Robert Newcomer-Dyer

Learning how to value a business is the process of calculating what a business is worth and could potentially sell for. One common method used to value small businesses is based on seller’s discretionary earnings (SDE). This method can be used to value a business for sale as well as raising capital. To make sure you maximize your payout when selling your business, it’s important to work with an experienced business valuation provider such as . For $495, Guidant’s specialists will supply you with a detailed valuation report, complete with a financing assessment and an in-depth industry analysis. Take advantage of this vital information to sell your business for the right price. How to Value a Business Yourself You can calculate the value of your business manually by following the three steps below, taking seller’s discretionary earnings (SDE) and applying an industry multiple. This is a simple method that can be applied when learning how to value a small business, and is appropriate for many small businesses. Other valuation methods exist, and may be more appropriate depending upon the complexity and structure of the target business. Completing a business valuation on your own can be complicated, and the results may not match the actual price the business sells for. For a simple estimate regarding the potential value of your business in a sale, you can use our free business valuation calculator. It will estimate the value of your business based on your industry, current sales, and current profit. The three steps to determine the value of a business are: 1. Calculate Seller’s Discretionary Earnings (SDE) Most experts agree that the starting point for valuing a small business is to normalize or recast the business’ earnings to get a number called seller’s discretionary earnings (SDE). SDE is the pretax income of your business before non-cash expenses, owner’s compensation, interest expense and income, and one-time expenses that aren’t expected to continue in the future. Small businesses report expenses on their tax returns with an eye toward reducing their tax burden. This means you likely claim many deductions that lower your business income on your tax return. For this reason, using income numbers from a business’ tax return can underestimate how much revenue the business actually produces. Why Seller’s Discretionary Earnings Matters SDE gives you a better idea of the business’ true profit potential by calculating what the business’ earnings would be with a new buyer. This is done by adding back in expenses listed on your tax return that aren’t necessary to run your business. This includes your salary as the business owner and any one-time expenses that aren’t expected to recur in the future. Items that are added to net income to calculate SDE include: Your salary, or total salary of all owners Any perks you or other owners receive (like personal travel or personal vehicle payments) Family members on payroll holding non-essential positions Non-cash expenses such as depreciation and amortization Leisure activities, such as business golf outings Charitable donations Any personal expenses, like the purchase of a personal vehicle, that were noted as expenses on the business tax return Business travel that’s not essential to running the business One-time expenses that are unlikely to recur after the sale of the business, such as the settlement of a lawsuit In order to get an accurate valuation, it is important that key figures such as those listed above are factored into the equation. Many business valuations experts recommend using a business valuation worksheet to make sure that critical information is not being left out. 2. Find Out Your SDE Multiplier Businesses typically sell for somewhere between one and four times their SDE. This is called the “SDE multiple” or “multiplier.” Think of the industry standard multiplier and the specific business multiplier as two separate numbers, one giving you a general value based on industry averages and another giving you a more specific value based on variable factors of each individual business. Some of the factors that make finding the right SDE multiple difficult are: Industry Geographic trends (market risk) Company size The business’ tangible and intangible assets Independence from the owner (owner risk) And many other variables. The biggest factors influencing the SDE multiple are usually owner risk and industry outlook. If the business is highly dependent on you or another owner, it cannot be easily transferred to new ownership and the business’ valuation will suffer. If you’re selling a business in an industry or area that is expected to grow in the near future, the SDE multiple will be higher. You can find out the approximate SDE multiple to use by looking at BizBuySell’s media insights quarterly report. BizBuySell provides multiples for different industries based on reported business revenue and cash flow. For a more personalized estimate of the multiple, you can also consult a business broker or appraiser. 3. Add Business Assets & Subtract Business Liabilities The final step of how to value a business is to account for business assets and liabilities that aren’t already included in the SDE. Most small business sales take the legal structure of an asset sale, which means the purchaser is buying the tangible and intangible things that make the business what it is. Typically the seller retains liabilities, but deal terms will vary from sale to sale. Tangible Assets Tangible assets are physical goods owned by the business that you can put a value on. Some examples include real estate (if the business owns any property), accounts receivable, and cash on hand. These are generally not included in the SDE multiple. All tangible assets should be added into the valuation separately (as shown in the examples below) if you are purchasing them. Intangible Assets Intangible assets are non-physical goods that have a value for a specific business purpose, like reputation, trademarks, patents, and goodwill. These assets are included in the SDE multiple because they are typically only sold if your business’ assets are sold. Liabilities A business’ current liabilities are debt or other obligations the business must pay in the future. When determining the value of a business, it’s important to factor whether the business’ liabilities will transfer with the sale or be settled by the selling owner. An asset sale is typically structured so that the seller pays off the business liabilities with proceeds from the sale. However, it gets more complicated when discussing things like an open line of credit facility that the business needs in order to continue operations. One way to determine what the potential liabilities are for a business is to run a business information report through Dun & Bradstreet. This can be purchased on virtually any company by any party for $121.99. The information on a business information report includes: Current debt How often the business currently pays its suppliers on time Any debt the business is past due on It’s an inexpensive way to get information about the business or to confirm that you’re not missing any important liabilities. It’s important to note that this may not include all liabilities, but it should give you a good estimate. Final Business Valuation Formula Now you can distribute all of your balance sheet lines into the appropriate category and use the formula below to come to an estimated business value: Business’ Estimated Value = (SDE) * (Industry Multiple) + (Real Estate) + (Accounts Receivable) + (Cash on Hand) + (Other Assets Not in SDE or Multiplier) – (Business Liabilities) How to Value a Small Business Example For an in-depth example of how to value a small business, we’ll walk through comparing the value of a family restaurant versus choosing a franchise, which will better illustrate how a business valuation works. Comparing a franchise to an independent restaurant allows us to demonstrate how risk can factor into business valuation. In many industries, an independent business will have more risks than a franchise and, as a result, will receive a lower valuation. Business 1: Joe’s Family Restaurant and Cafe located in Missouri Annual revenue: $528,747 Annual SDE: $80,799 Real estate: $234,000 Furniture, fixtures, and equipment (FFE): $31,950 Inventory and stock: $3,500 Liabilities: $40,000 Business 2: Subway franchise located in New Jersey Annual revenue: $373,200 Annual SDE: $76,272 FFE: $150,000 Inventory and stock: $4,500 Liabilities: $30,000 Calculate an Average Value to Get Started Once you have the SDE for your business, you can use it to calculate a ballpark value by multiplying SDE by a business sale price multiplier. Using statistics from restaurants sold between 2014 and 2017, bizbuysell.com determined that the average multiplier for the restaurant industry is 1.98. Using this figure, we can calculate an average value based on industry norms for Joe’s Family Restaurant and Cafe and for the Subway franchise: Joe’s Family Restaurant and Cafe: ($80,799 x 1.98) = $159,982 Subway franchise: ($76,272 x 1.98) = $151,018 If you stopped here, you would think that Joe’s is worth more than Subway. There’s more work to be done, however. The multiplier that you use, and hence the final valuation, will depend on multiple factors. Ironically, the final business valuation is only the beginning of the process of selling your business -- there are still more steps like finding and vetting buyers, structuring your deal with the buyer, preparing documents, negotiating terms and more. Try outsourcing to a business broker so you can focus on running your business while they focus on selling it. Business brokers, like , can help you value your business, maximize sale price, and expedite the process. Click below to schedule a free consultation today. Factors That Influence the Multiplier/Base Value In most cases, small businesses are given a business-specific multiplier of between one and four. The multiplier can be impacted by your geographic location, the risk of your industry, or a number of things related to your business. Here are the main factors that influence a specific business’ multiplier/business value: Assets Assets add value to a business. The more assets a business has, the more it will be worth on the market and the higher the multiplier that will be used for the valuation. Assets generally include items that can be sold and converted to cash. Generally, equipment being financed with a capital lease are considered assets, while equipment financed through an operating lease are not. Tangible Assets Tangible assets refer to all of a business’ material assets, and won’t typically have a major effect on your multiplier. However, you might get a higher multiplier if you have recently purchased new equipment. Let’s say a restaurant has just purchased a new set of fryers and stoves. That means that equipment will not have to be updated in the near future, cutting down on future costs and which can raise the current value. This includes but is not limited to: Furniture Fixtures Equipment Real estate Inventory (sometimes included in the asking price, and sometimes priced separately) Company vehicles It is important to take into account the asset’s depreciation when assessing the value of many of these physical assets. Equipment that is near the end of its economic life may be worth very little to the buyer. In some cases, assets may be seen as a liability that the new owner does not want to take on, like damaged or outdated furniture, fixtures, and equipment that require replacement. Real Estate & Lease Terms The property or land that your business occupies or owns has a large impact on a business' value. If your business leases a building, the amount of time remaining on the lease is an important factor. If your lease ends in less than three years, it could lower the multiple of your business because the new owner will have to renegotiate the lease. If a business actually owns its own property and building, then the value of that real estate is estimated separately and added to the SDE value of the business. Some small business owners hold on to the ownership of real estate when they sell their business and agree to lease the property back to the new owner on a long-term lease agreement. Subway Franchise Subway’s lease term still has four years left on it, so the value is not significantly affected. Joe’s Restaurant In our example, Joe’s restaurant owns its own property and buildings estimated at $234,000 in value. That number is added to the value of the final SDE x multiplier value. Intangible Assets Intangible assets are all of the positive aspects of the business that are not material in nature and are the biggest influencer of a business’ individual SDE multiplier. A wealth of intangible assets means a much higher multiple. A lack of non-physical assets means a much lower multiple. This is because the value of intangible assets often determines whether or not your business transitions successfully to a new owner. The following are some examples of a business’ intangible assets: Brand Reputation Independence from the current owner Recipes Trademarks Copyrights Patents In many industries, buying a franchise is considered a much safer bet than buying an independent restaurant because of the wealth of non-physical assets that inherently come with a franchise. You get credit for the brand, for example, which could be recognized nationwide, like Subway. Subway Franchise Non-physical Assets Some examples of Subway’s non-physical assets are: Brand value History of financial success Informed marketing strategy Standardized operating procedures (SOPs) The intangible assets above benefit every Subway franchisee, regardless of location, demographic, or owner charisma. They could be more highly regarded in different geographic locations, but there’s real value in using the brand everywhere it’s recognized. Joe’s Restaurant Non-physical Assets Some examples of Joe’s non-physical assets are: 35 years of success Loyal local customer base Good reputation in the community The fact that Joe’s restaurant has been relatively successful as a business for 35 years is great. However, there is no guarantee the restaurant will be successful once Joe leaves. That is a big risk to a potential buyer because of these risks: Future Prospects of the Business Industry and geographic trends also influence how to value a business. This is often referred to as “market risk.” If an industry is booming and trending toward your particular business, the higher your multiplier will be. In the same way, the more the population growth and popularity of a business area is growing, the higher your business’ specific multiplier will be. Subway Franchise In general, the fast food industry remains stable due to its convenience and low cost compared to full-service restaurants, making it unlikely to suffer a significant drop in patronage. Fast food is trending towards healthier food, but this is a major part of Subway’s brand recognition. As far as industry trends are concerned, Subway has good prospects. Geographically, New Jersey is staying pretty steady economically. Given this information, Subway’s multiplier is probably above the industry average of 1.98. However, specific geographic regions within a state can often have very different trends than the state as a whole, so it is also important to research local area trends. Joe’s Restaurant Although Joe’s restaurant has had success in the past, the future might not be as bright. David Coffman of Business Valuations & Strategies PC explained that restaurant success is trending away from independently owned businesses and towards franchises due to their brand recognition. That makes the industry outlook shaky, at best. Geographically, Missouri is actually doing pretty well, with dropping unemployment rates and a rise in entertainment and leisure jobs. Joe’s business-specific multiplier might be a bit above the industry average of 1.98 due to the state’s positive economic trends, but buyers might be leery of the future business potential because it’s not a recognized brand name. Other Factors That Affect the Multiplier The factors we’ve covered above are a list of the most common things that can affect the SDE multiplier. Any number of things, from the business being in a desirable or undesirable location to the business having a diverse or narrow customer base, can affect the multiple. This is why it’s important to consult experienced professionals like Business Exits to help you get an accurate valuation of your business. Financing Eligibility The availability of seller financing also has an impact on the sales price multiplier. In nearly 80% of cases, a business has some kind of seller financing option available to the buyer. This is typically around 30% to 60% of the overall business value or purchase price. If a small business doesn’t offer seller financing, it will take longer to sell and its value is typically decreased. Customers May Start Going to Another Location Many times, local customers choose one establishment over another because they have a personal relationship with the owner. One way to measure this risk is by asking customers what brings them back, and if they would still frequent the location if it was under new ownership. Some of this risk can be managed by the exiting owner remaining on in a transitional capacity for a period of time following the sale. Older Employees May Retire Employees who were hired by Joe and are loyal to him may decide to leave when he does. If they agree to stay, however, it may only be for a short period of time (less than one year). If these employees hold crucial positions in the business, such as manager or head cook, the buyer could lose some of the most valuable team members that made Joe’s Restaurant such a success. Supplier Relationships May End or Deals May Change If Joe had relationships with his suppliers, they may have been giving him an extra good deal, like lenient credit terms. When Joe leaves, those deals may dry up, or the suppliers may see it as an opportunity to back out altogether, which means lots of extra work, effort, and time to find new suppliers. In other words, the intangible assets associated with Joe’s Restaurant are much more closely connected to you as the owner of the business, making it less likely to transfer successfully to a new owner. This is often referred to as “owner risk.” Selling a business like this requires you to get out in front of these potential problems before you find a buyer. Owner risk is one of the biggest factors influencing business value. If a business has so much owner risk it cannot survive the transition to new ownership, then all other aspects of a business’ value are pointless. Final Values/Multipliers in Our Example Joe’s Restaurant: 2.0 Multiplier Total Estimated Value: $355,598 = ($161,598 Estimated Business Value) + ($234,000 Estimated Real Estate Value) – ($40,000 Liabilities) Our business valuation expert helped us put together these values. Although Joe’s Restaurant has had reasonable success in the past, the industry is trending away from independently owned restaurants. Also, the likelihood of new owner success is questionable because Joe’s is a family-owned business with a long reputation in the local community. Nevertheless, due to Missouri’s positive economic climate, Joe’s business-specific multiplier is a little higher than the industry standard, at around 2.0. Although it does not have a very high multiplier, the real estate value actually makes the investment a pretty good one. Subway Franchise: 2.8 Multiplier Total Estimated Value: $183,561 = ($213,561 Estimated Business Value) – ($30,000 Liabilities) Subway’s business-specific multiplier well exceeds the industry average multiplier of 1.96. The industry is trending toward franchises, and since Subway is a franchise, the transition to a new owner is less risky. Considering all of these positive factors, Subway’s business-specific multiplier is almost a whole point above the average industry multiplier of 1.98. Ultimately, the estimated business value of Subway is significantly higher than that of Joe’s Family Restaurant and Cafe. Alternative Business Valuation Methods In this article, we focused on valuing a business using a multiple of SDE, which is a popular and effective method. Business valuation specialists generally prefer the SDE method when valuing a business worth $1 million or less. The SDE method is part of a larger category of methods known as multiples of earnings. In addition to using multiples of earnings, popular valuation methods include asset-based, return on investment (ROI)-based, discounted cash flow (DCF), and market value. Some alternative business valuation methods are: EBITDA Approach EBITDA is another common valuation tool used by business valuation experts, and is often used instead of SDE. Which tool to use often depends on the type of business being valued, as well as its earnings. While SDE is common for small businesses that have less than $1 million in earnings, EBITDA is a preferred tool for companies with earnings in excess of $1 million. EBITDA Key Data Points EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a line on a business’ income statement. EBITDA attempts to take certain variables such as accounting and tax strategy, as well as whether a business is financed with debt or equity, out of the equation. This is intended to standardize a company’s earnings number, which can then be used to create an EBITDA multiple off of which to base the sale price of the business. EBITDA Drawbacks Because EBITDA discounts items like depreciation and amortization, it may overstate a company’s ability to cover its liabilities and ignore needed upgrades or replacement of assets. EBITDA is not a substitute for cash flow, and cannot account for the impact made by day-to-day use of cash to cover the expense of the company’s operations. It should always be used with additional cash flow analysis, such as discounted cash flow (DCF). Asset-based Approach An asset-based approach is a valuation method that can be particularly useful for potential buyers of a small business, as assets comprise the majority of the sale price in many smaller transactions. This approach includes both tangible and intangible assets, so a retail store’s inventory would be a tangible asset, while its reputation and location might be considered an intangible asset. Asset-based Key Data Points The formula for an asset-based valuation is simple. The business or prospective buyer should take all of the business’ tangible and intangible assets and subtract all liabilities. Unlike some other valuation methods, no multiple is applied, as the resulting value represents the total value of the business less liabilities. Asset-based Drawbacks An asset-based approach is a great comparative tool that a buyer can use to compare with a seller’s asking price to judge whether or not it is realistic. A drawback to an asset-based approach is accurately identifying the value of assets. The value listed on the balance sheet may not accurately reflect the fair market value of the asset. Market-based Approach Taking a market approach to valuing a business means identifying similar businesses and their recent sales prices. A popular method for valuing home prices, it is useful for businesses where a large amount of data on recent sales exists. It can be used in conjunction with one or more other methods to determine an accurate value. Market-based Key Data Points Being able to compare sales prices is only the beginning. In terms of valuing a home, key data points would include things like square footage and the number of bedrooms and bathrooms. When valuing a business, look for similar businesses by industry, location, number of employees, annual revenue, and other factors. It may also be useful to use a figure such as the EBITDA multiple to compare the relative financial strength of each business. Market-based Drawbacks One major drawback of the market-based approach is that it is overly reliant on data, and that the quality and quantity of that data is not sufficient, particularly when valuing small businesses. While a market-based approach may work very well when comparing businesses with a high percentage of commercial real estate assets, it is less likely to yield accurate results when comparing small businesses with a large number of intangible assets. 7 Tips to Maximize Your Business Valuation Now that you understand how to value a business on your own, you’ll want to maximize that value before you sell. There are both short- and long-term tips that can help you improve your business valuation and help you get the largest sum possible for your business. Seven tips from the pros to maximize your business valuation are: 1. Prepare for a Sale Jock Purtle, Founder of Business Exits It’s important to properly prepare for your business valuation like you’re getting ready to sell your business. You can do this in many ways, such as getting a third-party certified public accountant (CPA) to help you get your books in order or paying off your debt. The important thing is that your business is ready to maximize its sale value. “It’s important to get your financials in order before you sell. Not having strong bookkeeping or accounting is, without doubt, the No. 1 deal killer when selling small businesses.” You can learn what documents to prepare for the sale of your business by getting your questions about selling your business answered in our previous article. 2. Look Beyond the Past & Provide Projections One major problem with using an SDE multiple to value a business is that the number is backward-looking. When valuing a business, it is important to look at the future, even if you’re the seller. You will want to present a case to potential buyers that your business’ revenues and profits will grow and the business should have a higher multiple as a result. A buyer also wants to consider factors that might be challenges or opportunities for the business going forward. The best way to do this is to provide projections based on how the business could perform in the future in both best- and worst-case scenarios. It could help the buyer understand what your expectations are for the business and give them a level of comfort that it will continue to perform at or better than current performance levels. 