Tag Archives: Buying and Selling Businesses

Mind Your Business: The Value of Representation

TAS Marketing

By Steve Michaels

Q: My wife and I are considering selling our call center. I feel that I am capable of selling the business myself, while my wife feels we should get an intermediary or broker. What are your thoughts on this subject?

A: Let me answer your question by telling you a personal story. We recently built a small underground cement structure called an eco chamber to house a backup power generator. When I was ready to order the generator, the generator company told me the salesman I had dealt with was no longer with the company.

The new salesman informed me that the underground structure was not approved for use with the generator I wanted to buy. However, my contractor, my electrician, and I were told several times by the original salesman that, as long as it was vented properly, the generator would work fine. With no other recourse, I retained an attorney and sued the company.

The demand letter asked for $38K in damages, which was the cost of the structure. Since I had a contractor and electrician to corroborate my story, the case looked very favorable for me to win. However, to avoid a lengthy battle, the generator company offered me $10K to settle. I requested that my attorney counter with $15K, thinking that I would end up with approximately $12K.

When I followed up with my attorney, he said that he countered with $25K, not $15K as I had instructed, as he felt we had a good case. He was right; the company agreed to split the difference and offered a settlement of $19K.

I was thrilled, but I also realized that I would not have been able to negotiate such a favorable settlement myself. I was too close to the deal; because it was my property and my suit, it became personal, thus clouding my judgment. My attorney, however, was neutral and more objective, and thus able to get me a better settlement.

The same goes for selling your business. It is your baby that you’ve grown from scratch and owned for many years; all objectivity goes out the window when the seller is directly involved in negotiations. You should listen to your wife and hire an intermediary, such as a broker; you’ll be glad you did.

TAS Marketing

Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com.

[From Connection Magazine Jan/Feb 2011]


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Mind Your Business: Asset Sale or Stock Sale

TAS Marketing

By Steve Michaels

Question: What’s the difference between an asset sale and a stock sale? Why does it matter?

Answer: An asset sale is the purchase of the assets of a business, which normally consists of the client list, equipment, furniture, fixtures, rights, good will, and a covenant not to compete. It does not include cash, and the buyer does not assume the liabilities. When a buyer purchases the assets only, the buyer has the option of depreciating that investment over a period of years. The buyer is also increasing the value of the business entity by being selective about the assets purchased from the seller in order to grow the revenue base. This may be the ideal way a buyer can comfortably increase an existing business without creating any major IRS tax implications. An asset sale is also subject to the Bulk Sales Act and sales tax issues.

A stock sale is the purchase of corporate stock or LLC shares from the owners and can also include cash. A stock sale includes everything on the balance sheet, both assets and liabilities. If the buyer needs a tax write-off, this may be a viable option. This creates a completely new entity for the buyer, and this affects the buyer’s federal tax position depending on what basis is created upon purchase. A stock sale involves buying the entire entity, so past financial and legal liabilities are included, creating a significant exposure to the buyer. Thus, financial debt and legal risk could play a factor in reducing the purchase price of the sale.

A stock sale is not subject to the Bulk Sales Act, but this can be a negative concern to the seller by creating a large federal tax obligation. In a stock sale, the buyer assumes the current depreciation schedule of assets and the existing tax status of the corporation. Loans to the owner and personal liabilities are normally removed. One reason for a stock sale is when there is a right, license, or exclusive distributorship that cannot be otherwise transferred.

The majority of buyers do not want to take on the liabilities of a company; therefore, they choose to purchase selected assets, giving them the opportunity to increase their revenue base without acquiring the seller’s liabilities.

TAS Marketing

Steve Michaels is a broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com for questions.

[From Connection Magazine November 2010]


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The Sliding Scale of Power Strategy

TAS Marketing

By Steve Michaels

Question: I am thinking of selling my teleservice company myself, but I’ve heard horror stories about being taken advantage of. How can I protect myself?

Answer: Unfortunately, some unscrupulous buyers will do or tell you anything to purchase your business. Once you have signed a letter of intent and received a deposit, your business is off the market to other potential buyers. At this point, an unethical buyer can wear you down for their benefit.

First, the buyer may take too long performing their due diligence, focusing on irrelevant issues. The longer you have to wait to close, the more anxious you become. Also, other potential buyers may pursue other projects. Over time, you may become more willing to concede selling points in anticipation of completing the sale – and getting a big check. This maneuver is called the sliding scale of power strategy.

