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  1. Home
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  3. Understanding Transactions, Even if Your Business Isn’t for Sale

Understanding Transactions, Even if Your Business Isn’t for Sale

Posted by Tim Hilligoss on January 12, 2021

Tim Hilligoss Tim Hilligoss

Selling your small business may not have been your focus in 2020 and may not be your focus in 2021. With an economy in flux and public health at the forefront of every decision, you may be simply focused on keeping your businesses—and yourself—healthy.

But if there are two things that 2020 has taught us, it is that even the most certain things can change quickly, and planning ahead comes with huge advantages. As a small business, you never know when you will pick up the phone and take a call from an investor or private equity firm with a buyout offer, or when the door will open and the next generation will be ready to take the reins.

No one knows when it will happen, but those who are prepared will be able to take the most advantage. A basic knowledge of sales transactions is one of the best moves a business owner can make so that when the call comes, they know where to turn and what to look for. With decades of experience, Clayton & McKervey has helped businesses of every size prepare and execute transactions—it is never too early to start thinking about yours.

Here are four things our team walks through with every client when we prepare for a deal.

1. Contracts

Ownership of the business is not the only thing that changes hands when buying or selling—the entire company changes hands. To ensure a smooth handoff, buyers and sellers need to understand the full range of contracts and considerations that need to be transferred, including:

  • Employee/non-employee contracts
  • Vendor/customer contracts
  • Approved vendor agreements
  • Purchase orders
  • Lease agreements
  • Bank debt or other loan agreements
  • Related party agreements or lack thereof

Within each of these contracts are countless provisions that impact the business, including change of control, approval rights, termination penalties, and acceleration clauses. Without a full understanding of the implications of each, sellers and future owners could be taken by surprise.

The same needs to be considered for employees and human resources in order to have a full picture of the business. Does the business have employee and non-employee contracts, and, if so, what are the terms? Have all parties signed non-compete agreements or would you like them to? How do 401(k) plans function and what is the contribution? What strategies does the business use to keep key managers in place?

It is hard to overstate the advantages that come with knowing the answers.

2. Tax Free Reorganization

Limiting tax liabilities on transactions is one of our key focus areas when working with clients. Although maneuvering through the tax code is complex, tax free reorganization prior to the deal may offer buyers and sellers the opportunity to make post-closing operations easier for escrow, holdbacks and earn-outs, especially when there are many sellers. It is important for buyers and sellers to consider vendors, charitable giving options, estate planning, and whether a foreign buyer is involved.

If you are looking to acquire another company, buyers often establish a new parent company and keep the operating company intact. Alternatively, if you are looking to sell, pushing assets into a disregarded LLC will allow only desired business assets to be sold, therefore keeping continuity but avoiding other complications.

3. Quality of Earnings

Having a full financial picture of a company is also critical for buyers and sellers—an income statement is often not adequate. We usually advise our clients to assemble or ask for a quality of earnings report as it offers a full picture of net revenue, credit or debit sources, and whether or not they are reoccurring.

A quality of earnings report also gives insight into the company’s accounting mechanisms, errors (one-time or ongoing), and the existence of related party transactions.

4. The Impact of COVID-19

In the wake of the pandemic, the fundamentals of buying and selling have not changed very much. Technology has allowed us to continue working seamlessly with our clients and their partners.

We do urge clients to remain wary of an economy that is uncertain. In many cases valuations are down from their 2019 levels. As sales continue to close, valuations in many industries may continue to reflect this uncertainty.

With that in mind, it has never been more important for buyers and sellers to be meticulous about understanding the financial picture for their business before, during, and after COVID-19. Some companies may come out of the pandemic unscathed, but the only way to know for sure is to have a complete understanding of financial and internal considerations.

Contact Us

To learn more about transaction services and how to prepare for a potential sale, please call us at 248.208.8860 or click here to contact us. We look forward to speaking with you soon.

Our team is always ready to help.

Please contact us for more information.

Tim Hilligoss

Tim Hilligoss

Shareholder

Contact Tim   |   Read Tim's bio

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Understanding Transactions, Even if Your Business Isn’t for Sale

Posted by Tim Hilligoss on January 12, 2021

Tim Hilligoss

Selling your small business may not have been your focus in 2020 and may not be your focus in 2021. With an economy in flux and public health at the forefront of every decision, you may be simply focused on keeping your businesses—and yourself—healthy.

