Avoid these six mistakes in selling your business

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Most entrepreneurs eventually think about selling their businesses, whether as a prelude to retirement or to pursue other activities. In doing so, they often underestimate the effort required for a satisfactory outcome and overestimate the value and salability of their enterprises. If you’re contemplating selling, here are some common mistakes to avoid.

1. Overestimating the value of your business.

Your price should be based on the fair market value of the business in its current form. Buyers won’t care about the work you’ve put into building your business or your unique vision for its future.

2. Failing to account for the nature and make-up of your business.

The values of most businesses proceed from a mixture of variables. If your business includes significant equipment, real estate, intellectual property, or other such assets, their values should be separately established before being factored into the overall price. If you’re selling a service or professional firm, much of its value may depend on the experience and skills of your managers and employees. In such a case, the price may vary according to the expected retention of key individuals.

3. Failing to base your sale price upon independent appraisals.

Even if you think you know the value of your business, you should obtain two or more outside appraisals from professionals familiar with your industry. If the appraisals conflict with your opinion, they’ll provide a much-needed reality check. If they confirm your opinion, they’ll become a useful sales tool.

4. Not hiring a professional business broker to handle the sale.

Owners are often too personally invested (and/or eager to sell) to effectively negotiate sales of their businesses. A broker familiar with your type of business will know what issues are important to buyers and what characteristics to emphasize or de-emphasize, without becoming emotionally involved.

5. Neglecting to work with the buyer to ensure a smooth transition.

Nobody likes being thrust into unfamiliar circumstances without preparation. Notifying your managers, employees, and customers in advance and doing all you can to allay their concerns will serve your own best interests, as well as being the honorable thing to do. Discontent on the part of any of the affected parties could result in conflicts, reduced revenue for the buyer, withheld sale payments, and litigation.

6. Being unwilling to help finance the sale.

If you’re unwilling to take back a note, your sale price is limited to the buyer’s cash and ability to obtain outside financing. At best this could limit the number of potential buyers, and at worst it could limit your sale proceeds. (Conversely, if you finance too much of the sale price, you’ll increase the risk of default.)

Selling your business is too important to attempt without professional help. If you’re considering selling, call us for an appointment to help formulate your plan.

Here are tax breaks when you do charitable work

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If you do volunteer work for a charitable organization and have not kept track of your out-of-pocket expenses, you might be passing up an excellent opportunity to lower your tax bill. To qualify, your unreimbursed expenses must relate directly to the charity, and you must itemize your deductions on your tax return. Here is a brief rundown of some possible deductions.

* Volunteers may deduct the cost of phone calls, postage stamps, supplies, and other out-of-pocket costs incurred in their volunteer work. For volunteers who are required to wear a uniform, the cost of buying and cleaning uniforms is deductible if they are unsuitable for everyday wear.

* The cost of your time, no matter how valuable it may be, is not deductible. That’s true even if you would normally be paid for the type of service you contribute. For instance, accountants who perform free consulting for charities can’t deduct what they would normally charge for their services.

* Using your car in connection with volunteer work can earn you a deduction. The standard mileage rate for volunteers who use their own cars is 14 cents per mile. Alternatively, you may deduct your actual unreimbursed expenses for gas and oil – but not maintenance, depreciation, or insurance. Either way you choose, related parking fees and tolls are deductible as well.

* If you travel overnight for charitable purposes, your expenses are deductible as long as they are reasonable in amount and not connected with personal activities or any element of recreation.

* Special rules apply to conventions. Travel and other out-of-pocket expenses related to attendance at a convention for volunteers are deductible only if you have been chosen as a delegate to represent the organization.

Finally, just remember that it is up to you, the volunteer, to substantiate your deductions. If you take these deductions, you should be prepared to show the IRS the connection between the costs claimed and the charitable work performed.

 

Many of us are living close to our financial limit these days.

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Many of us are living close to our financial limit these days. We pay our bills on time, but there’s not a lot left over. But that’s a dangerous situation. If things go wrong, your financial situation can change very quickly from adequate to critical. Without a cash reserve, you could find yourself in serious trouble.

Imagine this situation. You’re driving home from work when a motorist runs a red light and smashes into your car. You’re rushed to the hospital with a broken leg that must remain in traction for several weeks. You quickly use up any sick leave from your job and your paycheck dries up. Luckily you have basic health and car insurance, but the deductibles and co-pays quickly add up to thousands of dollars. Meanwhile the mortgage and credit card payments are coming due, and you find yourself slipping into arrears.

It sounds grim, but it can easily happen. Natural disasters or a downsizing by your employer can have similar results. And when things go wrong, often several things go wrong at the same time. That’s why it’s a good idea to build a cash reserve of at least three months’ living expenses.

Invest your reserve in a safe, liquid account. Consider investments such as a bank CD, a money market fund, or a very short-term bond fund. Make sure you have easy access to the funds without losing too much interest. And once you’ve built your fund, avoid temptations to raid it for nonessentials.

