Motivations for Owning a Business

Motivations for Owning a Business
Guest column from Gregory Kovsky, IBA Business Brokers

An introductory conversation between adults locally will often include an inquiry about each person’s occupation.   Common answers include “I work for Boeing, Microsoft, Amazon, Costco, Starbucks, the University of Washington”, or any of the numerous other entities offering employment in the Seattle metropolitan area.   A rare answer to receive is “I own XYZ business”.  Think about it a minute, how many people do you know that own a business and create employment rather than working for someone else.  My guess is that the number is significantly less than the number of people you know that are employed.  Now think about the people you know that own a business.   Do you admire them?  The common answer is “YES”.  Why is that true? One reason is that entrepreneurs are traditionally confident & optimistic.   Two personality attributes that attract friends & followers.

Confidence & optimism are fundamental characteristics of successful business owners.  However, they are also characteristics found in quarterbacks, doctors, attorneys, military officers, and corporate executives.  The question is what motivates an individual with these attributes to become an entrepreneur.  In my 24 years as a business broker, I have identified the following four primary motivations for owning a business:

Freedom

Freedom is one of the great human motivators in history.   Freedom to openly practice a religion of choice motivated people to leave England and lay the foundation blocks for the United States of America.   Freedom to execute their vision for selling high demand consumer products at a discounted price motivated Jeff Brotman & Jim Sinegal to create Costco, one of the greatest entrepreneurial success stories in retail history.   Entrepreneurship at its core is about the freedom to execute a business plan to an individual’s or group’s vision.  This desire has motivated many entrepreneurs to risk time, energy, and resources to make a dream a reality.

Control

The desire to control one’s future and work environment is a strong motivating force.   The most common manifestation of this desire is to seek employment in a preferred location, industry, or with a specific company.   A less common action is to take control of one’s life path by creating or buying a business.  Examples of business acquisitions motivated by control witnessed at IBA have included corporate executives buying businesses before they are relocated or replaced with less expensive alternatives; gay & lesbian individuals buying businesses to create a desired corporate culture; and parents buying businesses to create leadership & income opportunities for children.

Investment

The desire to build a better life is a strong motivating force for many people.   A common component in constructing a better life is increased personal income.  The reality of employment in a capitalist economic system is that for a job to be offered an employer needs to make money off the production of the position.  Entrepreneurship offers a road to income above “market value” for their labor contribution for individuals with the knowledge, experience, and skill to compete successfully in business.  It is common for parties purchasing privately held companies from IBA to make a 20 – 40% return on their investment after “fair market” compensation for their labor contribution to the business.  This salary plus high investment return dividend compensation is a strong motivation for buying a business from IBA.  In addition to this short-term return, unlike a job, a business can be sold when an entrepreneur retires.  It is common for IBA clients to receive 6, 7, & 8 figure sale prices for their privately held companies and family owned businesses, a great nest egg for estate planning or retirement.

Lack of Alternatives

Many individuals immigrate to America annually from around the globe.   These individuals come to United States with a spectrum of knowledge, experience, and skills.   Unfortunately, language and a lack of uniformity in licensing for professionals can limit employment opportunities for new immigrants and their families.  However, the good news for individuals with appropriate confidence, work ethic, capital, and skill is the sky is the limit in terms of what is possible as an entrepreneur.   Favorite success stories at IBA for individuals who became entrepreneurs because they lacked an alternative path to financial security and professional fulfillment include a Moroccan electrical engineer who created a component level repair business for computers, a Russian entrepreneur who went from selling cigarettes at the end of communism in Moscow to operating a chain of florist shops known for their artistic quality, and  a Korean professionally trained dog groomer who runs one of Seattle’s best canine beauty parlors.  Nothing is more rewarding as a business broker than seeing people live the “American Dream” and take advantage of the unique ladder of opportunity that exists in our country for everyone.  It should be noted that Wan Kim, my friend, who bought the dog grooming business with financial support from family in the 1990’s, used that business to send both of his daughters through medical school.  A multiple generational, uniquely American success story that gives me great pride.

Entrepreneurship is the path not taken by many people during their working career.   However, for those with the proper motivation, skill set, knowledge, and experience it is a path that can result in a life of opportunity, freedom, and financial reward.