In the beginning of the transaction, the seller has all the power, but as things progress the buyer starts to gain more power by: (1) talking to the seller’s staff, who are now expecting a sale and may leak this to clients or quit, (2) asking the seller’s landlord to approve the rental space for the facility, (3) finding reasons why the seller’s business is worth less, (4) insisting on taking over the seller’s outstanding receivables, and (5) suggesting different terms or conditions. These tactics are not illegal, but they do need to be addressed at the proper time.

To combat this, establish the price you want for your business and stick to it. You can negotiate a bit, but don’t let the buyer become unreasonable. Firmly address who gets receivables: will the buyer purchase them, or will they collect them for you? What do you consider a viable client, when are you going to close, and who will do the final billing? Does a cash sale really mean cash at closing, or is there a holdback? (Unscrupulous buyers will slip this in at the last minute.)  Lastly, limit the amount of time the buyer is allowed for due diligence; a couple of weeks is plenty if you have your financials in order and other pertinent information ready.

Remember, don’t be afraid to walk away from a deal; after all, it’s a seller’s market.

TAS Marketing

Steve Michaels is a broker with TAS Marketing and can be contacted at 800-369-6126, tas@tasmarketing.com.

[From Connection Magazine September 2010]


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Mind Your Business: The Difference of One

TAS Marketing

By Steve Michaels

Q. I have been trying to acquire some call center accounts and have been told that I should not offer anything over ten times monthly billing, but I keep losing out. Can you help me?

A. I don’t know why someone would tell you this; sales of telemessaging call centers are just like any other market – run by supply and demand. There are averages that should be followed, but there are also times when you need to look beyond the averages to see how an account acquisition could help your business and its bottom line.

Even if you have just spent over $150,000 on a switch to answer your calls, have sent your managers to special classes for training, and have a brand new website, it doesn’t mean anything unless you have clients.  Clients are your lifeblood, and sometimes you have to go beyond any norms to acquire them.

Let’s take for example a service selling 120 accounts that are billing $20,000 per month. They are asking eleven times monthly billing, and you are sticking to your guns and offering ten times.  First, you will not get the deal, and second, we are talking about a price differential of only $167 dollars per account, an amount of money that you would gladly pay a salesperson to land that account.

The question comes down to what you are willing to do to enhance your bottom line and maximize your infrastructure.  You can always spend more money on your website, hire another salesperson, and create a marketing campaign, but none of these are going to guarantee more business.  Buying accounts will – if done right!

It’s ironic that the economy is flailing and yet the multiples for telemessaging business have never been better.  Finding financing to buy a business is harder, but even so, services are selling for top prices – for the time being.

TAS Marketing

Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com for questions.

[From Connection Magazine June 2010]


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Mind Your Business: Dealing with Large Accounts During an Acquisition

TAS Marketing

By Steve Michaels

Q. I am purchasing a telemessaging service for ten times the monthly billing amount. It is a good solid business, but they have one client that represents 27 percent of their revenue. What can I do to protect myself should that account leave after the acquisition?

A. This is a good question, and surprisingly it comes up rather often. There are several things you can do to take away the apprehension associated with your purchase. One is to add a thirty- to ninety-day retention clause on that particular client (some buyers request six months). This means that you could have the broker or attorney hold the funds that relate to that client and pay out the balance as long as the client stays with your company.

Another option is to put a lower multiple on that particular client since there is more risk involved. Let’s say you purchased the client for eight times the monthly revenue versus ten times for the other clients. You could also put a clause in the agreement stating that if the client stays with you for six months to one year, then the additional two points would be paid to the seller as a balloon payment. This amount could be held in escrow or paid by the buyer to the seller at the appropriate time.

There are some other items to consider when you are faced with a large client in an acquisition: Are you capable of handling that type of account?  (If the client is medical and you’re not, then it is time to reconsider.)  Do you have enough agents?  Are you planning to hire some of the seller’s staff?  Does the seller have the same equipment as you? Are you going to keep the acquired business in place, or will you move the accounts over to your center? You’ll want to consider these questions to determine if the large client will fit with your center. If you offer comparable or better service, than in all probability they will stay. As long as the customer is getting good service, experiencing minimal change, and paying the same rate, most likely they will stay with you.

TAS Marketing

Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com.

[From Connection Magazine January 2010]

Mind Your Business: Asset Allocations

TAS Marketing

By Christine Michaels

Question: While purchasing a telemessaging company, the seller’s attorney asked me to complete the allocation of the purchase price section in the purchase agreement. What is this, and why is it necessary?

