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Selling your business is tough. What is even tougher is realizing the urgency in transferring the ownership and control to someone else. Handing over the keys come easy for some, and very challenging for others.

Books have been written just on exit and succession planning so it is difficult to cover every angle in our over-arching book. But there are some general concepts to consider.

Most small business owners fret over two things as they get older- what the heck to do with his or her day, and income. The first worry is like nailing Jello to the wall. Do you go into the office to open the mail? Is your only responsibility maintaining client relationships? Are you a mechanic at heart, and still want to tinker with cars but not sign checks?

It is amazing how many owners want to stay on in some capacity, and then realize that the daily grind stinks, they are not needed as much as they envisioned, and how fun not knowing the time or day can be. But at first, the control aspect.. the what will I do with my day aspect is a big challenge. Remember, most small business owners got into business by turning a hobby into a profession, and while it became a job on many levels, at the core it remained a passion. Tough to give up.

Just like Brett Favre- a case where a person needed the game more than the game needed the person. That is tough to accept. But then again, father time is undefeated. So, get over it.

Income is one of the other concerns. If I just sell my business, will I have enough income? It depends on two variables- what you need and how long will you need it. More challenges. More Jello.

So, what does a small business owner do?

Sell Outright
Selling can be nearly impossible. Remember, the United States Board of Tax Appeals defines fair market value as, “The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.”

Face it. Some businesses are much easier to sell, and some are not. Do you have a lot of competition? If you do, that might be good since competitors might be looking to increase market share.

Is your business unique? Makes a boatload of money, but very specialized and isolated with few competitors. Selling these types of business is much more difficult. Sure, you can always find an investor who wants to learn your craft, but that is not as easy as selling your Subway franchise to another Subway franchisee.

These are things that small business owners need to consider.

Key Employees
What about selling the company to one or two or three key employees? Perhaps. This can solve a lot of concerns right away.

First, you know the employees. You trust them. They might even share the same passion you do for the business. You’ve trained them to do things your way, which might or might not last, but at least you feel more comfortable than an unknown.

You can dictate the transition. So instead of a cliff-type transition where you lock the doors at 5:00PM on a Friday and hand the keys to the new owner at 8:00AM on a Monday, you can slowly slide towards phasing out. But then again, as Def Lepperd once said, “It is better to burn out than to fade away.” Just kidding. Perhaps fading away is better.

Income can be generated by guaranteed payments or stock purchase loans. For example, one common way to sell your company to other key employees is have them buy a small percentage from the company. Let’s say you have two people. The company sells 5% to each of them, and over time the new owners use their distributions to payback the buy-in.

When the buy-in is complete and a date has been established for transition, the company buys 90% from you. This will probably be financed, but cash certainly works. So, the company owns 90% of the stock, and the remaining controlling interest is now owned by the two key employees. They run the company. You are out, or at least fading away.

You have to be careful, and you will certainly need an attorney for these arrangements. S Corporations cannot have two classes of voting stock, so if you sell 10% to a key employee, he or she is an owner with voting rights from the beginning. He or she will receive a K-1, with taxable income. Depending on the tax consequence, there might need to be a split between the shareholder distribution being used for payback of the buy-in and personal income taxes.

During the buy-in period, termination for cause would require the forfeiture of the shares at a predetermined value. Same with death, divorce and incapacitation. Again, more lawyer stuff.

There truly are a million ways to structure these buy-ins. WCG (formerly Watson CPA Group) recently represented a business owner who wanted to setup an account for three key employees. Profits exceeding a predetermined amount was placed into an account that would pay life insurance premiums. An insurable interest existed on each key employee for the company since their services were valuable. And if the key employee separated from the company, the company recovered the cash value of the life insurance policy.

It was intended for this account to grow in value plus the cash surrender which would be a sizeable down payment on the acquisition of the business ten years later. In these deals, valuation technique must be established at the onset.

In another deal, a client of ours did a similar cash account and arrangement with just one of his key employees. There was not a life insurance element. Basically it was a deposit of profit percentage each year for five years. The account could only be used as a down payment for acquisition. Need to be careful how this is structured too so it doesn’t appear to be a second class of voting stock.