Gregory Kovsky of IBA (www.ibainc.com), the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.   Mr. Kovsky can be contacted directly at (425) 454-3052 or .

 

Taking Things for Granted

Last month I had eye surgery and a blurry eye makes you realize how we take sight, hearing, health, and other things for granted. Ask anybody who’s been hit by the nasty viruses going around this winter and I’m sure you’ll get an earful.

So, what do we (most people) take for granted in our businesses? Usually it’s the people and often it’s not intentional, it’s just that we get focused on our machines, our product, the margins and forget about who runs the machines, buys the product, etc. While I could create a long list of situations where the owner berated their people, here are a few more interesting examples.

Last year I visited a manufacturing business and noticed the employees eating their lunches in their cars. I wondered why, moved on to my meeting, and then, on a tour of the plant, realized why they were in their cars. The lunchroom needed a pressure washer and large amounts of disinfectant.

Many years ago, client Keith Jackson with Industrial Revolution, in response to my question about how his marketing was going, told me, “It’s amazing what happens when you actually pick up the phone and call your customers.” The previous owner took orders; Keith took interest in his customers.

A past client had trouble keeping good vendors. He lost two primary vendors (the second had replaced the first). Selling more of their product and accepting their assistance would have preserved the relationship.

The above said, many, many employers do take care of their employees and their customers. Things like great benefit plans, super coffee machines, beer Friday, and more create an atmosphere that encourages people to stay – and contribute.

Next week’s memo will cover what can happen when you don’t make employees feel appreciated.

“All looks yellow to the jaundiced eye.” Alexander Pope

 

Buying a Business in a Competitive Marketplace, how to Separate Yourself from the Pack?

By Gregory Kovsky

John Martinka, as one of Seattle’s most successful, knowledgeable, & experienced buyer’s brokers, and I, as the President of IBA, the Pacific Northwest’s oldest business brokerage firm, have collaboratively completed a significant number of transactions involving the purchase & sale of privately held companies, including one already in 2017.   John & I work well together because we are both familiar with the landscape of the transaction process, desire to complete “win-win” transactions, and can serve as resources of what is standard and fair in a transaction.

One competitive edge John’s clients have in pursuit of a business acquisition is they are prepared for the competitive purchase environment presently found in the middle market.

Will Rogers famously said, “You Never Get a Second Chance to Make a First Impression”.

This statement is true in most sales environments and applies to an entrepreneur desiring to purchase a business through a business brokerage firm serving the middle market.  The reality of the current marketplace for privately held companies is that sellers have choices regarding potential buyers for profitable, established companies.   It is therefore prudent for a business buyer to take the steps necessary to separate themselves from the pack, if they want to successfully negotiate a letter of intent and secure first position status to purchase a specific company from a seller.

The following are five common characteristics of business buyers who have successful purchased privately held companies in deals I have facilitated during my 23 years as a business sale intermediary:

  1. Listen More Than You Talk – Most entrepreneurs are confident and have a substantial ego. A buyer who recognizes this will check their ego at the door when meeting a business owner and place the spotlight on the seller encouraging them to talk about the business and their own personal history.  Everyone likes to talk about themselves.   A business buyer who makes an impression with a seller of being a good listener and student early in a transaction generally will lay the groundwork for future “good faith” negotiations and a positive transition period relationship.    Conversely, a business buyer who spends a significant amount of a first meeting with a seller telling them how great they are often will be the party left on the wall when a transaction “dancing partner” is selected for negotiations by the business owner.
  1. Create an Environment of Transparency for the Transaction – A buyer’s due diligence prior to purchasing a privately held company will result in the seller being asked to share a significant amount of confidential information.  This can be an uncomfortable process for a seller because they will likely be asked to share information about their business that they share with very few people.  A buyer that recognizes that this “uncomfortable” situation is on the horizon for the seller, can mitigate the level of discomfort by taking the lead in disclosing information early in the process providing the seller, commonly through their broker, with a resume, personal financial statement, list of their transaction team members, and any other information relevant to the transaction that they deem would increase the seller’s comfort with them as a potential negotiating partner.  Conversely, a business buyer who is guarded in the information they will share with the business broker representing a company and their client, will often be categorized as unqualified rather than qualified as a default.   The most important information to share with a business broker and their client is information on financial strength, liquid assets that can be deployed in a transaction, access to acquisition capital, and relevant experience.
  1. Assemble a Transaction Team – The most common players on a business buyer’s transaction team are an attorney, CPA, and banker.  It is prudent for a business buyer to assemble this team prior to engaging with business owners, so they are prepared to negotiate in “good faith” and move forward in a timely manner.   A transaction can be lost by a business buyer if a timely turnaround time on a letter of intent, preliminary due diligence, or an assessment of financing capability is not possible.   Many times, I have witnessed good, qualified buyers lose out on business acquisitions, even as the preferred buyer on a personal level by a seller, because multiple offers were being simultaneously negotiated and their attorney was slow to turnaround a document, their CPA did not complete a valuation in time for their client to get an offer on the table, or because a buyer was deemed incapable of getting a loan because they could not generate a letter of commitment from their preferred lender.
  1. Negotiate in “Good Faith” and Minimize Direct Confrontation – Business buyers & sellers each have a vested interest in negotiating in their own “best interest” in a transaction. The most significant place this occurs is on price & terms.  Successful business buyers recognize that there is value in being liked by the seller and having them committed to a smooth transition of ownership.   A “win-lose” negotiation runs counter to having a seller in your camp after the transaction is completed.  It is my recommendation that buyers negotiate in a manner that allows them to achieve the necessary transaction terms while at the same time mitigating confrontation.   Strong business sale intermediaries and attorneys will also assist this process by making the negotiation more administrative and less emotional and minimizing direct engagement between the parties in negotiations. Buyers should also remember that if they walk away from the transaction they will not complete the acquisition and start the process all over again.   If a seller walks away, they still will own the company and continue to make money until a sale is completed.  In short, the default setting for business sale negotiation is generally better for the seller than the buyer.
  1. Hold Information in Strict Confidence – It is in the best interest of both a business buyer and seller to keep information related to the potential sale of a privately held company out of the public domain as long as possible. A buyer who breaks confidentiality about a sale or has someone they have shared information with break confidentiality can jeopardize their transaction, as a common default by a seller to protect the business is to disclaim the information and pull the business from the market if it is deemed the information could damage the business.   The Pacific Northwest is a small community.   In a recent transaction John & I facilitated, a banker on the approval team for a loan was a long-time customer of a business being sold that did not know the company was for sale.  The sale came as a surprise to him.  The story had a happy ending, but is a prime example of how inadvertently information about a business sale can become known to a customer despite the best intentions of the parties.

Poor practices regarding confidentiality can also damage a business buyer’s relationship with a business brokerage firm.   IBA has a policy to disclose past confidentiality issues with a specific buyer to our clients prior to disclosing information to the party about a specific company being for sale.  It is common after that disclosure for our clients to indicate they do not wish for that party to receive information on their company.

As Will Rogers said, “You do not get a second chance to make a first impression.”  My recommendation to all buyers desiring to purchase a privately held company is to make the best first impression possible on the business broker representing the business and their client and to employ “best practices” whenever possible throughout the negotiation & acquisition process.

Gregory Kovsky is the President & CEO of IBA (ww.ibainc.com)  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.  Mr. Kovsky can be reached at (425) 454-3052 or .   Questions regarding IBA or the purchase & sale of privately held companies are welcome.

The Four Biggest Mistakes Business Buyers Make by Richard Parker

Guest Column:

I have been involved in buying and selling business for more than twenty years as an owner-operator, advisor and investor. Over the past ten years, I have worked with thousands of prospective business buyers through the various guides my company publishes. From these experiences, I have seen a number of common mistakes many people make over and over again; all of which are easy to avoid, if you are properly prepared.

Choosing the Wrong Business

This is undoubtedly the biggest challenge prospective business buyers face and it is remarkable how many end up buying the wrong one. First and foremost, buyers have to take a brutally honest look at their individual skills and weaknesses. When choosing a business, this is not the time to fool yourself. In order to be successful, your strongest skills must match the precise needs of a specific business. in other words, whatever you do best must be the single most important driving factor of the revenues and profits of any business you consider purchasing.