Answer: Purchase price allocation is different from receiving the actual funds from the sale of a business. Allocation means, “to set apart for a specific purpose.” In this case, allocation assigns a value to the assets. Shift your perception to general accounting principles. Allocation is required by the Federal Government for taxation (Section 1060). As in all cases of liquidating or claiming assets, the expense (in this case, the purchase or claiming of assets by the buyer) cannot generally be written off in one year, and the liquidation or gain (sale of assets by seller) should not be claimed in one year. Both of these situations can have huge tax consequences for both buyer and seller if not allocated appropriately.

For the sake of simplicity, the purchase price is broken down into descriptions of value, such as equipment, covenant not to compete, goodwill, customer list, training/consulting, and premise lease/leasehold improvements. Each one of these (if applicable to the assets purchased) is given a monetary value, which is a percentage of the purchase price. For example, if the sale of a business (assets only and not stock) is $90,000, the allocation looks like this:

  • $25,000 — Covenant Not to Compete
  • $10,000 – Equipment
  • $55,000 – Goodwill

Prior to completion of the sale of a business, it is critical that both buyer and seller consult with their accountants to determine the allocation. Each party’s tax situation is unique and can only be properly addressed by their accountant. Below is a general breakdown of the amortization applied to the assets. Once the amortization is determined, the accountant can then determine the allocation. For the non-compete, goodwill, and customer list:

Buyer: Amortize value over fifteen years

Seller: Treated as ordinary nonpassive income

Typically, both buyer and seller agree upon the allocation prior to the closing of the sale of the business. Once the sale is complete, both parties must file Form 8594. Allocation can be intimidating, so make sure you give your accountant enough time prior to the closing/purchase of the business to determine what is best for you.

TAS Marketing

Christine Michaels is an associate broker with TAS Marketing and can be contacted at 800-369-6126 or tasbroker@tasmarketing.com.

[From Connection Magazine December 2009]


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Mind Your Business: Retention Clauses

TAS Marketing

By Steve Michaels

Question: I am in the process of purchasing an answering service and want to put a retention clause in place. How does a retention clause work?

Answer: A retention clause states that an account has to be on service with the buyer for a certain amount of time and have made their payments in order to be considered a viable account and included in the purchase price. I’ve seen retention clauses anywhere from thirty days to one year, although one year is extreme.

There is a full retention clause where the purchase price of an account is not paid until after certain criteria are met. Alternately, there is a sliding retention clause where a percentage is paid over time.

Lastly, there could be a combination of both. For example, you could have a six-month retention, with the first three months as a full retention and the balance as a sliding retention. For an account billing $1,000 per month and the buyer paying nine times the billing, the account would have to stay with the buyer for the first three months, and then the seller would receive $3,000 per month for the next three months.

There could be certain stipulations made for full retention, such as no price increases, no DID number changes, or no changes to the level of service. A retention clause takes some the risk away from the buyer. No retention means that the buyer is taking all of the risk. If no changes are planned, then retention is largely a mute point. However, if the accounts will be moved, staff added, or rates increased, then the seller may object to a retention clause because the seller must take the risk for the buyer’s actions.

A buyer wants a retention clause to insure that the accounts being purchased are well-paying accounts that will generate a cash flow into the future. The longer the retention the better. The seller doesn’t want a retention clause at all, asserting that the accounts are on service, viable, and satisfied; if the buyer wants to come in and make changes, then the buyer should take the risk.

There are valid points to both arguments, and this is something that is negotiable. Lately, due to the economy retention clauses are making a comeback.

TAS Marketing

Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com for questions.

[From Connection Magazine October 2009]


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Mind Your Business: Why Should I Pay a Broker?

TAS Marketing

By Steve Michaels

Q. I want to sell my business myself. Why should I pay a broker?

A. The old adage from Abe Lincoln states: “A man who represents himself has a fool for a client.” This is also true for anyone who represents him or herself while trying to sell his or her business. A more mature and experienced negotiator will take advantage of you and make you think that you got a good deal in the process.

You, as the owner and seller, are too close to your business to negotiate from a position of strength. Tactical comments about your business are made to lower the price and can be taken personally or blow the deal. By using an intermediary, such as an attorney or broker, you put a buffer between you and the buyer, thus balancing out the position of power.

All negotiations arise from weakness. Do not confuse serious negotiations with management skills. They are different. A manager should not be in the room during a series of tough negotiations. However, a skilled negotiator is crucial when money is on the table and your future is on the line.

