June 2010
In This Issue:
Purchase Contract or LOI?
By CW Wilson
You found a business! So what is the next step?
At the time that a business has been found that suits the buyer’s requirements, an offer in the form of a purchase agreement or a letter of intent (LOI) is prepared.
So what is actually the difference between the two?
A purchase contract is a detailed agreement as to the acquisition of the business which includes all the terms, conditions, representations, warranties, trade names, non-compete conditions, inventory, furniture fixtures & equipment, leases, possible carry backs, training, etc. Normally the agreement sets the time limits for due diligence, which is buyer’s inspections of all aspects of the business, and sets the deadline for certain events to take place so that the change of ownership can be fulfilled within the agreed time period. With the signing of the contract a deposit is placed into an escrow account, which usually remains refundable to the buyer until the agreed upon due diligence time has been reached and all other contingencies have been removed.
A letter of intent is buyer’s expression of intent to purchase and seeking an acceptance from seller which is usually a “non-binding” agreement. The offer simply lays out some of the conditions of the acquisition such as price, general terms and anticipated time frame to complete the transaction. It also calls for additional action and presentations of documents and in many cases it will ask for a holding period so that other offers cannot be accepted. Once the initial terms, as per the letter of intent, have been fulfilled a purchase agreement will be prepared which lays out the detailed terms and conditions of the transaction.
So, why use a letter of intent first, instead of a detailed purchase contract?
A letter of intent is usually used with large multimillion dollar transactions. Those transactions can be very complicated and all details need to be carefully analyzed before writing the final purchase contract. In those types of transactions we frequently work with buyer’s and seller’s attorneys.
With smaller transactions, letters of intent are not acceptable to most sellers since they are perceived as not being serious. Generally the seller will be reluctant to remove the business from the market unless an offer has been presented through a purchase agreement. From the buyer’s point of view a purchase agreement, if properly prepared, still would provide them with a due diligence period and other important contingencies.
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Sell My Business While I Am Doing So Well…Are You Nuts? By Lucien Pillai
My business is the best it has ever been and you want to know whether or not I would consider selling my business? Give me one good reason why I’d even be contemplating it!
This is an all too frequent response that I have received over the years when talking to a prospective client whose business is doing extremely well. For most this is a normal reply but then you need to consider what your goals for the future are. Are you going to continue working until your dying days or do you plan to enjoy the fruits of all your years of hard work? A lot of you have already made plans to eventually retire, but selling your business in the height of its existence, especially when you still have many more years to go, is for many unthinkable.
So why consider selling when times are good? The answer is simple; maximum profitability!
What would be more valuable to a buyer seeking to acquire a business? A business that is able to make ends meet, or a business that has strong sales and healthy profit margins? This is not a hard one! Obviously a business that is doing very well holds a higher value in the eyes of an investor than one that is not. It’s a numbers game, as we like to say. If the profit and loss statements can clearly show that the profits are indeed there and that there are no onetime events like a short lived fad, then the potential buyer will not hesitate to offer a very fair price for your business. Another important factor is the confidence that the seller projects about their business by showing the buyer that he or she is more than willing to consider carrying a note on the business. Not only will this convince the buyer that he has a good opportunity here, but the seller can use the note as a tool to negotiate the best possible deal for him or herself, which could consequently provide for a higher price and tax benefits.
Many times the seller is so focused on the success of their business that they do not to see beyond their current short-term goals, and thus run the risk of missing the opportunity to maximize the profitability of their business. If your business is doing well and you have plans to retire sometime in the future, then let us help you figure out what your business might be worth, and at the same time, we can discuss what you could do to prepare your business for an eventual sale.
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Tax changes? What a surprise!
By Jackie Pillai
Here are a few of the changes taking place.
Personal tax info:
While the tax rate for each tax bracket is identical to last year’s, the tax brackets are very slightly wider than last year. The tax brackets range increases from about $50 to a few hundred dollars as the income level increases.
Standard deductions and personal exemption amounts remain the same as last year for many. Unfortunately, they are not increasing like they have in the past. Higher income earners don’t lose any of their itemized deductions and personal exemptions but in 2011, they can expect their write-offs to be decreased somewhat. Their itemized deductions other than medical expenses, investment interest and casualty losses will have to be cut by 3% of the amount that exceeds an AGI of $170,000. For their personal exemptions, 2% reduction will occur for each $2500 of AGI over about $170,000 for single filers, $255,000 for married filers and $210,000 for head of household filers.
Business tax info:
Estimated tax relief for the small business owner ends. No longer can they base estimates for 2010 on 90% of the prior year’s taxes. The usual 100% or 110% benchmarks apply.
Late filing penalties for S corporation and partnership returns went up from $89 per owner/partner per month to a whopping $195 per owner/partner per month that the return is late! Ouch! So make sure these are filed on time!!!
The standard mileage for business driving has dropped 5¢ to 50¢ a mile. For moving and medical miles, the rate is 16½¢ a mile and charitable miles remain at 14¢ a mile.
Some other things to know about:
Social Security has no cost of living hike this year. It remains at last year’s limit of $106,800.
Medicare Bart B premium remains the same at $96.40 per month for most this year. However, it increases to $110.50 per month for those that signed up for Medicare Part B in 2010. Premiums can be even higher for upper income seniors.
Annual limits on deductible pay-ins to health savings accounts rise in 2010. Maximums increase to $3050 for single coverage and $6150 for family coverage. HSA owners who were born before 1956 can put in an additional $1000.
Tax free EE bonds used for education have higher income caps now. The limits apply in the year the bonds were cashed, not bought, and the purchaser must be age 24 or older. The exclusions start phasing out at $70,100 for singles and $105,100 for married couples. The special break that students in the Midwest flood zone disappears for 2010
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