Conversely, a business cannot suffer from your weaknesses, nor should you attempt to learn a critical skill the business needs on the job. Certainly you will have to learn the workings of a business, but talent-wise, you have to be able to step in and operate it. For example, if your skills lie in marketing, or sales, or operations or production, you need to acquire a business where that specific skill is the driver of the business.

Overpaying For A Business

I can write an entire book on valuations (actually I have) since it is such a comprehensive component of the business buying process however, I shall endeavor to highlight the most important considerations.

Most prospective business buyers have never conducted a detailed valuation and so they rely upon the seller’s asking price, or a broker’s input, or an accountant’s perspective and all of these often leads them down the wrong road.

Buyers must keep in mind that valuations are an art; not a science. Next, the seller’s asking price of a business has no bearing on the final purchase price and terms and therefore one must consider the deal structure as well. Valuations must be based upon provable financial data while factoring in the potential return on investment. A very important point is regarding assets since many inexperienced buyers place far too much emphasis on the hard assets they will be acquiring. While important, assets serve two main purposes: first, they are solely a means to generate revenue and second, they can be leveraged to finance the deal.

Although it is always recommended to use a number of methods to get some general valuation parameters, the income multiplier formula is the most effective methodology to establish a valuation of a small business.

Spending Endless Hours Searching Listings and Never Finding A Good One To Buy

The Internet is the greatest blessing and curse for anyone who wants to buy a business. There are hundreds of thousands of businesses listed for sale and it does not cost anything to look (and look and look and look). That is precisely what most people do and ultimately, they do not achieve any results.

Yes, online listings of businesses for sale can be a very helpful tool. However, ones search must be streamlined. Targeting specific sectors and narrowing the scope of the type of business you want to buy is critical. Sure it is good to be open-minded, but to a point. The quicker you can focus into a particular industry – the better.

Also, do not limit the search to online business for sale listings. Most businesses that are sold never get listed for sale. There is a wealth of opportunity available by directly soliciting potential business to buy so again, spread the search and cover all bases.

Hiring The Wrong Advisors – If You Have a Toothache Don’t Call A Plummer

It amazes me how petty and foolish many buyers become when they need to outside assistance whether legal, professional or advisory. Regardless of the size business being acquired, surround yourself with the best possible team of advisors you can afford.

The good news is that an attorneys role can and should be limited within the process (the lesson here: lawyers do not make deals; they break them, so use them only for what they are skilled in doing). The same holds true with accountants – they have their role for the financial review period and for tax matters, but they are not, in most cases, valuation experts.

If you do not have a wealth of experience in this process, your first step is to invest a bit of time to prepare and educate yourself about each step. Next, align yourself with an advisor who will solely represent your best interests and can assist and guide you through the various stages. This is not a business broker who is being paid a commission by the seller; you need someone on your team who is experienced at buying business and can dispense unbiased advice to you. Their sole agenda is to make sure you buy the right business at the right price and terms.

Richard Parker is the author and publisher of, “How to Buy a Good Business at a Great Price,” the best “how to” publication available on business buying. He can be reached at www.diomo.com or rparker@diomo.com.

Transaction Documentation Means Dollars

The following article is from “IN$IGHT” the Zachary Scott Spring 2014 newsletter. I thought it so valuable I asked them if I could send it out in one of my newsletters and post it on my blog. Therefore, the following is being sent with their permission.

Transaction Documentation Means Dollars

The finer points of the deal could add up to significant value for the seller

By Mark D. Working

Fighting hard to come to a conclusion on price and handing off the transaction to lawyers to “paper the deal” risks losing sight of the fact that transaction documentation is an integral part of the economic bargain. Virtually every agreement contains the same components, as illustrated in the adjacent diagram, but the details of the constituent components are unique to each deal. These fine points have important implications to the amount of value a seller receives and keeps.