Small business owners are typically poor negotiators; that is why they are small. Larger business owners are great negotiators, which is why they are large. Remember, the buyer is not your friend. It is common for the buyer to initially flatter you with compliments about your business. Flattery tends to soften you so you’ll drop your guard as you leave little tidbits of information that will aid the buyer in their negotiations, resulting in a lower price and less favorable terms. Sometimes the buyer may state that certain multiples are industry standards and tell you that your business is not worth what you want. The buyer may also assure you that because of his or her years of experience in purchasing businesses all deals are done a particular way – that is, their way. As a seller with less negotiation experience, it is easy to fall for their pitch and sell your business for a price way below what it is worth. Having someone experienced in these matters makes all the difference, plus it gives you “peace of mind,” knowing that you are getting the most return from your many years of hard work.

TAS Marketing

Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com for questions.

[From Connection Magazine Jul/Aug 2009]


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Mind Your Business: Satisfaction of Due Diligence

TAS Marketing

By Steve Michaels

Q. I am selling my accounts only, and I am having a problem with the buyer. I would like to close the deal and then hand over my account list to the buyer. But he wants a copy of my customer list before closing so he can input the data into his system. Is there a way to resolve this dilemma? I don’t want to lose the sale.

A. This dilemma has plagued many transactions. A seller is apprehensive about prematurely giving up the account list because that is his main asset. If the deal falls apart, the seller does not want a potential competitor having the client list. On the other hand, receiving the customer account list after closing can cause problems for the buyer. The buyer may have to hire the seller’s staff to answer the calls as accounts are being transferred to the buyer’s call center. The buyer may also need to bring his staff over to the seller’s call center to answer the calls even though they are not familiar with the seller’s equipment or accounts.

The “Satisfaction of Due Diligence” document devised by my wife, Christine, states that the buyer has done their due diligence and is ready and financially able to purchase the business. Once this document has been signed by both buyer and seller, the account information can be transferred to the buyer prior to closing, enabling the buyer to answer the account calls after the business has been purchased. Thus, on the closing day the phone lines can be transferred to the buyer with staff present in both the seller and buyer’s offices to assist with the transfer. The buyer may also wish to hire some of the seller’s agents and can determine this prior to closing.

For the protection of the seller, the agreement states that if for any reason the deal is not consummated, the buyer cannot solicit any of the seller’s customers for a period of five years. If by chance one of the seller’s accounts goes with the buyer within that period, the buyer will pay for that account with the multiple agreed upon in the “Asset Purchase Agreement.”

This protects both buyer and seller.

TAS Marketing

Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com for questions.

[From Connection Magazine June 2009]


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Mind Your Business: The Distressed Sale

TAS Marketing

By Steve Michaels

Q. I recently picked up some accounts from a competitor who just shut his doors and walked away. I know he had many more accounts. Even in a distressed sale, don’t these accounts have any value?

A. Absolutely. It continues to flabbergast me that this continues to happen. Yet we all have different stress levels resulting from things such as a death in the family, an IRS tax lien, a major lawsuit, or a natural disaster. At some point, people just shut down, but no matter what the reason is, the accounts have value, even in a distressed sale.

Individuals who are thinking logically might wonder why someone would walk away from a pile of cash, represented by the value of their client base. Most of those who do close without warning are going through tremendous stress. They can’t see their way to take one more step, so they just give up, lock their doors, and walk away. The laborious transaction of selling their business seems like more than they can handle.

If you are the seller in a situation like this, there are several ways you can let your business go with a minimum amount of work on your part. One option is to call your attorney and simply give them your customer list, instructing them to call all your local competitors. Whoever comes up with the highest bid, gets the accounts. Alternately, you could rely on an industry broker or a trusted industry friend to do this. All it takes is a phone call.

Buyers must realize that whatever caused someone to walk away from their business is a heavy burden. Buyers need to be as compassionate and accommodating as possible. They should realize that due diligence may not be as thorough as usual, but knowing that they are picking up accounts at a discounted rate, some risk may be required.

There are several ways to purchase those accounts. One is to offer the seller X times the amount of their monthly billing and offer to pay for it thirty to sixty days after the accounts have transferred. Another idea is for the buyer to pay a percentage of the monthly billing (or collections) for a certain period of time. A third option would be to offer a lump sum, which might be preferable to the seller because of their difficult situation. While it may be tempting to just take the accounts and not pay anything, treat the seller the way you would like to be treated.

If you own a call center, you may want to set up a contingency plan with your lawyer, family member, broker, or trusted industry peer, so if you suffer such a disaster, you will have the bases covered and receive something for your many years of effort.

TAS Marketing

Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or tas@tasmarketing.com for questions.

[From Connection Magazine November 2008]


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