It may not be easy to build a reserve, especially if you’re barely paying your bills now. But you’ll never get there unless you try. Consider setting aside your tax refund or your next bonus, or set yourself a monthly saving goal. Perhaps you give up one espresso a day, eat at home instead of a restaurant one evening a week, or make your own lunch instead of eating out for a month. However you do it, and however long it takes, you might one day be very grateful that you made the effort.

Delaying retirement affects benefits and taxes

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n today’s economic environment, you may decide you have to work beyond the “normal” retirement age. Here’s how extending your work life can affect your taxes and retirement benefits.

“Normal” retirement age is not a fixed number. For social security purposes, the “full” retirement age threshold ranges from 65 to 67, depending on your birth date. However, you can elect to start receiving lower payments as early as age 62, or you can maximize your benefits by forgoing them until you’re 70. Once you reach age 70, there’s no incentive to postpone your benefits further since you’ll already have reached your maximum.

* Earnings limit

If you’re working, you probably should forgo the early payment option. Benefits received before full retirement age will be reduced by $1 for every $2 earned over an annual limit (currently $15,120). However, you will receive a compensating increase when you do reach full retirement age, and your payments will not be reduced thereafter no matter how much you earn.

* Taxable benefits

Whether or not you draw benefits, you’ll continue to pay social security and Medicare taxes on any income you earn from wages or self-employment. Up to 85% of your benefits may become subject to income tax, depending on the amount of your other income.

* Medicare

Medicare eligibility begins the year you reach age 65. The program encompasses four types of coverage: Medicare A (hospital insurance), Medicare B (general medical insurance), Medicare C (Medicare Advantage), and Medicare D (prescription drug coverage).

It’s wise to sign up for Medicare A as soon as you’re eligible. There’s generally no cost, and the program provides supplemental coverage even if you’re already insured at work. Medicare B and D are neither free nor mandatory, but the monthly premiums are reasonable, and either may be used as a stand-alone program or in conjunction with a private plan. If you have “creditable coverage” at work (i.e., coverage that’s at least as good as Medicare), you can postpone signing up for Medicare B and/or D until you’re no longer employed.

Your employer’s plan also may offer Medicare C, which provides for private programs administered under contract with the government. These plans typically merge Medicare A and B benefits with other coverage.

Working beyond retirement age can require several complex decisions. Call us for help with planning the outcome that’s best for you.

Great Tips – find one that you can implement today!

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Summer is a good time to do business entertaining. Meet the rules and you can deduct 50% of the cost.

If you and your spouse work, the cost of sending your children to a summer day camp may qualify for the child care credit.

Combine business and pleasure on a trip this summer and you can deduct the travel costs and other business-related costs.

The number of days you use your vacation home affects the tax deductions you can take on the property.

If your boat or recreation vehicle has sleeping space, a bathroom, and cooking facilities, it might qualify for tax deductions as a second home.

Before you accelerate payments on your home mortgage, consider other uses for that cash. Do you have other higher interest rate loans?

Document money transactions between you and your company (salary, rental payments, loans) as you would with an outsider.

If you have self-employment income, consider setting up a “solo” 401(k) or a Simplified Employee Pension (SEP).

Your smart phone may contain more personal financial information than your desk top computer. Protect it from criminals who “phish.”

Start saving early. Save 10% from every dollar. Those who start at age 25 have nearly double the $ at age 65 over those starting age 35.

$500 per month invested for 40 years ($240,000) will accumulate to $760,000 at 5%. Don’t wait to start saving.

It is common for those who earn $50,000 per year to spend it all. Sadly, most of those who earn $100,000 also spend it all.

Do you think you can’t save 10% of current earnings? Suppose you lost your job and the new job paid 10% less. Start saving 10% NOW.

Borrowing from your company retirement plan will have no tax consequences if set up properly and repaid on time.

Don’t buy or start a business outside your area of expertise. Many a family inheritance has been wasted while learning a business.

If you are planning to sell business or investment property and acquire another, consider a tax-deferred exchange. No current tax bill.

If you donate a vehicle worth over $5,000 to charity, an independent appraisal is required by the IRS.

Don’t decide on either a lump sum or a retirement annuity until you have explored all the options in light of your financial condition.

Woman-Owned Small Businesses are BIG Business

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If you are a woman-owned enterprise, take heart that you are not alone! There are nearly 6.5 million women-owned businesses generating a reported $940 billion in revenue, according to the 2009 U.S. Census report. For many women entering the small business ownership ranks, the reasons are as varied as the women themselves. Small business ventures like Mary Kay Cosmetics which recently posted a $2.5 billion in lipstick, eyeshadow and other beauty sales in 2010 even in this two-and-a-half year long recession. Large corporate businesses like Jill Blashack’s Tastefully Simple are also making a significant mark on the business world. One way to further highlight your small business enterprise is to undergo a woman-owned certification process. There are pros and cons to certification and depending on your business type and commitment level, you may want to weigh your options before you decide to certify.