3. Review & Improve Your Promotion Strategy Katy Herr, Founder of Audacia Strategies It’s important to control the public’s perception of your company before you try to sell it. Perception is often reality in business, and a business with loyal customers will almost always sell for more than one that doesn’t. Additionally, improving your market share and promotional strategies prior to selling can give a nice immediate increase to your business’ sale price. “You wouldn’t sell your house without clearing the clutter, giving it a fresh coat of paint, and engaging a crackerjack real estate agent. Business valuations are similar. First, review your external face to the market (e.g., website, sales materials, business cards). Are they dated? Do they positively reflect your business? Take the time to make your promotional materials work for you. “If you have time to engage in a promotional strategy, it could raise the visibility of your firm and demonstrate market leadership and awareness. By elevating public perception of your business, you improve your market positioning, customer awareness, and you may also increase your new business pipeline—all important factors as you enter into a business valuation and get ready to sell.” 4. Take Emotion out of the Business Valuation Process Michael Karu, CPA at Levine, Jacobs & Company Most experts we’ve talked to say that sellers set the asking price for their business too high. Michael Karu, a CPA at Levine, Jacobs & Company, explains that this is because “sellers often think they are the only ones who can properly run their businesses.” They place too much value on the amount of time and effort that they have put into the business, even if the financials don’t support such a high valuation. Having a number like SDE to support the valuation helps take all emotion out of the valuation process and results in a more accurate estimate of the business’ worth. Plus, a valuation from a professional adds credibility to your asking price. 5. Decide If You Need Professional Assistance Before setting out to value a business, you must decide how you’re going to conduct the valuation. You can either value the business on your own (with the assistance of your accountants and attorneys), or you can hire a professional appraiser or business broker. Value a Small Business on Your Own The main benefit of valuing a business on your own is that it saves you money. The experts we spoke to quoted different price ranges for appraisals, but a good ballpark is $5,000 or more for appraising a small business that’s worth $500,000 or less. Valuing a business on your own is also faster. A professional appraisal takes two to four weeks, while you can get a valuation within a few hours on your own. Hiring a Business Valuation Company or Appraiser Although hiring an appraiser can be expensive, there are certain advantages to doing so. The main advantage is that a professional appraiser will audit the business’ financials to make sure they are correct. Plus, you’ll get a valuation that is much more accurate and personalized to your business. Having an experienced professional value your business gives you indisputable evidence of what your business is worth. While a business is only worth what someone will pay for it, this is harder for a buyer to negotiate your sales price down than it would be if you just provided a valuation you did yourself. is a reliable business valuation provider that you can count on for accurate information. For just $495, you will have professionals analyze your business financials and provide you with a detailed valuation report to make sure you sell your business for the right price. 6. Lock Up Key Employees & Contracts Brandon Crossley, CEO of financial projections software company Poindexter Make sure that you have key employees committed going forward, in case the buyer needs them to stay. This can give all potential buyers a comfort level that the company will continue to operate the way it has been. This tip is especially important if you think your business is similar to Joe’s Restaurant from our example above. “Be proactive and get letters of intent from both your key employees and your key suppliers or vendors. Don’t wait until you have a buyer or until your contracts expire. Show all potential buyers that all of your important pieces want to remain with the company for the foreseeable future.” Also, work on getting all of your key contracts locked up for as long as possible. If you have important contracts coming up for renegotiation in the next year, then try to get them extended or renegotiated now. I’ve seen deals fall apart because important contracts were put up for bid during the sales process and the seller thought it would be easy to extend. 7. Start Paying More Taxes Shawn Hyde, CBA, CVA, CMEA & Business Appraiser at Canyon Valuations While most business owners spend tax season finding every business expense they can possibly claim in order to reduce their tax bill, that may not be the right move before you value your company and try to sell it. “Consider paying more in income taxes. This has two particular benefits. One, the fewer adjustments an appraiser has to make, the more favorable a potential buyer looks at the operation. Two, businesses are sold based on a multiple of earnings. That means for every dollar on the bottom line, one may pay 40% of it in income taxes, but that same dollar may count two to five or even more times in value when selling.” Padding your expenses to lower your taxes won’t help you get a higher sale price. Kevin Vandenboss, former Business Broker, solidifies this point further, saying, “Some business owners don’t report cash sales, or charge things like vacations, meals, and even home improvements to the business. Think of it this way: For every dollar of profit you’re hiding to save 25% on taxes, you’re losing out on $2 or $3 in the value of your business.” Paying more taxes will also make it easy to show any potential buyers what the company is making right from your tax return, which is a value that’s hard to argue against. Many potential buyers analyze more than one business at a time to find the right match for them. The easier you make it for them to see the value of your business, the more likely they take a closer look at it. Bottom Line Approaching the question of how to value a business is often seen as a blend of art and science. Many business valuation experts take a multifaceted approach, combining two or more methods to arrive at the most accurate valuation. For small businesses, starting with SDE and factoring in additional analysis based on cash flow and comparable sales should return a reasonably accurate estimate of a business’ worth. When pricing your business for sale, it’s important to get it right. Price too high, and you risk scaring away buyers. Price too low, and you’re risking your own bottom line. For $495, can help by working with you to complete a financing assessment and creating a detailed valuation report along with an in-depth industry analysis.

Much of FedEx’s success is due to the over 12,000 independent business owners who own the routes and deliver and pick up packages, keeping the FedEx machine running smoothly. These entrepreneurs hire and train delivery personnel, purchase and maintain vehicles and other equipment, and oversee the day-to-day operations on their route. If you don’t have the means to buy your own FedEx route, why not consider using your retirement funds to jump-start your company? will help you invest your retirement funds into your business without paying early withdrawal penalties. Set up a free, no-obligation consultation today. Where to Find FedEx Routes for Sale FedEx routes for sale can be found a number of different ways. One common method is through word-of-mouth. Prospective route owners that have contacts in the shipping or logistics industries can tap their network to determine what routes are for sale that might be of interest to them. While FedEx lists routes for sale at its website, BuildaGroundBiz.com, at the time of writing this article only a dozen or so routes were listed. Another common method for finding a FedEx route for prospective owners that don’t have existing industry experience or contacts is through business brokerage sites. Brokers like KR Capital maintain targeted buyer lists and can notify buyers when new routes come up for sale that meet their criteria. Some of the top sites that list FedEx routes for sale are: KR Capital: Broker that lists nationwide FedEx routes for sale, with about two dozen at the time of this writing. Maintains a targeted buyer’s list with nearly 10,000 buyers that are notified when specific routes come up for sale. BizBuySell: Business listings website listing nationwide FedEx routes for sale, search “FedEx” using advanced search feature. : Business listings website listing nationwide FedEx routes for sale, with about 300 at the time of this writing. : Broker that lists FedEx routes for sale in NY, GA, NJ, PA, SC, TX, VT, with about a dozen listings at the time of this writing. Capital Route Sales: Broker that lists FedEx routes with about a dozen listings at the time of  this writing. Although finding the right route may prove challenging, it’s important to do due diligence when a route that meets your criteria does become available. Most industry experts recommend not buying a route without riding it first. This will give you valuable insight into problems that may arise in the field such as unhappy employees, poorly maintained vehicles, and other logistics that likely won’t be covered in conversations with the seller. Minimum Eligibility to Own a FedEx Route Contrary to what you might think, most people who buy FedEx routes don’t have driving or trucking experience, and that is OK. You don’t need such experience to own a FedEx route. However, most usually become interested in the opportunity because of a background in logistics, shipping, or management. To own a route with FedEx, you will have to sign a contract with FedEx and become an independent contractor. This means you are not an employee of FedEx and will not receive health insurance, a retirement plan, or other benefits from FedEx. Additionally, FedEx requires that your business is set up as a Corporation. Some of the logistics a FedEx contractor is responsible for are: Equipment: Contractors are responsible for buying or leasing equipment such as vehicles, as well as maintaining that equipment. HR: All hiring, training, and employee retention is the responsibility of the route owner. Benefits: Route owners will be responsible for offering insurance and retirement plans (if applicable). Accounting: Accounting and bookkeeping responsibilities such as payroll and business taxes are managed by the contractor. Although you are an independent business owner and will oversee the day-to-day operations of the route, you must also comply with certain FedEx rules. For example, you and your employees will have to wear FedEx uniforms, and the drivers you hire will need to satisfy FedEx’s driving safety rules. Most owners of FedEx routes are owner-operators. Not only do they own the route, but they also drive and deliver packages regularly or from time to time when their employees call out sick or are unavailable. If you plan on driving, you will have to meet FedEx’s driving safety rules. You should see your contract for any additional requirements. The minimum standards that must be passed by an owner-operators are: No more than 3 moving violations in the last three years, and a maximum of one in the last 12 months Able to pass a Department of Transportation physical and drug test A valid Commercial Driver’s License (CDL) The contractor agreement that you sign with FedEx lasts one to three years, and it renews automatically unless the contractor wants to get out of the business or if FedEx can demonstrate that the contractor is not meeting the terms of the contract. Types of Routes You Can Buy Before beginning the search for a FedEx route, you should narrow down the type of route you would like to purchase. There are two types of business opportunities available to contractors; FedEx Ground, which is the most common type of route, and Custom Critical. The FedEx Ground routes are further separated into pickup and Delivery (P&D), and Linehaul routes. The two main types of FedEx independent contractor opportunities are: FedEx Ground: These consist of routes with residential and/or commercial customers. These are dedicated routes with set schedules. You own the route and can drive the route or can hire employees to do the driving. FedEx Custom Critical: This covers deliveries that require special handling such as temperature control. There’s no dedicated route and no set schedule, and you must be an owner-operator to participate (i.e., you own and drive the route). The two different types of FedEx Ground routes are: Pickup and delivery (P&D) routes: You drive a van or truck and drop off and pick up packages to and from residential or commercial addresses (or a combination of both residential and commercial). Linehaul routes: You drive a tractor trailer and cross state lines to deliver loads to and from designated FedEx hubs. These routes are usually more expensive compared to P&D. Independent Service Provider (ISP) Model In May 2020, FedEx will finish transitioning to an independent service provider (ISP) model. With this transition comes some changes to route ownership requirements, and ISPs will be required to own at least five routes or 500 stops per day under the new model. According to Kyle Rohner, CEO of KR Capital: “With the transition to the ISP model, there’s a route overlap component: historically you would have ground contractors—commercial accounts and businesses—and home delivery contracts, you might have one contractor that owned the ground routes in a certain ZIP code and a home deliver contractor sending his truck into that same area, which is not terribly efficient.” Contractors that are unable to meet these upcoming requirements will be required to enter negotiations with FedEx to expand their routes, sell their routes, or merge with another contractor to satisfy the minimum requirements. Existing and prospective contractors should ensure they fully understand FedEx’s shift to the ISP model which becomes fully active in 2020. Expected Costs & Earnings of a FedEx Route In many ways, says Rohner, being a FedEx contractor is a “double edged sword.” On the one hand, you don’t have to spend time or money on sales and marketing, customer acquisition, rent, or utilities. However, the hours can be long, you