READING THE AGREEMENT

Purchase agreements are inherently complicated. Defined terms, interconnected references, and schedules and exhibits make understanding the economic issues difficult if read from front to back. Follow the money. There are three critical economic components to each purchase and sale agreement: the transaction description, the promises and disclosures made by the seller (commonly referred to as representations and warranties), and the insurance policy (i.e. indemnification for broken promises)

Once the economic components are understood, the other important, but not economic, components, such as the procedures to get to a closing, conditions that must be met prior to the close, and the rules governing how the business will be managed during the interim period between an agreement and the transferring of funds and ownership, can be addressed.

TRANSACTION DESCRIPTION

This section provides the overall guidance as to what the parties are trying to accomplish. It defines what business assets will be purchased, which liabilities will be assumed, and the price that will be paid, as well as the timing of payments and currency (e.g., cash, securities, notes).

The form of transaction matters. The broad choice among a merger, purchase of stock, or purchase of assets is based on the objectives to be achieved, as structure can impact the need for third-party approvals, segregation of unknown or unwanted liabilities, and taxes.

These issues can complicate the choice because they can affect the economics of the parties differently depending on the specific circumstances of the buyer and seller.

For example, a stock transaction might be highly desirable to more easily transfer important contractual business relationships. The parties can still elect to treat the transaction as an asset sale for tax purposes (commonly referred to as a 338(h)(l0) election). Depending on the specific circumstances, this could either result in significant value that can accrue to the parties, or have devastating implications to the seller.

REPRESENTATIONS AND WARRANTIES

There are two purposes for a seller giving representations about the business, aiding the buyer in its due diligence and establishing a set of promises of condition that is the basis for allocating responsibility should actual conditions prove to be less than promised.

Supported by an integrated set of schedules, the representations provide an “official” disclosure of the state of the business, which assists the buyer to conduct due diligence.

Completeness matters because the clarity and accuracy of the scheduled data provides the buyer with comfort that the business is well managed. A company that has trouble documenting its assets, contracts, or some other aspect of the business, portrays an image of “seat-of-the-pants” leadership and can lead to more concern on the buyer’s part for protection against the unknown.

Representations also establish standards against which future claims by a buyer that it did not receive what was bargained for will be judged. While wanting to be positive about the company, representations can become the basis for a future claim of shortfall against that standard and be the responsibility of the seller.

The biggest fear of most buyers is the unknown. Therefore, when a seller is asked to state without exception that there are no other liabilities that will accrue to the buyer (as an example), the question of seller’s “knowledge” may become a point of contention. Although a seller might agree to a statement that is accurate “to the best of their knowledge,” the buyer might not take comfort in that standard and might require an independent standard such as the knowledge of a “prudent person, assuming appropriate investigations were conducted.”

Materiality poses another potential trap. Used throughout the agreement, its definition and application can be critical. Sellers generally fight for materiality exceptions to blanket statements, but embedded assumptions can be missed. A prominent example is granting the buyer a standard of compliance with GAAP. Whether audited or not, financial statements in their entirety can be GAAP compliant without individual accounts meeting the standard so long as the auditor determines there would be no material difference in interpretation of the statement in their entirety. Should the dispute be over a specific account, the seller can get caught.

INDEMNIFICATION

Buyers want assurance that they get what they bargained for, nothing more, and nothing less. The “bright line” concept is often used to establish where the seller’s responsibility ends and the buyer’s begins. What happened on the seller’s watch (before the transaction) is the seller’s problem, and what happens thereafter is for the buyer’s account. Seller indemnification obligations arise directly as a result of damages incurred by the buyer for infractions of the bright line.

A claim of damages creates the basis for seller liability. The agreement establishes a mini­ mum claim size, a minimum amount of claims that must occur before any seller obligation arises (deductible), total maximum claim liability, a period of time within which claims must be made, and whether, how much, and for how long an escrow might be needed as collateral for potential future claims. Since the buyer and seller often do not have the same perception of the risk of certain items, great pains are made to define various risks (e.g., taxes, environmental, employees, asset condition), and how each will be treated.

An example of where a disaster might arise is the case where an owner represents that the business being sold is an S-corporation and has no tax liability (as a result of its pass-through status). After closing, it is determined that the conversion to an S-corporation was not done properly and the IRS finds it to still be a C-corporation. As a result, all of the past profits of the business actually represent taxable income to the company and the past distributions made to the owner are recharacterized as dividends. The profits are taxable to the corporation and the buyer files an indemnification claim for damages as a result of the company’s obligations to the IRS.

