The key issues that influence a company’s value when there are two working owners:
1. What is the profit level of the business after allowing for the second partner’s salary Sellers Discretionary Earnings (SDE)?
2. Do a few customers dominate the sales? I see some great companies where one customer is over 50% of the sales volume. In this case if the biggest single customer left, the company’s value would collapse? Read more
Fully half of all the businesses that are sold are retail food storefronts. This includes franchise, non-franchise, sandwich shops, bagel shops, coffee shops, as well as good old fashioned sit-down restaurants. Half!
I noticed a trend about 20 years ago. The trend went from undeclared cash payroll to employees being declared on the business books. It started with automotive businesses and then moved into restaurants. It now can be found in many industries. The construction industry still has not caught on to this interesting trick yet. They still operate on many undeclared cash wages. Read more
When you buy a seller’s corporation, few to none of the benefits accrue to you but there are a lot of negatives. Lets start with the benefits.
When you buy stock in a corporation you lose tax benefits plus take the assumption of all liabilities known and unknown, and warrantee claims that may come in after the purchase.
Payroll taxes, sales taxes, and income tax can show up years later and the corporation is responsible to pay them. Even accrued vacations are a liability that a buyer and seller may not even think about. You inherit the corporation’s workers compensation policy history –good or bad. There are too many contingent liabilities that no one is aware of when taking over a corporation.
Taking over a corporation is also a very poor income tax move. You cannot take depreciation on the assets of the company you bought. You must continue the greatly reduced depreciation that the corporation already was taking. Only when you sell the corporation’s stock do you get the benefit of writing off what you paid for the company. The tax consequences alone are enough to avoid buying a seller’s corporation.
The only time you should ever consider buying the corporation is when there is a government license (like a recycling license) or customer contracts (like an insurance contract for body shops) that are in the corporation’s name. Then you might have to buy the seller’s corporation. It is much better to apply for a new license in your name as buyer and borrow the seller’s corporation only until that new license comes through. The seller’s corporation would not have any assets in it by that time because you bought all the assets out of the corporation at the close of escrow.
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Recently, I was sent a report of, “Which Business Types Were The Top Sellers,” based on the information provided by one of the top business-for-sale web sites, in the world. Read more
In the Rodgers & Hammerstein movie and play ‘South Pacific’ there is a song called “Happy Talk”The words to that song go something like this (feel free to sing along if you know the tune):
When a business sells a product or service and doesn’t declare the income on its financial statements, you might assume that if you add that same amount to the owner’s profit at the bottom of the profit and loss statement you will have an accurate number. The truth is that when you change the gross income or gross sales number other numbers are also changed.
The sales tax expense number also goes up. Part of that cash, not declared, belongs to the State Board of Equalization as sales tax collected and not paid.
In some cities the business tax is tied to the gross income. So when you have cash income not declared the tax would be higher. I am a member of the Southern California Business Brokers Association. One of our members moved out of Los Angeles because the city sent him and his agents tax bills totaling over $60,000, because his firm earned real estate commissions in the City of Los Angeles. The city of Oxnard did the same thing to a broker based in Westlake Village that sold a business located in Oxnard. They wanted $5,000 as a city license tax for doing business in Oxnard.
Creative Commons Attribution: Permission is granted to repost this article in its entirety with credit to Business Buying Services and a clickable link back to this page.
California Licensed Real Estate Broker #00529559
Certified Public Accountant (CPA) # 106752
Certified Fraud Examiner (CFE) #594927
Professional Certified Business Broker (CBB) designation
Kismet Business Brokers
PO Box 2734, Seal Beach, CA 90740-2734
Phone: 805-428-2063
Fax: 562-446-0575