have to work on some holidays, and most importantly, you must follow pay schedules and other rules set by FedEx in your contractor agreement. Revenues & Profits The three ways FedEx contractors are typically paid are: Annual rate: FedEx contractors are paid a flat annual rate based on the size and other characteristics of the route. Delivery and pickup payments: Contractors receive a payment for each delivery and pickup, for example $1 and $2 respectively. Bonuses: Contractors can earn bonuses for things like customer service and safety achievements. When you add all this up, the average annual profit for a FedEx route is around $30,000-$40,000 per route. Keep in mind that this multiplies with every additional route that you own. Actual profits will vary based on where your route is located, how many employees you have, the number of loads you handle, and other factors. Expenses The three biggest expenses of owning a FedEx route that may impact revenues are: Buying the route itself Paying and retaining employees Vehicles and other equipment (as well as fuel, maintenance costs, etc.) While the cost of a route varies widely based on its location, number of employees, and other factors, the average price is about $100,000 per route, says Rohner. Several routes often come bunched together if you are buying linehaul routes. In fact, FedEx estimates that 92% of packages are handled by contractors with multiple routes. The average number of people employed by a FedEx Ground contractor is seven. In addition to paying their salary, you will have to take into consideration employee benefits (should you choose to provide them) like health insurance and retirement plans. Apart from the route and employees, you'll need to purchase equipment. Some examples of the type of equipment you’ll need to purchase are: Vans, trucks, and (depending on your route) planes Uniforms for yourself and employees Decals for vehicle FedEx scanners and software There’s no particular dealer that you need to go through to purchase this equipment as long as it meets the specifications laid out in your contract. FedExTrucksforSale.com has several options for vehicles. Rohner says that most contractors use FedEx terminals where packages are stored to park their vehicles, so you most likely won’t have to pay for vehicle storage. Adding all these expenses up, it’s apparent that owning a FedEx route can be a costly endeavor. That being said, if you can provide great service and build on your customers’ loyalty to their “FedEx guy” or “FedEx girl,” then you can potentially go very far in this business. Benefits of Owning a FedEx Route There are several distinct advantages to buying a FedEx route, and these routes are highly sought after for a number of reasons. Among these benefits, route owners will not be required to make any sales or marketing efforts, can expect to be paid on time, on a weekly basis, and may choose to manage remote routes that are not in close proximity to their residence or place of business. Some of the primary benefits of owning a FedEx Route are: No Sales or Marketing Required FedEx handles all of the required sales and marketing efforts involved in developing routes. Owners only need to handle the logistics of picking up and delivering packages on scheduled routes. This can be a huge benefit for owners that are not interested in managing the development of routes, and would prefer to focus on transportation logistics instead. A key concern prospective owners will want to be aware of is that routes may experience diminished performance over time, and there is very little control an owner can exercise over this. While the package delivery industry itself continues to grow, as does FedEx’s market share, some routes may be subject to heavy competition. Would-be FedEx route owners should consider diversifying routes to avoid an outsized impact to revenues from any one route. Reliable, Quick Payments FedEx pays its route contractors on a weekly basis, for the previous week’s package deliveries. Pay is executed by direct deposit, and is generally reliable. Revenue for routes is generally considered to be consistent week-over-week. However, pay can be impacted by both peak delivery periods, as well as dips in shipping activity. Contractors will want to plan accordingly, and ensure that they are managing logistics efficiently during seasonal changes. May be Managed Remotely While FedEx does not advertise its routes as absentee owner compatible, FedEx routes may be managed remotely, and many route owners do not perform any package delivery, instead focusing on the management of route logistics. Prospective owners looking for an absentee-owner route may find that the logistics of managing one or more routes requires more effort than they planned for, and in general FedEx does not encourage absentee ownership. Excellent Growth Potential “FedEx is growing very rapidly, organically. So based on the growth that FedEx is experiencing you might benefit from that directly. There are growth opportunities that become available to existing contractors at no charge. So, as FedEx opens up a new territory, or gains new customers, those new customers need to be serviced, and those opportunities are awarded to contractors that demonstrate an ability to be successful and serve customers well. “The way that works is FedEx will make an announcement that a new opportunity has become available, and existing contractors will put together an RFI making a case for why they should receive the new opportunity, creating additional upside for growth.” —Kyle Rohner, CEO of KR Capital LLC Financing Options to Buy FedEx Routes Most borrowers need some kind of financing to purchase a business such as a FedEx route. There are a variety of options for obtaining financing. Generally speaking, you will need a loan to cover the cost of equipment and working capital to hire and pay employees, storage fees, etc. The least expensive source of financing for most people who buy a FedEx route will be an SBA loan, which can be for working capital and to buy equipment. Some of the typical requirements to qualify for an SBA loan are: Credit score: At least 680 Cash flow: Existing route should be cash flow positive Collateral: Primary personal residence may need to be put up as collateral, as well as FedEx vehicles and other equipment related to the business, up to 100% of the loan, or to the greatest extent possible If you meet these requirements, we recommend for SBA loans when buying a business. They excel at relatively quick turnarounds on SBA loans and offer free consultations. As with all SBA loans, borrowers should expect to bring up to a 30% down payment. ROBS financing is an option for both SBA loan down payments and complete funding. Through a ROBS, aka “Rollover as Business Startup,” you can finance a business using your retirement account. You can learn more in our Ultimate Guide to ROBS Financing, or speak with our recommend ROBS provider, Guidant Financial. Bottom Line Buying FedEx routes for sale can be a lucrative and flexible way to get into business with fewer costs than traditional brick and mortar businesses. There are multiple opportunities to find a FedEx route of interest to you, and when you’re ready to purchase, there are multiple financing options to get you going. Need financing to get started? is an experienced ROBS provider which can help you convert your retirement funds into working capital today. They also offer free outside counsel throughout the entire process. Set up a free consultation with an agent today.

A business valuation calculator helps buyers and sellers determine a rough estimate of a business’s value. Two of the most common business valuation formulas begin with either annual sales or annual profits (also known as seller discretionary earnings), multiplied by an industry multiple. Both methods are great starting points to accurately value your business. For a more in-depth analysis, which can help maximize your payout when selling your business, consider working with a business valuation provider like Guidant. For $495, a dedicated valuation specialist at will provide a detailed business valuation, financing assessment, and in-depth industry report. Factors That Go Into A Business Valuation The factors most brokers will take into account when assessing your business include: Net profit Growth trends Website traffic (if significant to your business model) Age of business Online and offline sales network Business model Niche Competitors Company assets Getting a ballpark value by using the business valuation calculator above will be useful to buyers, sellers, brokers, and other parties who need a quick estimate. However, you may want a more detailed analysis of what your business is worth, instead of just a thumb in the air estimate. In order to get that you’ll have to find a professional, which often can cost tens of thousands of dollars. Many business brokers offer a free business valuation to business owners that are ready to sell their business, especially those businesses with net cash flow above $100,000. These valuations will take significantly more information into account than most business valuation calculators, increasing their accuracy. Tangible Assets vs Intangible Assets While not included in our business valuation calculator, tangible and intangible assets are both critical pieces of the business valuation puzzle. Tangible assets such as commercial real estate, equipment, and inventory all have the potential to increase the value of a business; and businesses that lack these tangible assets may have a lower value compared to counterparts. Some intangible assets are difficult to put a price tag on, but they should be valued. A business broker or mergers and acquisitions (M&A) expert with deal-making experience can help determine the value of these assets. An accurate valuation will help you set a price for your business as well as play a significant role in the type of financing options a potential buyer may have. How To Use The Business Valuation Calculator If you’re buying a business, this business valuation calculator is designed to tell you whether you can afford to purchase the business and whether the business is worth its asking price. If you’re a seller, the calculator is a reality check. Essentially it gives you an estimation of the price you can charge if you want to attract potential buyers. Here’s a simple breakdown of how to use the valuation calculator properly: Business Valuation Calculator Inputs The inputs in the calculator are the boxes where you must add information about your business. Below we analyze what you should include in each category. Industry Select the industry to which the business you’re buying or selling belongs. If the exact industry is not there, choose the closest match. This is an important step because the multiplier that the calculator uses to come up with the final valuation will vary based on the industry the business belongs to. For example, a restaurant with $100,000 in sales or profits will be valued less than a medical practice with the same sales or profits. This is because a medical practice will typically be more stable and have a higher long-term success rate than a restaurant. Last 12 Months Sales Type in the business’s sales over the last 12 months. This can be found by looking at the latest income statement. Sales are the revenue that the business generates before subtracting any expenses. Last 12 Months Profits + Owner’s Salary Profit is your revenue minus expenses. You can find this number on the business’s latest profit and loss statement. Add in the owner’s salary as well before inputting this number into the calculator. Business Valuation Calculator Outputs The outputs are the fields provided after calculations are complete, and display the potential value of the business. The business valuation calculator only has two output fields. Business Value Based on Sales Our calculator will give you an approximate value for your business by taking the annual sales and multiplying it by the appropriate industry multiplier. For example, if you are selling a law firm that made $100,000 in annual sales, the industry sales multiplier is 1.03, and the approximate value is $100,000 (x) 1.03 = $103,000. Business Value Based on Profits + Owner’s Salary Our calculator will also give you an approximate value for your business by taking the annual profit and multiplying it by the appropriate industry multiplier. Taking the same example of a law firm, suppose the profits were $40,000. The industry profit multiplier is 1.99, so the approximate value is $40,000 (x) 1.99 = $79,600. Note that there will always be a discrepancy between the business value based on sales and the business value based on profits. The two numbers give you an approximate range of potential values for your business. For some small businesses, the profit-based number will be more accurate because the business may have a lot of sales but also a lot of operating expenses. This means the ultimate profit potential of the business is quite low. Business Valuation Calculator Formula There are many ways to value a business, and which method is most reliable will depend on the annual revenue of the business as well as how much data is available, among other factors. In addition to multiples of annual sales and annual profits, which we’ve included in our calculator, business owners may wish to consider other methods such as market-based and asset-based valuation approaches. Annual Sales Multiple Formula Business Valuation = Annual sales x industry multiple Seller’s Discretionary Earnings (SDE) Multiple Formula SDE Valuation = (Annual profits + owner’s salary) x industry multiple When to Consider Using a Business Valuation Expert A business valuation expert can help sellers obtain the best price for their business while also ensuring that the sales price is based on strong data. The case for using a business valuation expert depends on a number of different factors, including the size of the business, the complexity of its operations, and the industry and market factors that influence its growth. Why Use a Pro “Valuation is all about analyzing the company’s ability to produce future cash flow, combined with what the market value for their business is selling for. The short-term goal to selling a business is to increase sales and profit, but valuation is a combination of where the business is right now and where it could go.” —Jock Purtle, Founder of Business Exits Tips For Sellers If you’re looking to get a business valuation so that you can sell your business, then you’ll likely want to know how to maximize the sale price. Our top three tips to help you maximize the value of your business are: 1. Prepare for the Sale Start preparing long before you put the business up for sale. Get your books in order, and make sure there aren’t any accounting or reporting mistakes. These can slow down the sale process, and make it difficult to maximize your value. The fewer things that look wrong when your business is analyzed, the easier it will be to get to closing. Also, when you’re ready to sell, make sure you have the right documentation ready to go before approaching a business broker. This will speed up your process, and give the broker more confidence that they can count on you being ready when you need to provide more information to them later. The documents business owners should have ready are: 2+ years of business tax returns Current P&L (profit and loss statement) Current balance sheet 2. Use a Business Broker Using a broker not only will set your expectations at an acceptable level, but it could also make or break your entire sale. An experienced broker will be able to maximize the value in your sale and get you the largest sum possible for your business. Brokers are often able to get much larger sale amounts than you’re able to get on your own. Choosing the best business broker for your situation also takes away many of the headaches that would otherwise fall on you. Try outsourcing to a business broker like so they can handle the administrative work, marketing your business for sale, communications with potential buyers, and negotiating both sales prices and final contract terms. One free consultation with VNB will provide you with answers to questions like: What is my business worth? Can the valuation price be increased? How long will it take to sell my business? What’s the next step? Meanwhile, you can stay focused on operating your business, and continuing to maximize its value until it’s time to sell. Click below to schedule your free consultation today. 3. Don’t Let Your Emotions Impact the Sale Your business can feel like an old childhood friend, or even a family member, because of the amount of time you’ve spent working in it. You’ve likely poured your heart and soul into making the business what it is today. However, according to Jock, “The market is the market.” This means that your business is going to get the value that the market dictates based on your performance, the current economy, and the industry. Being emotional about what potential buyers value your business at isn’t going to help you get to closing. Put yourself in the buyer’s shoes, and don’t get emotional if you want a smooth sales process at a maximum price. 3 Tips For Buyers Buying a business can often be even more complicated than selling, because you may not be familiar with the industry or business which you’re buying. Many buyers start out with no clear understanding of the type of business they would like to own, and wind up doing research on the fly. Buyers should research industries that they are interested in to determine future potential, while avoiding contracting markets. The three tips to keep in mind as you look for the right business to purchase are: 1. Find an Industry with Potential While you may pay more for a business in an industry with high multiples, it’s also more likely to hold its value. This means that when you’re ready to sell the business in the future you should still be able to get a higher sales price for it, especially if you choose an industry with high future growth potential. 2. Ask for Seller Financing Seller financing is when the seller gives you a loan for part of the purchase price. This can lower the financing amount you need to close the transaction, and you’ll typically get it at a cheaper cost than you would if you received a business acquisition loan for the whole purchase price. Seller financing is common for small business transactions, but you should determine early on in the process whether or not it’s available from the seller. 3. Hire a Business Broker Hiring a business broker is not quite like hiring a real estate agent. Brokers are compensated by the seller, and may not have an incentive to work with buyers directly, preferring instead to let buyers choose the listings they’re interested in. This doesn’t mean brokers will not work with buyers, but rather that they may not be well suited to show the buyer listings that make sense, as they typically list only a small handful of businesses. A good business broker can also access many more business opportunities than you can by yourself due to their experience and extensive network. A good place to start is with a nationwide business broker network, where listings are shared between brokers across the country. Some brokers may charge an upfront fee for assisting buyers, and in return provide valuation and negotiation services in addition to help finding the right business. Pros and Cons of Using a Business Valuation Calculator Using a business valuation calculator is a fast and simple way to get a ballpark value of a business without hiring an expert and with minimal effort; however, it’s not without its disadvantages. Our business valuation calculator doesn’t factor in tangible and intangible assets which can both significantly impact a business's actual value. Some of the pros of using a business valuation calculator are: Quick and simple: A business valuation calculator can be used as a quick and easy tool to ballpark a business’s value, which can be especially useful when comparing many like businesses to each other. Valuation varies by industry: Most business valuation calculators include an average industry multiple in the calculation, which is useful as not all industries have the same risks and opportunities, which can significantly impact a business’s value. Based on revenue and profits: By focusing on actual revenues and profits generated by a business, our valuation calculator is based on a business’s bottom line, which is how much money a business generates notwithstanding assets and liabilities. Some of the cons of using a business valuation calculator are: Doesn’t include assets: Our valuation calculator excludes tangible and intangible assets, which can make up a significant portion of the actual value of a business in asset-heavy industries. It should be combined with a valuation method that includes assets. Not a market-based approach: For some businesses, bullish market trends may indicate a much stronger valuation. Conversely, for businesses operating in a contracting market, this approach may overinflate the value of the business’s future revenues. Excludes expert analysis: The biggest flaw in any math-based valuation method is the absence of expert analysis. No two businesses are exactly alike, and a math-based calculation ignores factors like intangible assets and year-over-year growth. Bottom Line The most important thing in a business acquisition, whether you’re a buyer or a seller, is to arrive at a fair price for the business. This involves several factors not taken into account by a business valuation calculator, however, it can serve as a good starting point. From there you will want to choose a detailed valuation method and determine whether to hire an expert or perform the valuation yourself.

A business succession plan includes step-by-step instructions that establish procedures in the event a business owner or key employee leaves the business. Our succession planning template helps business owners as they answer questions like who will take over the business, how long will it take, and what standard operating procedures need to be passed on. There are five common steps involved in succession planning: Timeline of succession Determining your successor Formalize your standard operating procedures (SOPs) Value your business Fund your succession plan Download Succession Planning Template Click below to download our succession plan template as a DOCX or PDF: Download as PDF Download as DOCX How Succession Planning Works Succession planning is the set of events, timelines, and standard operating procedures that are established ahead of a change of ownership in a business. Business owners can create a succession plan in a number of ways, including by following this succession planning template, as well as by engaging a professional who’s well-versed in the process. Who Should Create a Succession Plan? Any business owner with a successful, thriving business should consider creating a succession plan. Often thought about in the context of retirement or sale of a business, a succession plan is also a critical tool in the event of untimely death or illness. A properly constructed succession plan acts like a will for your business, ensuring the best interests of the business are carried out. When to Create a Succession Plan Business owners wondering when to use this succession planning template to create a plan might wonder when they should get started. Much like a personal will, the answer depends on a variety of factors, but generally comes down to as soon as possible. Creating a succession plan takes time and effort, and answering the questions accurately is not easy. For this reason, many business owners start planning for succession at least five to six years before a transition. Creating a succession plan should be considered as a contingency in case of death, illness, or other circumstance that creates an unexpected need for transition. Succession Planning Resources Finding help with succession planning may mean working with your current accounting firm (provided they have experience with helping to develop succession plans). The amount of help you need will likely scale up with the urgency of your succession planning needs, as well as the size and complexity of the business. Consider whether to bring in a temporary accounting and finance professional, or hire an accounting firm to assist you. Some resources you can tap to help you with succession planning are: PwC As one of the accounting industry’s “Big Four,” PricewaterhouseCoopers (now doing business as PwC) is a firm with extensive experience in succession planning. The company’s self-described focus on small, privately held businesses minimizes the risk of becoming just another number and means it commonly deals with the sort of obstacles that you’ll encounter. SCORE SCORE, the nation’s largest network providing small business mentoring, has developed a quick guide to succession planning. The real value is that small business owners can apply to be matched with mentors who offer their assistance on a volunteer basis. For business owners in need of simple succession planning help, this option is worth consideration. Local Accountant Small business owners may wish to consider working with a local accountant (provided that accountant is well versed in succession planning). Entrepreneurs who choose this route can ask around in their personal network, tap in to their local Chamber of Commerce or other local business support groups, or search for a certified public accountant in the directory provided by the American Institute of Certified Public Accountants. The Five Steps to Writing a Succession Plan Writing a succession plan can be a daunting task. Indeed, many business owners put it off because they’re not ready to tackle the complexities. We’ve narrowed the process down to five simple steps to direct you along the way, including choosing your successor and determining whether to sell your business using life insurance, an acquisition loan, or other methods. The five common steps to preparing a business succession plan template are: 1. Timeline of Succession There are two key types of succession plans: an exit succession plan and a death-or-accident succession plan. You may wish to write a death-or-accident succession plan well in advance of when you think you’ll need it to protect your business and successors in the event of unanticipated events. An exit succession plan should be written when you have a specific plan to transfer ownership of your small business. The two most common types of succession plans are: Exit succession plan: A plan to transfer ownership on a specific date, e.g., at retirement. Death-or-accident succession plan: A plan for one’s business in the event of their death or disability. While an accident plan should be considered at any age, an exit succession plan should be written when you are within several years of retirement or wish to otherwise exit the business. When writing an exit succession plan, you should have a specific date that you would like to transfer the business, and indicate whether you will remain involved in the business post-succession or prefer a clean separation. Template Tip On the succession planning template, answer all the questions in section one. If you’re writing this succession plan to exit your business on a known date, fill out any remaining details, including how long you expect the transition to last. 2. Determining Your Successor A highly important aspect of writing a succession plan is choosing who will take over the business. Many business owners plan to have a family member, such as a child, take over the business. Other common choices include a business partner or key employee in the business. And of course, an outside buyer is always a possibility. Common successors business owners choose are: Co-owners Family members Key employees Outside buyers Choosing a successor may be difficult, and requires considering what is in everyone’s—including the business'—best interest. While keeping the business in the family may seem like a clear choice, keep in mind that second generation businesses have a high failure rate. For this reason, many business owners choose instead to sell the business and provide a cash inheritance for their family. Template Tip Consider filling out profiles for at least three potential candidates. This will give you a good preliminary comparison of everybody’s skill and experience. Even if you’re already set on a candidate, you may wish to have a backup plan in the event the person leaves your business or doesn’t want to become an owner. 