Many possible surprises can occur after the deal closes. Better due diligence by both seller and buyer can reduce the number and nature of surprises.

NEGOTIATE A HOLISTIC DEAL THAT CONTAINS ALL ECONOMIC COMPONENTS.

The “deal” and the documentation should be treated as an integrated whole. Principals should make sure they have a qualified team of advisors to deal in advance with all issues that will arise during the process of negotiating and closing a business transaction. Financial advisors working hand-in-hand with the owner’s attorneys will greatly improve the overall result. We recommend considering all issues at one time, rather than in sequence, so that the ultimate objective, maximizing the after-tax proceeds after indemnification, remain clearly in focus

Zachary Scott , www.zacharyscott.com, 206-224-7380

 Video Podcast

Transaction Documentation Means Dollars

The following article is from “IN$IGHT” the Zachary Scott Spring 2014 newsletter. I thought it so valuable I asked them if I could send it out in one of my newsletters and post it on my blog. Therefore, the following is being sent with their permission.

 

Transaction Documentation Means Dollars

The finer points of the deal could add up to significant value for the seller

By Mark D. Working

Fighting hard to come to a conclusion on price and handing off the transaction to lawyers to “paper the deal” risks losing sight of the fact that transaction documentation is an integral part of the economic bargain. Virtually every agreement contains the same components, as illustrated in the adjacent diagram, but the details of the constituent components are unique to each deal. These fine points have important implications to the amount of value a seller receives and keeps.

READING THE AGREEMENT

Purchase agreements are inherently complicated. Defined terms, interconnected references, and schedules and exhibits make understanding the economic issues difficult if read from front to back. Follow the money. There are three critical economic components to each purchase and sale agreement: the transaction description, the promises and disclosures made by the seller (commonly referred to as representations and warranties), and the insurance policy (i.e. indemnification for broken promises)

Once the economic components are understood, the other important, but not economic, components, such as the procedures to get to a closing, conditions that must be met prior to the close, and the rules governing how the business will be managed during the interim period between an agreement and the transferring of funds and ownership, can be addressed.

TRANSACTION DESCRIPTION

This section provides the overall guidance as to what the parties are trying to accomplish. It defines what business assets will be purchased, which liabilities will be assumed, and the price that will be paid, as well as the timing of payments and currency (e.g., cash, securities, notes).

The form of transaction matters. The broad choice among a merger, purchase of stock, or purchase of assets is based on the objectives to be achieved, as structure can impact the need for third-party approvals, segregation of unknown or unwanted liabilities, and taxes.

These issues can complicate the choice because they can affect the economics of the parties differently depending on the specific circumstances of the buyer and seller.

For example, a stock transaction might be highly desirable to more easily transfer important contractual business relationships. The parties can still elect to treat the transaction as an asset sale for tax purposes (commonly referred to as a 338(h)(l0) election). Depending on the specific circumstances, this could either result in significant value that can accrue to the parties, or have devastating implications to the seller.

REPRESENTATIONS AND WARRANTIES

There are two purposes for a seller giving representations about the business, aiding the buyer in its due diligence and establishing a set of promises of condition that is the basis for allocating responsibility should actual conditions prove to be less than promised.

Supported by an integrated set of schedules, the representations provide an “official” disclosure of the state of the business, which assists the buyer to conduct due diligence.

Completeness matters because the clarity and accuracy of the scheduled data provides the buyer with comfort that the business is well managed. A company that has trouble documenting its assets, contracts, or some other aspect of the business, portrays an image of “seat-of-the-pants” leadership and can lead to more concern on the buyer’s part for protection against the unknown.

Representations also establish standards against which future claims by a buyer that it did not receive what was bargained for will be judged. While wanting to be positive about the company, representations can become the basis for a future claim of shortfall against that standard and be the responsibility of the seller.

