelucci at 859.425.7695 or dangelucci@deandortonstg.wpenginepowered.com.

View Adam Shewmaker’s Bio