In both of these deals we represented the business owner. However, had we represented the key employees, we would have asked some basic questions such as how is profit margin determined? Should officer wages, depreciation and amortization be backed out? Does the employee or group of employees get first right of refusal? In other words, what prevents the business owner from selling to someone else? Is there a poison pill to that effect? Is there guaranteed seller financing? If so, what are the terms?

Again, many variations. Many dangers. Seek legal advice. Seek our advice.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

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As stated earlier, businesses are easy to start, hard to get out. With partnerships, all owners need clauses in the partnership agreement to deal with divorces, death and incapacitation. Corporations, partnerships and sole proprietors might also want to effect ownership transfer or buyout. Easy, right. Yes, easy from an administrative perspective. For example, a divorce clause is straightforward. In the event a partner or shareholder get divorced, the business has the right to purchase the ownership interest of the divorcing owner. Yup, easy.

But wait. What about the money? Let’s say the corporation is worth $1.0 million, but only has $200,000 in cash. How does the corporation buy out a 50% owner with $200,000 when his or her share is worth $500,000? Enter the Buy Sell Agreement funded by life insurance and drafted by an attorney, and reviewed by your tax and accounting consultants.

The first requirement is to establish a price. This could be a fixed amount regardless of company health, or it could be a formula such as the 3x net income plus book value. Or to help avoid fighting and heartburn, the agreement could name a third-party business valuation firm or arbitrator. It is a balance between what is fair and what is easy to administer.

Next, the owners or partners would purchase a cash value life insurance policy on each of the other owners or partners. So, if there are three owners, each owner would buy two life insurance policies for a total of six policies. If an owner dies the remaining owners will use the death benefit to pay for the deceased’s ownership interests. If the owner departs either through divorce or incapacitation or some other contractual obligation such as removal for cause, the remaining owners will use the cash surrender of the life insurance policy to purchase the departing owner’s interest.

Many people are reading this book because they are considering getting into business, and perhaps the Buy Sell Agreement is just silly to even think about. But, as WCG (formerly Watson CPA Group) has witnessed numerous times before, small businesses have a unique way of becoming big businesses, and at some point exit strategies must be considered.

Having said that, Buy Sell Agreements are unnecessary in two cases- first, when the company has no value. Second, when the remaining owners or partners could very easily shutdown the old company and start a new one without the deceased or departed owner.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

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This is a big deal, and it is often overlooked. We have seen too many business acquisitions fail because the buyer did not get quality advice on debt service. Let’s look at two common scenarios that need to be avoided. First is the asset-heavy acquisition-

In this scenario, a buyer would need to have a considerable down payment to make the cash flow provide for debt service plus owner compensation. This was a real case we dealt with recently, and the buyer couldn’t stomach working for $16,000 per year for 15 years.

In the second scenario, the fixed assets are small but the terms offered by the seller were onerous in terms of loan length-

This too was a real case. And in this case, the buyer decided that she did not want to take on the business only to clear $9,500 per year. It wasn’t worth the work in her opinion.

In both of these situations the acquisition would have paid for itself from a cash flow perspective. Let’s say that the owners in both situations were also able to justify working for the incremental leftover cash ($16,000 in the first scenario, and $9,500 in the second scenario). This only looks at cash.

From a tax perspective, it will be even less attractive since a portion of the annualized payments will be principal reduction which is NOT a tax deduction. So, while your net cash might be $16,000 in the first example you might actually pay taxes on a higher number such as $80,000 (especially in the later years). $80,000 at 25% marginal tax rate becomes a $20,000 tax bill for $16,000 in net cash. Now you are upside down by $4,000, and hopefully future growth can pay for it.. hopefully.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

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You will probably need an attorney’s advice for your purchase agreement, but here are some highlights to get the creative juices flowing.

Revenue Guarantees, Holdbacks
Many times, especially in service oriented businesses, a buyer is purchasing future cash flows. Therefore if revenue drops off during transition and subsequent ownership transfer, the value of acquisition is reduced. A buyer should protect him or herself by including a revenue guarantee from the seller.