But if there are two things that 2020 has taught us, it is that even the most certain things can change quickly, and planning ahead comes with huge advantages. As a small business, you never know when you will pick up the phone and take a call from an investor or private equity firm with a buyout offer, or when the door will open and the next generation will be ready to take the reins.

No one knows when it will happen, but those who are prepared will be able to take the most advantage. A basic knowledge of sales transactions is one of the best moves a business owner can make so that when the call comes, they know where to turn and what to look for. With decades of experience, Clayton & McKervey has helped businesses of every size prepare and execute transactions—it is never too early to start thinking about yours.

Here are four things our team walks through with every client when we prepare for a deal.

1. Contracts

Ownership of the business is not the only thing that changes hands when buying or selling—the entire company changes hands. To ensure a smooth handoff, buyers and sellers need to understand the full range of contracts and considerations that need to be transferred, including:

  • Employee/non-employee contracts
  • Vendor/customer contracts
  • Approved vendor agreements
  • Purchase orders
  • Lease agreements
  • Bank debt or other loan agreements
  • Related party agreements or lack thereof

Within each of these contracts are countless provisions that impact the business, including change of control, approval rights, termination penalties, and acceleration clauses. Without a full understanding of the implications of each, sellers and future owners could be taken by surprise.

The same needs to be considered for employees and human resources in order to have a full picture of the business. Does the business have employee and non-employee contracts, and, if so, what are the terms? Have all parties signed non-compete agreements or would you like them to? How do 401(k) plans function and what is the contribution? What strategies does the business use to keep key managers in place?

It is hard to overstate the advantages that come with knowing the answers.

2. Tax Free Reorganization

Limiting tax liabilities on transactions is one of our key focus areas when working with clients. Although maneuvering through the tax code is complex, tax free reorganization prior to the deal may offer buyers and sellers the opportunity to make post-closing operations easier for escrow, holdbacks and earn-outs, especially when there are many sellers. It is important for buyers and sellers to consider vendors, charitable giving options, estate planning, and whether a foreign buyer is involved.

If you are looking to acquire another company, buyers often establish a new parent company and keep the operating company intact. Alternatively, if you are looking to sell, pushing assets into a disregarded LLC will allow only desired business assets to be sold, therefore keeping continuity but avoiding other complications.

3. Quality of Earnings

Having a full financial picture of a company is also critical for buyers and sellers—an income statement is often not adequate. We usually advise our clients to assemble or ask for a quality of earnings report as it offers a full picture of net revenue, credit or debit sources, and whether or not they are reoccurring.

A quality of earnings report also gives insight into the company’s accounting mechanisms, errors (one-time or ongoing), and the existence of related party transactions.

4. The Impact of COVID-19

In the wake of the pandemic, the fundamentals of buying and selling have not changed very much. Technology has allowed us to continue working seamlessly with our clients and their partners.

We do urge clients to remain wary of an economy that is uncertain. In many cases valuations are down from their 2019 levels. As sales continue to close, valuations in many industries may continue to reflect this uncertainty.

With that in mind, it has never been more important for buyers and sellers to be meticulous about understanding the financial picture for their business before, during, and after COVID-19. Some companies may come out of the pandemic unscathed, but the only way to know for sure is to have a complete understanding of financial and internal considerations.

Contact Us

To learn more about transaction services and how to prepare for a potential sale, please call us at 248.208.8860 or click here to contact us. We look forward to speaking with you soon.

Our team is always ready to help.

Please contact us for more information.

Tim Hilligoss

Shareholder

Contact Tim   |   Read Tim's bio

related news

Financial Management: 4 Key Technology Transformations

The accounting industry looks a lot different these days than it did 10 years ago. From shifts towards data-driven strategy to the implementation of new technological tools, the profession has…

Read full story

5 Financial Considerations for Architecture and Engineering Firms

Working with walls, light, shadow and the properties of a nearly endless array of building materials, architects and engineers create the spaces in which we live and work. Some are…

Read full story

How to Increase Tax Savings with a Roth IRA-Owned IC-DISC

Did You Know Combining these Strategies Can Help You Save Even More Tax Dollars? Many business owners may already be aware of the very popular tax saving strategies that exist…

Read full story

Family-Owned Businesses: Succession Planning

In this episode of The Sound of Automation podcast, Frank Lashier III, COO of Dominion Technologies Group, Inc. joins us to talk about the challenges of transitioning a business within a…

Read full story

Clayton & McKervey Announces Appointment as Key Global Partner for the Centuro Global Network

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—April 5, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is pleased…

Read full story

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