What is certification?

Certifying a business as woman- or minority-owned can provide additional opportunities for growth that may not otherwise be available through more traditional business channels. If your business would benefit from access to large national suppliers or government contracts certification may be in your future.

With the signing of Executive Order 13360, an increase in federal contracting and subcontracting opportunities were made available for both veteran service-disabled and woman-owned businesses. Many government contracts have a portion of their work earmarked for this population of business owners and even give preference to this smaller subset when contracted dollars are allocated. That means that there are many government contract dollars just waiting for your small business to fill a need. In order to qualify for these contracts, a woman-owned enterprise must complete several steps including an application and government contract training course. These steps help to ensure that you and your business are ready to manage the work required including the substantial paperwork that comes with a government contract.

Mounds of Paperwork

With any government contract also comes the ‘bureaucratic red tape’ associated with government work. The process can be intimidating at first, so collect your resources, attend the government sponsored courses and then evaluate if government contract work is a good fit for your small business.

Steps to Certification

Like any reward, the process to achieving success is often a difficult one. Obtaining woman-owned certification is also a lengthy process, but can be highly rewarding in the end. Here’s a brief list of what is required:

 

  • · Business must be woman-owned and led. The owner must be female and hold at least 51 percent interest in the company.
  • · The woman-owner must be active in the daily operation of the business. This ensures that a man doesn’t put his wife on the masthead only to be left to running the company himself. You can demonstrate involvement by providing documentation with regard to the daily operation, hiring, firing and community duties of the business.
  • · The woman-owner must be a U.S. citizen and in business for a minimum of six months. The longer the business is in operation the better for consideration (usually several years with a solid track record).

It’s a marathon, not a sprint.

If your business can clear the first three bullet points, you’re in a good position to start the certification process. The entire application from start to approval can take several months to up to a year to complete and receive approval. Stay organized and keep a duplicate set of all records so that you know where you are in the process and can readily work on open issues and documentation. As a safety precaution, store your second set of documents off-site, so you’re covered in the event of a workplace catastrophe.

What are the types of certification?

Women Business Enterprise Certification (WBE) – A national certification awarded by the Woman’s Business Enterprise National Council (WBENC). This is a lengthy application process requiring the woman business owner to not only demonstrate 51 percent or greater ownership in the business, but also a full set of business financial statements (prepared by a third party accountant), copies of rental agreements, equipment rental or purchases, real estate holdings and even records like bank signature cards. There is a $300 application fee.

HUB Zone – The SBA’s Historically Underutilized Business 8(a) program called the HUB Zone program, is based on the geographic location of the business’ primary site. The mission of the program is to serve economically disadvantaged and challenged communities. Each state has a hand in running the program, so check with your state’s Minority Business Development center through the SBA to find details.

State and Local Programs

Again, each state runs their own version of the national woman-owned program. Details for application and levels of certification can be found on the individual states’ web sites. Using the state-level application can be cost-effective and far less time consuming if you’re only looking to expand your business opportunities within your state. For businesses in large states like New York, Texas and California, this is often a great option and way for a small business to explore contracting on a more limited scale.

Additional resources:

WomenBiz.gov – The hub for learning the ins and outs of navigating government contracting. Start here to learn the basics and see if certification is right for you.

NAICS – Obtain the North American Industry Classification System (NAICS) for your small business’ industry or service type. Once you have these numbers, you can then apply to Dun & Bradstreet for a DUNS number.

Central Contractor Registration – Primary database for becoming a registered U.S. Federal Contractor and for government contractors to search for qualified subcontractors like you. Note: You can also obtain your DUNS number here.

Defense Contractor – If your small business is seeking work with U.S. Department of Defense contracts, you’ll need to register ith the On-line Representations and Certifications Agency (ORCA). This new online registry will gain your business access to contracts and awards from the DOD. Data can be entered here once for eligibility to all government contracts.

Federal Business Opportunities (FBO) – This site gives you access to the Procurement Technical Assistance Program, which is a resource at no or low cost that provides assistance to businesses in marketing products and services to federal, state and local governments.

There are many ways a woman or minority-owned small business can expand their markets and explore government contracts. First and foremost on the list is to have well organized, accurate and timely small business finances so you can prove your business is a good risk that is ready and capable of the work. Talk with a us to see if your small business is ready for the challenge.

Copyright Information 2011 Professional Association of Small Business Accountants
Presented By: David Bradsher, CPA , a PASBA member accountant, located in Falls Church, VA

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David Bradsher, CPA is a Washington DC / Northern Virginia area CPA who works with small business owners and non profit leaders on a monthly basis to provide them with guidance and advice on how to grow their organizations, minimize their tax liabilities and increase their bottom line.

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