3. Formalize Your Standard Operating Procedures (SOPs) As a small business owner, you should understand the importance of recording and formalizing day-to-day functions. Standard operating procedures should be documented for your managers and employees to reference, as well as any future owners of the business. Important items to document may include a daily checklist of opening and closing procedures, training for new employees, and a performance management system. SOPs vary from business to business, but often include the following items: Common Standard Operating Procedures While not required, many businesses include standard operating procedures when writing their initial business plan, and update these regularly as procedures change and the business grows more complex. It is a good idea to have these SOPs in place prior to succession planning, as they will help your business grapple with growth and change. Template Tip In our succession plan template, we’ve provided a checklist for these items—feel free to add or remove any, if necessary. Once you have completed an up-to-date document, attach it to your succession plan and check it off the list. 4. Value Your Business Figuring out the value of your business should happen early—and regularly. It’s an unfortunate fact that many business owners tend to overvalue their enterprise, and these misjudgments can snowball into financial errors when planning for retirement. There are several ways you can determine the value of your business, from using a simple business valuation calculator to provide a rough estimate, to following more advanced methods for how to value a business, as well as hiring a professional appraiser. You may also consider working with a company that offers business valuation services, such as BizEquity or Guidant Financial. Template Tip A good practice is to consider the lowest price the business should sell for. When the business is eventually listed for sale, it may take a long time to find a buyer who is willing to pay your asking price. The succession plan should provide stipulations regarding how long to wait before dropping the price, how much to lower the price, and the lowest acceptable offer. 5. Fund Your Succession Plan Few buyers out there have enough liquid cash to pay for your business upfront. This is why every succession plan needs a specific plan for how the buyer will make the purchase, whether it’s a loan, installment payments, or other option. The last thing you want is to reach your retirement date, or triggering event, and find that your chosen successor has no way to afford your business. This is also why your funding plan will often need a buy-sell agreement. This is a legal document in which your buyer agrees to a specific course of action (like taking out a loan or life insurance policy) in order to afford the purchase. Once you’ve settled on a specific method of funding, make sure you meet with a legal professional to draft your buy-sell contract. Common Succession Plan Funding Options Here are the most common ways succession plans are funded: Life Insurance Most commonly used when a family member or co-owner is taking over the business, a life insurance policy can help your successor purchase the business from you or your heirs. Contrary to how it sounds, life insurance isn’t only used in the event of one’s untimely death. Permanent life insurance builds cash value that can be taken out at any time, so it can also be used in the event of retirement, disability, or any other triggering event. Life insurance arrangements are common in family successions, especially when you may have multiple children, but only one is taking over the business. With your chosen successor as the beneficiary, a life insurance payout can enable them to purchase shares from your other children, thus leaving everyone with some compensation and financial security. Acquisition Loan An acquisition loan is money borrowed by the buyer in order to purchase the business. This is common when a key employee or outside party is taking over and they need some funding to afford the purchase. Buyers can typically get 70% to 80% of the purchase price financed from a bank or the Small Business Administration (SBA)—which is great news for sellers who want to be paid in full upfront. Acquisition loans are secured against future profits of the business. While this makes them a generally reliable option, it also means a bit of work for the seller. Prior to the purchase, you’ll need to provide a lot of details about your business for the bank’s due diligence. Even then, however, the loan is not guaranteed. Pre-approval can provide some security, but it would need to be undergone regularly (every six to 12 months) up until the transfer date or triggering event. Seller Financing Seller financing is when the buyer pays you back gradually over time. This is one of the easiest and most flexible arrangements, as the business owner and buyer can set whatever terms they like. Most agreements involve a down payment of 10% or higher, followed by monthly or quarterly payments with interest until the purchase is paid for in full. Again, however, the exact terms can vary widely. The key downside to seller financing is the time it takes to get paid back. Especially if you’re relying on the sale to fund your retirement, a 20-year term may be less than ideal. However, given the flexibility of seller financing, it can be possible to find an arrangement that works for everyone. Business Succession Planning Tips From the Pros We asked industry experts in succession planning to provide some tips for business owners thinking about creating a succession plan. Choosing the right successor is a critical step, as is ensuring that you have realistic expectations throughout the process. Many business owners also ask themselves whether they should consider creating a succession plan. Some tips when creating a business succession plan are: Groom Your Successor Ahead of Time Ray McKenzie, Founder & Managing Director at Red Beach Advisors “A majority of businesses do not have a formal business succession plan and never anticipate it being needed. “The most common mistake business owners make is they retain and keep information only for themselves. This can be signatory rights, passwords, access, or key phrases. “Review your company succession plan every six months and every time a critical employee leaves the business.” Keep Your Expectations Realistic Ed Alexander, Esq., Founder at Alexander Abramson PLLC “The biggest mistake small business owners make in their succession plans (aside from not having one) is having unrealistic expectations. “First, business owners regularly have an unrealistic conception of what their business is worth. It’s their baby, and they have an emotional connection to it, but this connection can’t be laid out in a profit and loss statement. “Second, Family Business Institute data has shown that 88% of small business owners believe that transferring the business to their children is a viable succession option. The reality is that only 30% of small businesses will pass to a second generation, and only 12% to a third generation." Consider the Risk of No Succession Planning Patrick Hicks, Head of Legal for Trust & Will “Having a business succession plan becomes more important if your business has valuable assets or has employees. If you operate your own business with just yourself and no business assets, the downsides of having no plan may be smaller. "If you have employees, consider who will be able to make payments to those employees and who will carry on operations after your death. "Machinery, equipment, materials, intellectual property, and customer lists can all be valuable assets—the brand and reputation associated with your business—that can all disappear if you don't have a plan in place to deal with those assets.” One of the most common mistakes business owners make in succession planning is failing to review their plan regularly. Time changes many things, and in order for your succession plan to be effective, it needs to be reviewed regularly and updated to reflect any changes. These could be company changes, tax law updates, changes in valuation, or new industry developments, among other things. For family-owned businesses, you’ll also need to consider aspects such as changing family dynamics—do all members have the same desire regarding what to do in the future, or are all key players still with the business? It’s essential that business owners update and adjust their business plan to reflect changes such as these. Bottom Line Often, the most difficult part of succession planning is answering difficult questions. What unexpected events should you prepare for? Who will take over your business? How will you compensate yourself, your spouse, or your children? You can answer these questions with the help of our succession planning template. You may also wish to engage legal or financial experts with experience in succession planning.

Apple business financing is an equipment lease that lasts 12 to 36 months and is available to businesses on transactions starting at $4,000. Two lease types are available—fair market value (FMV) and $1 buyout—based on whether you intend to keep the equipment or trade it in at the end of the lease. Apple Business Financing vs Top Alternatives How Apple Business Financing Works financing equipment leases are fulfilled by CIT Bank, an online bank offering deposit accounts, business credit cards, term loans, and other business financing. Borrowers apply for Apple business leasing or loans through a web portal (offered by CIT) or by calling Apple Business directly and speaking to a member of the sales staff. Once the business has selected the equipment it wishes to finance, and the type of term, an application is submitted to CIT, who either approves or declines the equipment lease based on the business and borrower’s creditworthiness, and other factors. What Apple Business Financing Offers Two different Apple business leasing programs are available: FMV and $1 buyout. An FMV lease is advertised as a no-interest option to potential borrowers, and $1 buyout leases are charged interest at competitive industry rates. Who Apple Business Financing Business Loans Are Right For Business owners who need to purchase Apple computers, tablets, phones, and accessories should consider Apple Business Financing. Both leasing programs are attractive and have their own benefits. Business owners who need cutting-edge technology: The FMV program is excellent for a business that knows it will want to upgrade its equipment at the end of the lease term and want to take advantage of low monthly payments as well as 0% financing. With the FMV program, buyers will pay off at least 80% of the equipment value over one to three years, at which point they can elect to upgrade or to purchase the equipment at FMV. Businesses that want to own the equipment long-term: For business owners who want to own their equipment at the end of the lease term, Apple business leasing offers a convenient and simple $1 buyout lease. This option is most similar to a loan and gives businesses ownership at the end of the lease term with the symbolic payment of $1. At this point, business owners can choose to sell the equipment or continue using it. Apple Business Financing Rates and Fees Interest: 0% for FMV; 5.5% to 15% for $1 buyout Documentation fee: $0 Application fee: $0 Apple business financing does not disclose its interest rates, nor does it disclose a rate range. Apple indicates that its FMV lease does not have any interest charges, making this similar to a same-as-cash agreement. Interest is due on its $1 buyout and is likely between 5% to 15% based on equipment leasing standards. Compared to other leasing options on our list, Apple business financing is likely to offer the most competitive rates and pricing on Apple equipment, and for borrowers utilizing the FMV lease to upgrade equipment, Apple will offer additional discounts, making this an excellent option for businesses that plan to upgrade their equipment consistently. Apple Business Leasing Terms Lease terms: 12 to 36 months Minimum order: $4,000 Financing type: FMV and $1 buyout lease Other financing types: None Apple business financing