The contract should define the period of time, the guarantee amount and the modification of purchase price. In a contract with seller financing, a reduction in loan balance or debt forgiveness would essentially reduce the purchase price. In cash deals, it is smart to keep a portion of the purchase price in the holdback escrow account. A holdback is where funds are held until certain milestones or obligations- very useful for revenue guarantees, warranty work, work in progress, and any other unknowns.

A buyer could protect themselves with a pay-as-you-go plan. Again, this is useful in a service oriented acquisition where revenues collected are then turned over to the seller using a gross revenue factor.

Seller Financing
A buyer wants the seller to have some skin in the game or dog in the fight, or whatever euphemism you like. And, many SBA loans want this as well. It adds motivation for the seller to ensure the buyer’s success during transition.

Due Diligence
Due diligence is a big deal, and it varies by the size of the contract. Sellers have been known to frontload projects or simply inflate sales in an attempt to look attractive to suitors. There are two quick ways to discover that a buyer might have a problem which warrants deeper investigation.

First, tax returns should be reviewed. If the most recent tax return’s income is substantially higher than the first two in a three-year look back, you might have a seller inflating the numbers. Remember, as a business owner you want to minimize your tax consequence so a tax return can be a good litmus test of a business’ income. Second, a quick tally of deposits should get close to the income numbers on a tax return. Yes, a seller could trickle cash deposits into the bank account to inflate numbers. But when you combined these two quick reviews you can get a good idea of how the business performs.

After that, the sky is the limit on the things a buyer should review. Employment contracts, vendor contracts, title searches and encumbrances, technology of the business, etc.

Work in Progress
Who will be responsible to complete projects that straddle the closing of the sale and purchase? What percentage of completions are agreed upon? How will the revenue collected be assigned and used in revenue guarantee calculations? Any prepayments, deposits or retainers?

Similar to work in progress, or WIP as accountants say, is warranty work. How is that handled? These are all questions that need to be broached, discussed and agreed upon.

Lawyer Stuff
Representations and warranties are attorney nomenclature that need to worm their way into a decent contract. Representations are things that you believe to be true or those things that a reasonable person would expect you to represent as true. Warranties are things that you are guaranteeing to be true, which is a much higher standard. Don’t fret over this stuff too much, your attorney will hammer it out.

Indemnification, damages and arbitration are some more terms that you’ll find in a contract to protect all the parties’ interests.

Non-Compete Agreements
While non-compete agreements or covenants not to compete continue to get litigated with limited success for the buyer. There are three elements that routinely cause these agreement to get tossed- restricted activities being too vague, restricted are being too broad and time period being too long. In addition, a non-compete agreement cannot prevent someone from earning a living in their chosen profession. On the following page is some language that was used in a purchase contract of a service oriented company-

For good and valuable consideration received as part of this Agreement, Seller herein agrees that for Five (5) years after Closing (the “Restricted Period”), Seller shall not engage in any Competitive Activity, being the current activity of the Seller, within a 100 mile radius of Anytown USA (the “Restricted Area”). During the Restricted Period in the Restricted Area, Seller shall not, except insofar as the restrictions are for the benefit of Buyer:

1. Canvas, solicit, or accept any business from any present, clients or new clients of Seller, unless actions are in attempt to gain business for Buyer’s sole benefit;

2. Give any other person, firm, partnership, or corporation the right to canvas, solicit, or accept any business for any other firms from any present or past clients of Seller;

3. Directly or indirectly request or advise any present or future clients of Seller to withdraw, curtail, or cancel its business with Buyer;

4. Directly and indirectly disclose to any other person, firm, partnership, or corporation the names of past or present clients of Seller;

5. Solicit, induce or attempt to influence any employee, independent contractor or supplier of Buyer to terminate employment or any other relationship with business of Buyer or the prior business of Seller.

Seller acknowledges that the restrictions contained in the foregoing sections, in view of the nature of the business in which Buyer is engaged, are reasonable and necessary in order to protect the legitimate interests of Buyer, that their enforcement will not impose a hardship on Seller or significantly impair Seller’s ability to earn a livelihood and that any violation thereof would result in irreparable injuries to Buyer. Seller therefore acknowledges that, in the event of Seller’s violation of any of these restrictions, Buyer shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies to which Buyer may be entitled.

