Why is your business closing? You’re closing because you can’t make it, and you can’t find anyone to buy whatever is left of it. unfortunately, what I see way too much of, especially in the United States is, people retire, because they’re tired of it, and they close the doors, versus look for a buyer, or any other potential.
So, what happens to a business when it closes, if it’s just being shut down? When a business closes, you look at all the tangible assets, like your equipment, all your technology. You’re looking at furniture, and you might even own the real estate, which should have been a separate asset than the business. A lot of people screw that up and put it all in one LLC. You really should have the business and the real estate in two separate LLCs.
You look at the tangible assets, and most people that are doing it strategically, they would sell them off, even if you have a liquidation office sale at the end or sell it to other similar companies. I’ve seen dental practices sell all their dental equipment to different groups. At least do that part.
The piece that gets left behind too much is people don’t know how to sell their intellectual property or their goodwill. I think that’s actually the higher value because your database of monetized customers is, I think one of your highest assets. And, too many, I’m going to call them old school business folks, they don’t know how to sell that. And they don’t know how to sell their intellectual property, their trademarks, or any of their patents. That is a completely different sale, and honestly legally, it’s a different team that knows how to sell tangible assets, versus your intangible assets. You’re going to need two teams as you’re looking at closing.
For all of those who may want to buy one of the companies, here’s what’s interesting, a lot of people go through brokers, or they just close them with a local business contracts lawyer. There are very few companies who will actually, in real estate, put out For Sale signs, because what happens the minute you put that For Sale sign out that you’re actually going to be closing your doors, everybody knows to come in for discounts, but they’re finding a new place to shop really fast, and they’re leaving you too soon in a period where you need them to come in and shop, which means your marketing has got to be way higher.
So, that’s why you don’t see businesses having For Sale signs. They typically go to a broker, they go to a lawyer, and they just close it down. I think they should sell the whole thing and get prepared to sell versus just shut down. It’s way more lucrative. If you do this cool thing called keep a tail, then you continue to get cash flow for the next few years. So, you don’t sell it completely, you sell maybe 80-90 percent of it, and keep the rest.
How do you maximize the value of those assets? I like to sell them independently, or to one big roll up. So, again, you’ve got to have some really smart business folks around you, as you make these decisions. If you built the business, typically you’re not going to be the one that knows how to sell it well. Don’t be afraid of business brokers. Most business brokers I know help you get 30-40 percent more on a sale, than just you trying to figure it out, and put some little ads in the local paper.
The one thing you have to look at in no maximizing your assets is, if you have creditors. Your creditors are going to be aligned for inline for any cash that you owe them. So, if you know you’re closing, and you can’t pay them all off, and take some profit out on the other side, I would start negotiating down that debt right away. This is when you go to debt reconsolidation folks and have them try to pay down the debt for 10-20 cents on the dollar, way before you announce the sale. So, you get the debt off the books, and you have what’s looking like a healthier business. But if you go to sale, and you have all this debt, no one’s buying your debt.
The mistakes people make is, number one, you don’t offset that debt, and get the debt out first. And if it’s really upside down, you need to bring in some experts. Because the other way you’re going to go, in the assessment of how to sell or just close is, if the debt looks too big, then let’s go the other way and sell off key assets, like the monetized database, any intellectual property, trademarks, patents. Sell those first, then you have a very dilapidated business. You’re not going to sell it for a lot, but you also will then avoid a lot of taxation.
The other big strategy is, when you sell, do not take a one-time pay. If you can do it, be paid out over the next year or so, if the buyer is viable, and you know that financially they can do it. Now, if they’re going to financially pay you on the success of the business, and it’s sort of broke, and you’re expecting to pick it up and then pay you later, I wouldn’t do that.
So, think about some owner finance, owner carrying on the sale. It’ll minimize your tax burden, and if you really are worried about the big tax at the end, because that’ll be a big capital gains hit, think about a multiple corporate structure. You put a C Corp in, and ideally that with the LLCs and S Corp, will completely dismantle the tax at the end of the sale. You have to do that three years before you sell or close.
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