offers one of the shortest lease terms on our list, starting at one year, and going up to three years at most. With a minimum order of $4,000, businesses are likely to qualify for this program with a couple of MacBooks and assorted accessories, so this program casts a pretty wide net in terms of eligibility. Apple business financing takes a simple approach to financing, offering two equipment programs; the FMV and $1 buyout lease. Businesses looking for greater flexibility in financing programs may wish to consider offers from other lenders. Apple Business Financing Qualifications Credit score: 640-plus Time in business: N/A Personal guarantee: Required if you have been in business less than three years Qualifying for Apple business financing is refreshingly simple. A personal credit score of 640 or better is recommended, although Apple’s financing partner CIT Bank is likely to qualify your business for financing based on additional factors such as strong business tradelines, revenue, and debt service coverage ratio (DSCR). Apple leaves other criteria, such as time in business, undefined, meaning you may qualify for this program even if your business is a startup. Additionally, Apple business financing requires a personal guarantee from all partners with at least a 20% stake in the business, if your business has been in operation fewer than three years. Pros and Cons of Apple Business Financing Apple business financing can be a great way to get needed equipment while keeping upfront costs low. There are several pros and cons to financing your equipment using Apple Business financing, however, and we cover a few here. Pros of Apple business financing include: Upgrade equipment frequently: With an Apple FMV lease, you can upgrade equipment easily, keeping your technology on the cutting edge. Keep upfront costs low: With a lease, you can make low monthly payments, keeping most of your cash flow for other business needs. Accessories and other costs can be financed: Apple business financing allows accessories and other costs to be rolled into the lease payment. Cons of Apple business financing include: Higher long term costs: Over time, the cost of leasing equipment will be higher, especially if you can get away with keeping equipment longer. Difficult for new businesses: Businesses without two years in operation will need to explore other options. Creates debt: Having a leasing liability on your books may make your business less attractive to other lenders. How to Apply With Apple Business Financing Businesses looking to finance equipment starting at $4,000 can apply for and filling out an application, with same-day approval and funding available. : Best for Apple and non-Apple equipment is a large provider of technology equipment, offering computers and other hardware from hundreds of manufacturers. CDW’s business financing for Apple equipment is fulfilled by VAR Technology Finance. It should be noted that businesses financing non-Apple equipment may have their financing fulfilled by one of several other equipment financing partners and that the terms for that financing will vary. CDW Rates and Fees Interest: 0% for FMV; variable for $1 buyout leases Documentation: $0 documentation on select leases Application fee: $0 application fee on select leases CDW’s solution for Apple business financing bears many similarities to Apple’s own offering, including offering a 0% FMV lease and $1 buyout lease. Like Apple, CDW and VAR do not publish their interest rates on $1 buyout leases. However, they are likely to be between 5.5% and 20% based on industry averages. Also, like Apple, CDW indicates that documentation and application fees are waived on select leases, although that wording means that you should probably read the contract’s fine print carefully to ensure that your lease qualifies. CDW Terms Lease terms: 12 to 60 months Minimum order: $2,500 Financing type: FMV and $1 buyout Other financing types: None CDW offers somewhat better lease terms on Apple equipment, with lengths from one to five years, which may help businesses keep costs down as well as go longer between equipment upgrades. CDW also offers leases starting at $2,500, meaning businesses contemplating smaller purchases may wish to consider this option. Lease options are simple, like Apple, with an FMV and $1 buyout being the only options. CDW Qualifications Credit score: 680 Time in business: Minimum 2 years Personal guarantee: Yes Borrowers hoping to get Apple equipment financed through CDW’s lease program should have average or better, and businesses need a minimum of two years in operations to qualify. Although CDW indicates on its website that it is possible to get financing for businesses with less than two years in operations, this does not appear to apply to Apple equipment leases. How to Apply With CDW To get started with an equipment lease on purchases of Apple products $2,500 and apply with online, with same-day approvals and funding available. From there, a representative can help you apply with its financing partner. : Best for Flexible Repayment Options is an established equipment leasing company that offers a wide variety of flexible repayment options on a variety of different equipment, including Apple technology products, including equipment leases and equipment loans. It’s known for quick, same-day approvals and competitive interest rates. Crest also offers business loans, which makes it a great option if you’re comparing financing options. Crest Capital Rates and Fees Interest: 5.5% to 20% Documentation fee: $0 Application fee: $275 administrative fee Crest Capital is known for offering very competitive interest rates to businesses with strong credit profiles. Most leases on Apple equipment will average between 5.5% and 9.5%, although Crest will attach a higher interest rate to transactions with more risk involved. While Crest mentions no documentation fees, it does have a standard $275 administrative fee on all of its leases. Crest Capital Terms Lease terms: 24 to 72 months Minimum order: $5,000 Financing type: FMV, $1 buyout, and 10% option leases Other financing types: Term loans Crest Capital lease lengths start at two years, and financing is available on equipment starting at $5,000, of which 25% can be soft-costs such as installation, training, and delivery. Borrowers can select from FMV, $1 buyout, and 10% option leases; and Crest offers a variety of flexible repayment programs such as seasonal, deferred, and step-up—where the monthly payment due grows incrementally based on increased revenues. Crest Capital Qualifications Credit score: 650-plus Time in business: 2 years Personal guarantee: Yes Crest Capital has some of the more stringent credit criteria on our list, asking for a minimum credit score of 650 as well as two years in business. However, it does not set a minimum revenue so that businesses with lower revenues can still apply for equipment leases. A personal guarantee is required, and Crest Capital may file for a Uniform Commercial Code (UCC) lien on business assets. How to Apply With Crest Capital For application only financing of Apple equipment starting at $5,000 with , apply online to receive same-day approval with no further documentation required. : Best for New Businesses may be a good alternative to Apple business financing for businesses with six months or more in operations and are known for its relaxed credit criteria, working with borrowers with credit scores as low as 620 on equipment leases. National Funding offers term loans, lines of credit, and merchant cash advance (MCA), which borrowers can compare to the costs of equipment leasing. National Funding Rates and Fees Interest: 8% to 19% Documentation fee: $0 Application fee: $0 National Funding’s interest rates tend to be higher than some other competitors, with a range of 8% to 19%. This is likely due to its generally relaxed credit standards and the ability to finance businesses with only six months in operations. However, borrowers should take note of its Guaranteed Lowest Payment program, which offers to match the lease payment from a competitor. National Funding Terms Lease terms: 36 to 60 months Minimum order: $15,000 Type of financing: FMV, $1 buyout, and 10% option lease Other financing types: Term loans, lines of credit, and MCA National Funding offers standard lease types, including FMV and $1 buyout. The length of lease terms is less flexible, starting at a minimum of three years. Business owners who don’t need a fleet of new MacBooks might find the minimum order of $15,000 difficult to swallow and may want to consider an option like CDW, with a much lower minimum order of $2,500. National Funding Qualifications Credit score: 620-plus Time in business: 6 months Personal guarantee: Yes National Funding offers approachable minimum criteria for securing a lease on Apple equipment. Businesses with more than six months in operations have a high likelihood of obtaining funding. Like the other options on this list, a personal guarantee is generally required from partners in the business with a greater than 20% stake. How to Apply With National Funding Business owners interested in financing Apple equipment with can receive quick approvals by filling out a simple application online, with funding available as soon as the same day. : Best for Small Businesses With Poor Credit makes the list for its relaxed credit criteria, financing borrowers with a 600 credit score or better, as well as its application only financing on leases starting at $3,000. Balboa offers several different lending programs in addition to equipment leasing, including term loans, and MCA as well as lines of credit. Balboa Capital Rates and Fees Interest: 5.5% to 30% Documentation fee: No Application fee: Unknown Expect to see interest rates ranging between 5.5% to 30% with Balboa Capital. Borrowers shouldn’t expect to pay additional documentation fees, although application fees may apply. Balboa does not disclose any application fees on its website, and borrowers should ask about any additional fees that may apply. Balboa Capital Terms Lease terms: 24 to 72 months Minimum order: $3,000 Financing type: FMV, $1 buyout, and 10% option leases Other financing types: Term loans, lines of credit, and MCA Balboa offers relatively flexible equipment lease terms for Apple equipment financing, with term lengths ranging between two to six years, and minimum orders starting at $3,000. In addition to FMV and $1 buyout lease types, borrowers interested in 10% option leases can explore that route with Balboa. Balboa Capital Qualifications Credit score: 600-plus Time in business: 1 year Personal guarantee: Yes With the most lenient credit criteria on the list, Balboa presents as a good option for newer businesses with poor credit, requiring only one year in operations, and a 600 credit score for financing. Balboa may also require a personal guarantee from the business’s major partners. How to Apply With Balboa Capital To apply for Apple equipment financing with , borrowers can fill out a quick and easy online application, with same-day approvals and financing available. : Best for Short-term Financing Needs Business Financing is fulfilled through Behalf Financial and stands apart as a good alternative to Apple's business financing due to the wide variety of technology available in TigerDirect’s inventory, including Apple computers and accessories as well as relatively lenient credit qualifications. Businesses with at least one year of operations and two years of personal credit history can apply for net 30 financing, allowing for no interest if the balance is paid within 30 days. TigerDirect Rates and Fees Interest: 0% on net 30; 1% to 3% monthly thereafter Documentation fee: $0 Application fee: $0 TigerDirect charges a monthly interest rate of between 1% and 3% and no further fees for documentation or applying. For short-term funding, this may be suitable but represents 12.01% to 36.60% annually, compared to between 5.5% to 9.5% on a lease with Crest Capital. TigerDirect Terms Lease terms: 30 to 180 days Minimum order: $500 Financing type: Revolving line of credit TigerDirect’s Apple equipment financing acts as a revolving line of credit, with term lengths between 30 and 180 days available and a minimum order of $500. This may be preferable to businesses that can pay off equipment quickly and intend to it long term, vs a lease which might have more favorable terms but with no equity in the equipment at the end. TigerDirect Qualifications Credit score: 640 Time in business: 1 year Personal guarantee: Yes TigerDirect does not publish its minimum credit qualifications, and upon inquiring, indicated that a fair credit score is necessary to obtain credit. However, that can be influenced by other factors such as the strength of the business’s trade lines as well as time in business and revenue. A likely minimum credit score to obtain short term financing with TigerDirect is a 640 credit score, although other factors such as business credit may influence the decision as well. How to Apply With TigerDirect To access straightforward net 30 or short-term Apple business financing options, you can apply online and receive approvals and financing as quickly as the same day. Bottom Line Apple business financing is a cost-effective way to obtain Apple equipment for your business and is particularly cost-effective if you choose to do an FMV lease. There are alternatives to Apple business financing that you will want to consider, including a nearly identical FMV lease option from CDW. Which option fits your business best will depend on whether you intend to buy or upgrade the equipment at the end of the lease, among other criteria.