Ok. Don’t run out, copy and paste this into your contract and think you are good to go. Every deal and every jurisdiction will require tweaks here and there, but you get the general idea. Basically it will be hard for a buyer to prevent a seller from competing for a livelihood, but a buyer can prevent a seller from poaching their previous clients. Talk to an attorney.

Small Business Administration Loans
The SBA does a wonderful job of providing people with loans for startup and business acquisition purposes. The terms are extremely favorable yet the fees can be a bit high (2-4% of loan value). The SBA uses approved lenders such as Wells Fargo to put deals together, and the process can take 12-16 weeks. Yes, they advertise 8-10 weeks, but in our experiences with consulting on other business acquisitions the process is longer.

Common deals are an 80-10-10, where the SBA lends 80%, seller finances 10% and the buyer brings 10% as a down payment. If there is real estate involved, the SBA really shines since they will finance 50% and a local lender can finance 40% in the first position. This is huge- the SBA is kicking in 50% but taking a junior creditor position. Any local bank would love this arrangement since they are guaranteed to get paid first and paid in full on any default.

SBA loans on business acquisitions is 10 years and current rates are in 5% to 6% range, which is fantastically good. SBA loans on real estate (such as office buildings or commercial space) is 20 years with current rates in the 4.5% to 6.0% range. That too is incredible. If the deal involves both business assets and real estate, then the SBA at times will blend the terms based on the prorated loan amounts. For example, if 33% if used for business assets and 67% is used for real estate, the term might be 17 years with an equally blended interest rate.

SBA deals vary across the board, but they are usually good deals if you can stomach the slow, arduous underwriting and processing. As an aside, there is a fast-track program for deals under $150,000.

Entity Structure
As alluded to earlier most business acquisitions will be an asset sale and purchase. Therefore, you’ll need an entity to perfect the terms of the contract. LLCs, partnerships, S Corps, C Corps, etc. all have their place and consultation with WCG (formerly Watson CPA Group) will be beneficial in determining the best plan.

If your transaction involves real estate, typically we suggest that a holding company owns the real estate and another operating company owns the business assets. Accountants, attorneys and lenders all like this arrangement from all the angles you would expect- taxes, liability and underwriting. Again, we can help.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

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Generally speaking when you purchase another business, you are only buying the assets of that business. In other words, you are not buying the entity. Why not? Well, the entity could have a lot of skeletons in the closet. Using our accounting firm example above, if the previous owner had made a mistake on a tax return and that mistake led to $100,000 in damages for the client, as the new owner do you want that responsibility or exposure? Nope.

There are circumstances where an asset sale is NOT ideal. At times the entity holds a license that is non-transferrable such as a liquor license or the entity has a contract with the government that took 7 years to bid and be awarded, and is also non-transferrable. But for most transactions, you will be executing an asset sale.

Within that asset sale is allocation of assets. Buyers and sellers have competing interests on price of course, but they also have competing interests on tax consequences. And to add to the complication, based on each party’s unique circumstances, a buyer and seller’s interests might be in concert with each other. In other words, an asset allocation might provide a favorable tax position for the buyer because of his or her own tax world, while still providing a favorable or at least neutral tax position for the seller. And these issues can affect the purchase price as well.

As business consultants and tax accountants, WCG (formerly Watson CPA Group) is very aware of these competing interests and how they interplay with price negotiations. Let us help!

Let’s review some basics.

* Sellers using an accrual method of accounting would not recognize income for the sale of their Accounts Receivable

The IRS breaks assets into classes, and essentially once you’ve allocated everything to Class I thru Class VI, whatever is left over is then considered Goodwill. So if the price is $200,000 and all your assets add up to $150,000, then you are also purchasing $50,000 in Goodwill.

