A few years ago I attended the UC Davis Wine Executive program. It was a great week of learning that provided me a deep dive into the real world issues involved in acquiring and operating a wine business. Since then, I’ve had my own experiences with starting and exiting various businesses. In my current role as a financial planner, I work with lots of different types of businesses and business owners, each with their own unique perspectives on how to run a successful business. Here are some of the key factors you must consider in you decision to buy or sell any business, including those in the
Sales price & type of sale: This is pretty obvious. How much you are going to pay for something is going to have a big impact on the success or failure of a deal. However there are a number of other factors besides just the dollar value both parties agree upon.
Cash Flow: Another pretty obvious issue, but one that sometimes gets side-stepped when negotiating the price. It is important to understand the timing of when payments must be made. Failing to do so can crater a business before it starts. For example, if 75% of your annual revenue comes in the 4th quarter, but your loan payment is due in the 3rd quarter, you are going to be scrambling each year before your customers even start paying you.
Financing & Payment terms: This is when and how often you make payments, and at what interest rate. For example, annually for five years, or monthly for ten years. Negotiating the right payment terms will have a major impact on your cash flow. Typically the longer the payment terms, the higher the interest rate.
Taxes: How the deal is structured will have an impact on the taxes a seller pays on the deal. Are they going to realize a gain or loss on the deal? At what tax rate? The value of the tax impact is a negotiating point for both sides, because nobody wants to pay more in taxes than they have to.
Exit: You should really be thinking about when and how you plan to exit before you go into the deal. Are you planning to sell 5 years from now or pass the business on to your kids when you die.
People and Family: Running any business will take its toll on you, so whether you are running one person farm or have 1000 people working for you, it is important to realize that dealing with and managing people is part of the deal. A business needs customers (people), employees (people), suppliers (people)…you get the picture. Whether they are close family, or remote contractors, think deeply about how you plan to work with other people in your business.