Business succession planning is a series of logistical and financial decisions about who will take over your business upon retirement, death, or disability. To write a succession plan, the first step is to identify the ideal successor to take over the business, then determine the best selling arrangement. This usually involves a buy-sell agreement, secured with a life insurance policy or loan. There are five common ways to transfer ownership of your business: Co-owner: Selling your shares or ownership interests to a co-owner. Heir: Passing ownership interests to a family member. Key employee: Selling your business to a key employee. Outside party: Selling your business to an entrepreneur outside your organization. Company: For a business with multiple owners, you can sell your ownership interests back to the company, then distribute them to the remaining owners. How a Business Succession Plan Works A business succession plan is a document that is intended to guide through a change in ownership by providing step-by-step instructions. If a purchase is involved, the sale price and purchase terms are clearly outlined, relieving stress for the departing owner’s family. A well-crafted succession plan aims to benefit everybody—the departing owner, the business, employees, and the successor. A small business succession plan should include the following: A succession timeline: Details regarding the circumstances when a succession would take place and specific dates as applicable. Your potential successors: A list of potential successors, including strengths and order of consideration. Formalized standard operating procedures (SOPS): A collection of documents, procedures, employee handbooks, and training documentation. Your business’s valuation: The valuation of your business should include the method by which is valued and be updated frequently. How your succession will be funded: Details including whether the succession is funded through life insurance, a seller’s note, or other funding options. Who Should Create a Business Succession Plan Succession plans are commonly associated with retirement; however, they serve an important function earlier in the business lifespan: If anything unexpected happens to you or a co-owner, a succession plan can help reduce headaches, drama, and monetary loss. As the complexity of the business and the number of people impacted by the exit grows, so does the need for a well-written succession plan. You should consider creating a succession plan if you: Have complex processes: How will your employees and successor know how to operate the business once you exit? How will you duplicate your subject matter expertise? Employ more than just yourself: Who will step in to lead employees, administer human resources (HR) and payroll, and choose a successor and leadership structure? Have repeat clients and ongoing contracts: Where will clients go after your exit, and who will maintain relationships and deliver on long-term contracts? Have a successor in mind: How did you arrive at this decision, and are they aware and willing to take ownership? Many business owners ignore succession planning because they don’t believe it’s necessary or put it off until they’re ready to retire. For small, simple businesses, a succession plan may not be necessary. However, consider what would happen to your business if you were no longer able to run the day-to-day operations. Who would take over? Would the business be viable? When to Create a Small Business Succession Plan Every business needs a succession plan to ensure that operations continue, and clients don't experience a disruption in service. If you don't already have a succession plan in place for your small business, this is something you should put together as soon as possible. While you may not plan to leave your business, unplanned exits do happen. In general, the closer a business owner gets to retirement age, the more urgent the need for a plan. Business owners should write a succession plan when a transfer of ownership is in sight, including when they intend to list their business for sale, retire, or transfer ownership of the business. This will ensure the business operates smoothly throughout the transition. The 5 Common Types of Succession Plans There are several scenarios in which a business can change ownership. The type of succession plan you create may depend on a specific scenario. You may also wish to create a succession plan that addresses the unexpected, such as illness, accident, or death, in which case you should consider whether to include more than one potential successor. Here are the five most common types of small business succession plans in detail. 1. Selling Your Business to a Co-owner If you founded your business with a partner or partners, you may be considering your co-owners as potential successors. Many partnerships draft a mutual agreement that, in the event of one owner’s untimely death or disability, the remaining owners will agree to purchase their business interests from their next of kin. This type of agreement can help ease the burden of an unexpected transition—for the business and family members alike. A spouse might be interested in keeping their shares but may not have the time investment or experience to help it blossom. A buy-sell agreement ensures they’re given fair compensation, and allows the remaining co-owners to maintain control of the business. Potential Drawbacks A buy-sell agreement with a co-owner requires a lot of cash kept on-hand. Your co-owner should be prepared to buy-out your shares, theoretically, at any moment. Many businesses will fund this plan with life insurance. Term life insurance is relatively inexpensive and can offset a lot of costs in the event of an owner’s death. Permanent life insurance is a bit more expensive with the added benefit of a payout in the event of retirement or disability. If you choose to draft a buy-sell agreement with your co-owner, you’ll want to make sure a life insurance policy is stipulated in the agreement. The company can also purchase key person insurance that pays out in the event a key member of the business dies or becomes disabled. We recommend speaking with an expert for specific help on the type of policy you’ll need. 2. Passing Your Business Onto an Heir Choosing an heir as your successor is a popular option for business owners, especially those with children or family members working in their organization. It is regarded as an attractive option for providing for your family by handing them the reins to a successful, fully operational enterprise. Passing your business on to an heir is not without its complications. Some steps you can take to pass your business onto an heir smoothly are: Determine who will take over: This is an easy decision if you already have a single-family member involved in the business but gets more complicated when multiple family members are interested in taking over. Provide clear instructions: Include instructions on who will take over and how other heirs will be compensated. Consider a buy-sell agreement: Many succession plans include a buy-sell agreement that allows heirs that are not active in the business to sell their shares to those who are. Determine future leadership structure: In businesses where many heirs are involved, and only one will take over, you can simplify future discussions by providing clear instructions on how the structure should look moving forward. Failing to address these steps may lead to a chaotic transition. For example, if a future leadership structure is not implemented, and the business passes on to more than one heir, the resulting power struggle may negatively impact the business. Alternatively, each heir may incorrectly assume the other will take over day-to-day responsibilities. Before instructions can be given on who will take over leadership of the business, a future leader should be chosen. This is likely to be complicated when more than one heir is interested in taking over. Business owners can reference current business contributions and responsibilities from potential heirs to assist in choosing a successor. Potential Drawbacks Making business decisions within a family can get messy. Emotions can run high, especially after an untimely death or disability. Further, second-generation businesses rarely survive the transition, as they’re often sold by the inheriting family member, or fail outright. Only about 30% keep the same name and ownership following an inheritance. Altogether, this should beg the question; is inheritance even the best idea? If your successor is skilled and business savvy, then perhaps the answer is “yes.” If not, you may consider selling your business to a co-owner, key employee, or outside buyer instead. 3. Selling Your Business to a Key Employee When you don’t have a co-owner or family member to entrust with your business, a key employee might be the right successor. Consider employees who are experienced, business-savvy, and respected by your staff, which can ease the transition. Your org chart can help with this. If you’re concerned about maintaining quality after your departure, a key employee is generally more reliable than an outside buyer. Just like selling to a co-owner, a key employee succession plan requires a buy-sell agreement. Your employee will agree to purchase your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business. Potential Drawbacks A common drawback to key employee succession is money. Most employees aren’t in the financial position to buy the business they work for. Even if they are, having enough liquid cash on hand is another challenge. One solution is seller financing, in which your employee pays you (or your family) back over time. There’s typically a down payment of 10% or higher, then monthly or quarterly payments with interest until the purchase is paid for in full. The exact terms of the loan will need to be negotiated and then laid out clearly in your succession plan. 4. Selling Your Business to an Outside Party When there isn’t an obvious successor to take over, business owners may look to the community: Is there another entrepreneur, or even a competitor, that would purchase your business? To ensure that the business is sold for the proper amount, you will want to calculate the business value properly, and that the valuation is updated frequently. This is easier for some types of businesses than others. If you own a more turnkey operation, like a restaurant with a good general manager, your task is simply to demonstrate that it’s a good investment. They won’t have to get their hands dirty unless they want to and will ideally still have time to focus on their other business interests. Meanwhile, if you own a real estate company that’s branded under your own name, selling could potentially be more challenging. Buyers will recognize the need to rebrand and remarket and, as a result, may not be willing to pay full price. Instead, you should prepare your business for sale well in advance; hire and train a great general manager, formalize your operating procedures, and get all your finances in check. Make your business as stable and turnkey as possible, so it’s more attractive and valuable to outside buyers. Potential Drawbacks One of the main drawbacks to an outside sale succession plan is the unexpected: It’s nearly impossible to predict exactly what the sales process will have in store. The process of selling a business to an outside party is complex and could encounter roadblocks like: your business not being as valuable as you anticipated, lack of credible buyers, your business not being able to sell at all, and more. Business brokers, like , are experienced and well-versed in all aspects of selling and purchasing businesses on their clients’ behalf. Consider outsourcing to a business broker so that you can focus on running your business and maintaining its value while professionals handle the sale. In addition to taking care of potential problems, VNB will ensure all steps of the process including finding and vetting buyers, structuring your deal, preparing documents, and negotiating terms. After one quick call, VNB Business Brokers will be able to tell you things like: what your business is worth, if the valuation price can be increased and how long it will take to sell your business. and find out what the next step is. 5. Selling Your Shares Back to the Company The fifth option is available to businesses with multiple owners. An “entity purchase plan” or a “stock redemption plan” is an arrangement where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate, thus giving each surviving owners a larger share of the business. Potential Drawbacks An entity purchase is similar to a cross-purchase, in which you sell your shares to a co-owner or co-owners. In most circumstances, a cross-purchase is more financially viable. When co-owners purchase shares directly, they get a “step-up in basis,” which means the stock’s basis is revalued at its current price. With an entity purchase, the original basis remains, and your co-owners will be liable for potentially higher capital gains. Despite this drawback, entity purchases can still be beneficial when you have a large number of co-owners. Drafting cross-purchase agreements with each owner can be cumbersome. An entity purchase agreement, in comparison, is much simpler to implement. It can typically be funded with a single life insurance policy for each co-owner. How to Create a Succession Plan There are several key steps necessary to create a comprehensive small business succession plan, and several ways to go about creating your plan. Some business owners may choose to create their own succession plan, while others may wish to engage the help of a professional, depending on the complexity of the plan and the business. Whether you create your plan yourself or engage a professional, the five steps to writing a succession plan are: Determining timeline: Define when the succession should take place, either on a predetermined date or in the event of death or disability. Choosing your successor: If this is not a purchase by a specific party, consider choosing three or more potential candidates, filling out a profile for each. Formalizing your standard operating procedures: Document your standard operating procedures (SOPs), including an organizational chart, employee handbook, operations manual, and any other recurring meetings or processes. Valuing your business: Several methods exist to value your business. Once you have calculated your business’s value, it should be updated frequently. Funding your succession plan: Define a specific path that lays out how the successor will purchase the business. Options include life insurance, loan, and seller financing. Small Business Succession Planning Providers Creating a small business succession plan can be complicated, and many business owners choose to engage a professional third party to help them determine the value of the business, the type of succession plan, and create any supporting documentation. The choice of provider may be based on the complexity of the business as well as the event being planned for. Small Business Succession Planning Providers Whether you choose a large accounting firm or a local certified public accountant (CPA) to assist in your succession planning will depend largely on the complexity of the business, and how many employees are involved. For small businesses, including a sole proprietorship, business owners might consider seeking the help of a small business mentor, using services like Service Corps of Retired Entrepreneurs (SCORE) and Small Business Development Centers (SBDCs). For small businesses with multiple employees and simple to complex finances, a local CPA may be a viable option, or you might consider hiring a business attorney to help you draft the paperwork. For more complex scenarios, a business attorney and CPA should likely be involved, to ensure that everything goes smoothly when the succession plan kicks in. Finally, for larger, more complex businesses, business owners may wish to consider working with an accounting firm with extensive experience in creating business succession plans. There are hundreds, if not thousands, of such firms. Business owners can start by researching local firms or may choose to work with one of the so-called “Big Four,” such as PriceWaterhouseCoopers—operating as PwC—which specializes in privately held businesses. Succession Planning Pro Tips 1. Avoid common mistakes Asghar Kazim, CFP, ChFC, CLU, Principal & Co-founder, United Wealth Group LLC. “One of the most common mistakes business owners make in succession planning is failing to review their plan regularly. Time changes many things and, for your succession plan to be effective, it needs to be reviewed regularly and updated to reflect any changes. These could be company changes, tax law updates, changes in valuation, or new industry developments, among other things. “For family-owned businesses, you’ll also need to consider aspects such as changing family dynamics—do all members have the same desire regarding what to do in the future, or are all key players still with the business? Business owners must update and adjust their business plan to reflect changes such as these.” 2. Create your succession plan at the right time Whitney L. Sorrell, JD, CPA, MBA, Principal Attorney, Sorrell Law Firm, PLC “Business owners should start the succession preferably 5 years or more before they want to retire. Many business owners want to transfer their business to their family members in a way that minimizes the tax cost, holds the business assets in asset protected structures, continues the cash flow to the business owner post succession, and ensures a successful transition of management to the succeeding family members. “The techniques bringing these benefits have better results over time. Other business owners are selling their business to a third-party buyer. Again, allowing time to prepare the business for sale will reach the highest possible price, and allowing time to properly structure that sale will allow the transaction to incur the smallest legal tax liability and the greatest level of wealth protection upon receipt of the sale price. 3. Consider the benefits of succession planning Ed Alexander, Esq., founder, Alexander Abramson, PLLC “The benefits of succession planning are that you don’t spend 30 years running and building a business only to leave empty-handed. Liquidating and closing up shop—not selling out—will be very unprofitable. The majority of the value of most businesses is in their goodwill and intangibles, not their hard assets. “As I tell my clients, failing to plan is planning to fail. There have been many times when I’ve spoken to clients after their business sales, and they say to me, “I wish I’d started planning earlier.” They’re happy with the outcome, but they only realize after the fact how much even six months of additional planning could have improved the sale price.” Bottom Line While many experts recommend beginning succession planning three to five years ahead of retirement, it is never too early to begin. Knowing how your business will transition, who will take over, and how heirs and partners will be compensated are all keys to reducing future stress in the event of an owner’s sudden departure.