Some more notes. Cash and investments are usually kept by the seller in an asset sale. And commonly so is Accounts Receivable- most sellers will say that they earned this income, and it is just a matter of collecting. Buyers are usually accepting since collections can be tough- why pay for an asset that might not fulfill its value. If, however, a seller does transfer his or her Accounts Receivable (AR) to you, that will be considered ordinary income for a seller who is uses the cash method of accounting. Who would have Accounts Receivable yet use a cash method of accounting? Lots. WCG (formerly Watson CPA Group) invoices clients but does not recognize income until payment is made. We use the cash method of accounting, and use our AR as a way to maintain the naughty list and the good list.

Ok. Back to the competing interests.

Generally speaking, the buyer wants as much allocation to items that are currently deductible such as a consulting agreement and to assets that have short depreciation schedules. However, there are always circumstances where the buyer might want to defer deductions to later years, or some other unique scenarios. When people ask us this question it takes about 10 seconds to ask the question, about 30 seconds to give the generalizations, and about two hours of consultation, projection and review to ensure allocation is being handled correctly.

The seller typically wants as much of the purchase allocated to assets that enjoy capital gains treatment, rather than to assets that bring ordinary income. Capital gains max out at 23.8% (including the net investment income tax) where as ordinary income could be as high at 39.6%. Again, there are always scenarios that might make sense to flip this around- perhaps there is a net operating loss from previous years that needs to be used before expiration, or some other situation.

Bottom line is that price and asset allocation must be handled carefully. It is commonly used a negotiation tactic, and to properly negotiate you as a buyer or a seller should know what the other side is thinking. That’s just smart business.

Recapture of Depreciation
Assets that are eligible for depreciation might have two elements of gain. One is recapture of depreciation and the other is capital gain. Let’s say you had $50,000 in furniture that is being sold with the business, and you depreciated it to $10,000. If $65,000 was allocated to furniture, you would have a $40,000 recapture taxed as ordinary income and another $15,000 in capital gains taxed at your capital gains rate. Here is in table format-

Non-Compete Agreements
Even though non-compete agreements are tough to enforce they still show up in business asset sale and purchase agreements. As an aside, you should consider using a non-disclosure agreement in addition to your non-compete agreement. Typically these are bad for both parties from a tax perspective- non-compete agreements or covenants not to compete, whatever you want to call them, at taxed to the seller as ordinary income but then are amortized over 15 years for the buyer. This is one area that both parties have an interest in keeping low (but you should consult an attorney at to actual value of the non-compete agreement, it might have some repercussions from a litigation perspective).

Sales Tax and Assumed Liabilities
Sales tax might need to be collected on the sale assets, and are usually collected by the buyer. Most sellers will want the buyer to simply back out sales tax from the purchase price. So, if a $500,000 deal would incur $10,000 in sales tax, the buyer is essentially paying $510,000 since the seller still wants $500,000 in proceeds. Sales tax will vary by state and by purchase price allocation, and is only due on certain assets. Again, this needs to be vetted out and modeled by experienced tax accounts- we suggest us.

Of course if the transaction is a stock sale as opposed to an asset sale, then sales tax does not usually apply.

Assumed liabilities. Messy. Try not to do it. There are instances where you must, and it can get complicated beyond the scope of this book.

Employment / Consulting Agreements
Transition between owners is critical. A tax and accounting firm can buy another tax and accounting firm, and even though the work is nearly identical, the seller is usually retained to help with client transition. This is true in most businesses, especially those in the service industry.

The value of the employment or consulting agreement is an instant tax deduction to the buyer, but it incurs ordinary income tax PLUS self-employment tax for the seller. Unless that seller was smart, read our book and elected to be treated as an S Corp. Remember, most deals will be an asset sale, so the seller retains the business entity. And if that entity is an S Corp then that income can be sent through the entity and shelter some of the self-employment tax.

Some more thoughts. At times the buyer and seller will use the employment/consulting agreement as quasi-seller financing without calling it seller financing. This can help with debt ratios, and debt service calculations (more on that later) since the bank will want you to be able to service all debt instruments including their own. These agreements at times can bypass some of that scrutiny.

Also, some attorneys do not like these agreements lasting for more than one year. Some cases have been litigated, and purchase contracts have been considered null and void because there was not an effective transfer of ownership because the seller was under an employment / consulting contract. Seems crazy, but true.