The biggest fear of most buyers is the unknown. Therefore, when a seller is asked to state without exception that there are no other liabilities that will accrue to the buyer (as an example), the question of seller’s “knowledge” may become a point of contention. Although a seller might agree to a statement that is accurate “to the best of their knowledge,” the buyer might not take comfort in that standard and might require an independent standard such as the knowledge of a “prudent person, assuming appropriate investigations were conducted.”

Materiality poses another potential trap. Used throughout the agreement, its definition and application can be critical. Sellers generally fight for materiality exceptions to blanket statements, but embedded assumptions can be missed. A prominent example is granting the buyer a standard of compliance with GAAP. Whether audited or not, financial statements in their entirety can be GAAP compliant without individual accounts meeting the standard so long as the auditor determines there would be no material difference in interpretation of the statement in their entirety. Should the dispute be over a specific account, the seller can get caught.

INDEMNIFICATION

Buyers want assurance that they get what they bargained for, nothing more, and nothing less. The “bright line” concept is often used to establish where the seller’s responsibility ends and the buyer’s begins. What happened on the seller’s watch (before the transaction) is the seller’s problem, and what happens thereafter is for the buyer’s account. Seller indemnification obligations arise directly as a result of damages incurred by the buyer for infractions of the bright line.

A claim of damages creates the basis for seller liability. The agreement establishes a mini­ mum claim size, a minimum amount of claims that must occur before any seller obligation arises (deductible), total maximum claim liability, a period of time within which claims must be made, and whether, how much, and for how long an escrow might be needed as collateral for potential future claims. Since the buyer and seller often do not have the same perception of the risk of certain items, great pains are made to define various risks (e.g., taxes, environmental, employees, asset condition), and how each will be treated.

An example of where a disaster might arise is the case where an owner represents that the business being sold is an S-corporation and has no tax liability (as a result of its pass-through status). After closing, it is determined that the conversion to an S-corporation was not done properly and the IRS finds it to still be a C-corporation. As a result, all of the past profits of the business actually represent taxable income to the company and the past distributions made to the owner are recharacterized as dividends. The profits are taxable to the corporation and the buyer files an indemnification claim for damages as a result of the company’s obligations to the IRS.

Many possible surprises can occur after the deal closes. Better due diligence by both seller and buyer can reduce the number and nature of surprises.

NEGOTIATE A HOLISTIC DEAL THAT CONTAINS ALL ECONOMIC COMPONENTS.

The “deal” and the documentation should be treated as an integrated whole. Principals should make sure they have a qualified team of advisors to deal in advance with all issues that will arise during the process of negotiating and closing a business transaction. Financial advisors working hand-in-hand with the owner’s attorneys will greatly improve the overall result. We recommend considering all issues at one time, rather than in sequence, so that the ultimate objective, maximizing the after-tax proceeds after indemnification, remain clearly in focus.

Zachary Scott , www.zacharyscott.com, 206-224-7380

Racing an Ironman, or Buying/Selling a Business: The Need for Objective Data

Reflecting on the Ironman World Championships, I’m struck by how erratically many of the competitors rode the 112-mile bike leg of the race. Let’s put this in perspective: an Ironman is a 2.4 mi swim, 112 mi bike, followed by a 26.2 mi run, that takes anywhere from 8 hours (pro winner) to 17 hours (for an “official finish”) and about 5,000 calories to complete. Maintaining a steady power output on the bike – the longest duration – leg is critically important to a successful race. And yet, time and again, I encountered racers that seemed to surge and settle, riding on “perceived effort”, or worse, ego (when overtaken, surging ahead to retake me only to then settle back (block) just in front of me).

I race with a power meter – a device that’s in the hub of the rear wheel that tells me my immediate and average output of watts. I ride to a prescription of wattage based on training data compiled over months and months. I know that this wattage, combined with a set amount of caloric, electrolyte and water intake will get me through the bike with legs to run the marathon. Without that data, it’s far too easy for my effort level to spike or drop without knowing it as I encounter hills, winds, and fatigue. Steady power output translates to efficient use of calories, and far better overall performance.

