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Checking for the exits

Planning to exit the business

Perhaps you attended a speech in a scenario like this.

The audience wandered into the auditorium and takes a seat. There was a short message given before the main speaker got in front of the crowd. With the short message, given by the individual introducing the main speaker, the audience was told that their announcement was a necessity.

The announcement explained to all who had just entered the room that there were multiple exits to the room.  The announcement continued with the explanation that attendees should take a moment to look around to find the exit nearest them. When there would be a need to use the exits, the audience should proceed in a careful manner to that exit.

With the conclusion of that announcement, the main speaker was introduced and the audience would listen attentively to get the most from the message being given.

Likely, the announcement is made because of a law in that community which requires that instructions be given with regard to how to leave in an orderly manner.

There is a great comparison that can be drawn between the scenario just described and most anyone’s business. If not your personal story, then at some industry event you have met someone who started their range as a hobby. They opened their range because there was not one in the area or because the one in the area was not a fun range to shoot at.

Over a period of years, this individual’s business grew. Perhaps they added additional lanes and a store front. The business became a profitable enterprise.

Growth to the business, as with any business, comes only because of success. Growth requires time to manage profitably; Time that is likely not spent looking for, or thinking about, the ‘exits’.

The comparison continues as this is where many business owners wish there had been a requirement similar to the auditorium with an individual, perhaps an accountant, attorney, or business coach had given a speech similar to our example.

Too often looking for the exits occurs only when someone is ready to get out of business. A couple interviewed for this article stated they called for advice only at the point a competitor visited their business with an offer in hand to purchase their range.

Others have come to a point in time where a stressful situation, a medical or family situation, or simply age or exhaustion, causes a person, or couple to decide, it is time to look for the exit.

Surely, many a business has changed hands, or even closed, because of these situations. Another individual spoken to for this article had experienced many successive years of operating a profitable business. However, a less than stellar 2012 and 2013 had this owner convinced it was time to simply hold a clearance sale for the retail side of their business and close the business – range and all. Yet, two years ago this individual had paid themselves in excess of $100,000 for their efforts.

The business changing hands, or closing, in either of these situations would allow the current owner to get out of the business, but would do so at a very sizable financial loss to either owner.

If you are years from wanting to get out of the business, this article is reaching you in plenty of time. If you want to get out of the business now, allow this article to persuade you to consider delaying your exit because of the potential for additional dollars for you.

Of course, if you are thinking you will transfer the business to the next generation of your family, we will look at the situation somewhat differently. The same could be said if the new ownership is to be an employee. In any situation we will start with the current day and your ownership of the business.

Think first of an individual who is an employee of a business. At the end of the year they receive a W2 for their work and their tax return is somewhat easy. They may have deductions for mortgage interest, child care, medical expenses and a few other expenses occurred over the course of the year. There is not much room for discussion with regard to deductions.

The case of the business owner is somewhat different. While it should be a discussion between you and your accountant, there is the possibility of your claiming your cell phone as an expense for your business. Instead of an allowance, your children can become employees of your business by performing some work. If you are doing some of your business work at home, your residence may qualify as a partial business expense.

The list of possibilities goes on and on. However, these possibilities are reserved for owners of businesses.

Most likely your accountant has been advising you as to how you can maximize business ownership to your advantage with regard to taxes. The logic of maximizing the benefit of business ownership is that you are not as concerned with what the business is reporting as a profit when the owner can legitimize what would be non-deductible personal expenses to an individual.

All of this is fine until the owner of the business decides they want to sell the business. If the business is to be sold the first question is about the price for the business. With some degree of variation, the person selling the business will be asking to be paid for the inventory if the range is selling ammo, accessories and/or firearms.

The owner should be asking for payment for inventory at ‘landed cost’ instead of the cost of the item. As an example think about any item being sold and the price paid to the wholesaler or manufacturer. Secondly, think about that same item having been received by the dealer, unpacked, a price tag applied, and displayed on the shelf. Obviously the product sitting on the shelf of a dealer has a higher cost than the same item sitting on the shelf at the manufacturing facility.

Secondly, the selling dealer should expect a fair market price for the fixtures, equipment and the ‘build out’ of the business. The ‘build out’ being things like carpeting, offices, light fixtures, rest rooms and all the other necessities to change a bare and empty building into an attractive sales floor. The build out also includes the air filtration system.

This is where selling the range as a ‘going concern’ is important as there is likely to be no usage for the air filtration system for a business that is not a range.

Speaking of a building, this is where you determine the price for selling the building. A market analysis, likely produced by a local real estate person can provide guidance on establishing that number. The challenge with their valuation is that because of the construction of the ceiling, walls and floor, the building is likely to be worth substantially less for a business that is not a range.

If the business, and building is sold to be continued as a range, at this point it could be said that the selling owner has only recovered money that has already been invested in the business with the exception of the appreciation or depreciation of the building.

However, this is where a business that has a history of profitability over the years rewards the selling business owner. The purchaser of the business is likely going to ask to see from two to five years of profit and loss statements. Of course the purchaser is looking to see how much money you have made in the business. This two to five years of profit and loss statement speaks to the reason why the current owner will not want to be maximizing their ability to have the business provide them with a vehicle, employ additional family members, or allow the business to be paying this type of additional expenses.

Looking at these years of profit and loss statements, the purchaser should make an offer to pay an additional amount which takes into consideration the net profit of the business over the years. One example would be an offer of taking the average of the net profit of the past five years and taking 2.5 times that number. There is no set pattern of how this works. The purchaser is making the determination of how this calculation is made based upon their experience in purchasing other businesses and information from their advisors.

An additional consideration would be the current zoning requirements of the community. As an example, if the current zoning laws would not allow a range in this location and there is a substantial number of customers living nearby, the fact that this range is ‘grandfathered in’ would add additional dollar value to the business. An outdoor range would be in a similar situation.

This dollar amount is referred to as the ‘blue sky’ or ‘good will’. Along with the price for inventory, fixtures, equipment, build out, and a building, the selling owner and the purchaser will finally come to an agreement for the price of the business.

While you would hope this would be the conclusion of the negotiation, there is more to come. The next step is the allocation of the funds. As an example, if the fair market value of the fixtures, equipment, air filtration and build out is $100,000 but the selling dealer has depreciated all of this to a ‘book value’ of $10,000, there will be a tax bill on the $90,000 difference. A similar situation could occur for the building. The ‘good will’ or ‘blue sky’ will likely be a taxable amount.

The owner expecting to sell the business, receive a sizable check, or move onto the next stage of their life is likely going to have an unpleasant surprise. There exists the possibility the selling dealer would find themselves writing a check to the IRS for a large portion of what the owner thought they were taking home.

This is where financial advice from an attorney and accountant will be of value. Their counseling will help you structure the agreement so that the income will come to you over a period of years.

The person purchasing the business is very likely not going to come with all cash on hand. An old adage of selling a business is that the selling owner should not take their existing business as collateral in the loan. The reason for this is the challenge of getting the business back in the case of the buyer running the business into the ground. While recapturing the business, the owner may found all they have recovered is an empty building.

Selling the range requires planning; not just in valuing the business but in the years before so as to maximize the selling price and in the transaction so as to keep as much of your hard earned money as possible in your pocket.

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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.
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