There have been instances where a seller was retained through a consulting agreement, and misrepresented the company to customers. Lawsuits have been successfully litigated resulting in damages being awarded based on the behavior and representations of the seller while contracted as a consultant for the buyer. Be careful.

As a buyer you should get in, use the seller during a short transition, and get going. As a seller, you should help your buyer, defer future client interaction to the new owners, and get out. Transition is one of the toughest things to agree upon, execute and find success. Good luck.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

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Are you considering buying or selling a business? It can be exciting, but the biggest problem is determining a value. If you are Mark Cuban from Shark Tank, you have money to burn and can take risks on pricing mishaps. But if you are like most people, the value of what you are buying or selling becomes a sensitive issue.

Large corporations that are traded on the New York Stock Exchange or are listed with the NASDAQ are easily valued. If you wanted to buy Apple, you would simply buy all the outstanding shares at market price. While that is an over-simplification, small business are way more complicated in terms of valuation.

Here are the basic techniques-

• • Market-Based- business brokers in a certain geographic area have a good feel for what a business is worth based on historical information, trends, and their ability to add value to the business being sold. But are you comfortable taking someone else’ word for it? Perhaps.

• • Asset-Based- this technique looks at the market value, book value and liquidation value of the company’s assets. These values will all be different of course with liquidating probably being less than book (depending on prior depreciation), and with book being less than market.

• Earnings-Based- this takes into account past performance of the company from a cash flow and taxable earnings perspective.

The important thing to remember is that these techniques are not independent of each other. Often they are used in conjunctions with each other. For example and as alluded to earlier, a jumping off point is three times net earnings plus book value. So if your business earned $300,000 per year and had $500,000 in assets, you might be able to justify $1.4M.

Control Premium
There is a concept you should be aware called control premium. It can add significant value to your business during a sale. Let’s say you own 30% of a market and your competitor who is also buying your business owns 40% of the market. Comparable in size, but when combined the singular company has control of the market at 70%.

The ability to control the market allows a company to perhaps raise prices, or lower prices temporarily to drive out remaining competition or dictate better terms to vendors. Sure some of this is business school theoretical stuff, but glimmers of these issues are observed in real life, every day.

There are other control premium examples that might include location, key employees, clients, etc. So giving a new buyer more control demands a control premium to the value of the business.

Earnings and Cash Flow Based
This is the most common focus for buyers. For service industries such as law, medical, accounting and information technology, the earnings based valuation technique will be used the most. For example, accountants will sell their practice for a factor of 1.1 to 1.5 of gross revenue. How does a factor get determined?

Simple actually, and we’ll use an accounting firm for illustration. First, when you are considering the net earnings of any business you need to back out the officer compensation to determine potential earnings. Here is a quick table showing some of the math-

So this table is suggesting that if your business profits are 35% including your compensation, then 3 x 0.35 equals a factor of 1.05. And since service industries such as our accounting firm example have very little assets, the earnings based technique is usually all a seller and buyer need to reach an agreement.

Assets and Market
Aside from earnings and cash flow valuations, some businesses are attractive because of other reasons. Perhaps a target business has a monopolistic government contract. Or perhaps the target business has some key employees that you want to assume and add to your core competencies. Or channel experience. The list goes on. So while cash is nice, and earnings are nice, not everything is easy to put a value on. These softer assets or intrinsic value can actually be a much larger and smarter reason for an acquisition.

Depreciation, Amortization, Personal Expenses
Other considerations when reviewing a seller’s financials are non-cash deductions and personal expenses. When a seller is depreciating assets or amortizing purchases, those expenses only affect the seller’s financials. So a careful analysis of cash flow versus taxable income must be performed.

Personal expenses include items such as travel, meals, mileage, home office and family-member wages. Let’s be frank- business owners have been known to deduct personal expenses through the business. A buyer might not get a straight answer from the seller, but these activities should be reviewed and perhaps added back into the statement of cash flows when evaluating a transaction.

Appraisal
Valuation techniques are just conversation starters. There are CPAs and other experts who do nothing but business valuations and appraisals. And if you purchase a business with a Small Business Administration (SBA) or other bank loan, you will undoubtedly have to an appraisal done on the business you are buying.

Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

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