My observations were validated: first by all the people I passed on the run who I saw surging earlier in the day on the bike, and later by the official components stats compiled by the race administrators…less than 35% of the competitors used power meters! Shocking for a field of elite triathletes…

As a transactional business attorney, I often find parallels to the business world. Completing a purchase and sale of a business is no less of test of planning, execution and endurance than an Ironman. If you think otherwise, you are in for a rude awakening. The lesson here is a simple one, but one that take tremendous discipline to apply. If you are contemplating a purchase or sale of a business, your success is dependent upon how you obtain and use objective data. If you rely on subjective data (your perceptions) or allow ego to influence you, a “bonk” is most likely what you’ll encounter on your way to the finish line, if you reach it at all. What does that mean for business people? It means surrounding yourself with thought leadership in the form of an experienced business advisor such as John, transactional attorneys, and accountants and tax practitioners. And it means carefully crafting a plan well in advance of the contemplated transaction, disciplined execution against that plan, and minimizing reactive decision-making.

Winners don’t just work hard, they work smart.

David Cook is the owner of Sovereign Legal Group, a transactional business law firm based in Seattle. He is also a competitive age-group triathlete. dcook@sovereignlegal.com www.sovereignlegal.com

Work/Life Integration: Where Relationships are King by Craig Williamson

A famous African proverb states, “if you want to go fast go alone, if you want to go far, go together.” This proverb captures how important relationships are to getting things done. Relationships are at the core of all the activities that bring value to our work and our lives. Many times, relationships overlap in both areas. A colleague becomes a friend or a friend becomes a professional mentor. When we observe relationships integrating seamlessly between our work and our personal lives we have the opportunity to more effectively leverage the unlimited value that relationships offer in multiple areas of our lives.

As humans, we love to put everything into categories, yet relationships provide more value when they can remain fluid, flowing in and out of different areas of our lives. For example, today, I had breakfast with a guy who used to be my competitor. He’s now a friend, neighbor, and a client. He’s also given me valuable coaching on various aspects of my personal life. We are both one another’s customers. If I thought of my work and personal life as separate categories, I would have trouble figuring out which bucket to put him in. Would he be considered a customer or client? Or maybe I should view him as a friend and neighbor? Attempting to categorize our relationship into one of these buckets would actually limit the rich experience and expertise we bring to one another’s lives. Our relationship overlaps seamlessly in both professional and personal ways, which brings tremendous value to us in both areas.

Likewise, non-work settings can also be a source for cultivating valuable professional relationships. I attend bible study with a guy who happens to be the president of one of the largest private land holding companies in the country. As someone who curious about the trend of converting biomass into fuel, I immediately thought about my bible-study friend. Thanks to his expertise and experience in the land business, I bet he could offer insight into how to approach investing in this new technology. Again, if I siloed my friend into merely a Church friend, I would have missed out on the opportunity for us both to connect and benefit in a professional capacity. Chances are, you too belong to communities, groups, or participate in activities that offer many symbiotic friendships in both work and life.

The lesson here is that each person we meet in any setting, whether it be work or personal, provides us with the opportunity to add and take value regardless of whether we have clocked in or not.

 

Guest Column – Using Technology For Growth

From Russel Wood, www.fushionflavorsusa.com, Tampa, FL

When we purchased our company, it became blatantly obvious how important technology was going to be for us to be efficient. Coming from the large corporate world, you have huge amount of resources at your disposal; this is not the case when you are in the fast paced environment of small to midsized business owner ship.

We quickly latched on to the use of cloud drives to share documents. Our smart phone became an indispensable member of the team. We began using web clipping and mind mapping to bring ideas together until we were able to execute on them.  Using technologies like these have enabled us to move quickly, increase productivity and stay competitive.

My advice to other small businesses, constantly seek areas where you can employ technology to be more efficient. Don’t underestimate the importance of a mentor/consultant to help you implement. In the long run it will save time which is money. Lastly, never allow yourself to grow complacent; business is moving just too fast for that.

Guest Post – Relationships Trump All

From Pat Nugent, www.patricianugenttextiles.com

After returning last week from Printsource, an international print and pattern market for textile and surface designers, I was struck again at how much fun it is to work face-to-face with people. I was reminded of how critical it is to work one-on-one with customers. In person, I’m able to see reactions to what we are showing, to ask questions about what they need, what they want to find to improve their products and — most importantly — how to help them be successful designers.