eNewsletter
November 2018

Featured Clients this issue:
**Details of each client below article

- Specialty Vehicle Maintenance and Repair #1718
- eCommerce Distributor of Consumables #918
- Specialty Distribution Business #1818

For those of you that have been reading our eNewsletters for a long time, this month's theme may seem somewhat familiar. Although I don't like to be redundant, I am making an exception because there are two important topics that are addressed this month.

First is the importance of communicating with your tax advisor prior to year-end to ensure that you are taking the appropriate steps to mitigate taxes for you and your business. This is especially critical this year as a result of the new tax reform legislation that took effect at the beginning of 2018.

Second is the importance of planning, with your accountant, for the sale of your business and the anticipated timeline for that to occur. By planning ahead, you can avoid last minute fire drills and be prepared for perhaps the largest financial transaction of your life.

Please feel free to contact me or another member of the FBB Team if you believe that we can provide guidance in this process.
 
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.   
  RVC signature
 

Ronald V. Chernak
President

Inspiring business relationships since 1982!

  
Year-end Tax Planning
 
As 2018 heads to a close, many businesses that have calendar year ends are, or should be, in discussions with their tax advisors about year-end tax planning. Usually, the goal for most small business owners is to pay as little tax as possible. However, this may not always be the best route to the end goal.

If you are considering selling your business within the next three years, or if your strategy is to consistently operate your business so that it is positioned for maximum transferable value, then your outlook on taxes will likely differ from other owners. Below are a few items to consider:

Deferral of Income - A common tax strategy is to defer revenue and accelerate expenses. This strategy may reduce taxes, but it may also decrease the value of the business. The cash flow and profitability of a business are significant drivers of business value. Decreasing the income can reduce the value of the business by multiples of the amount reduced. Additionally, this tax strategy may distort the profitability of the business between years. Both buyers and lenders like consistent earnings and are typically willing to pay / lend more for consistency. When a higher business value is the goal, showing less income and more expenses is not the way to go.

Discretionary Expenses - When looking into a company's financials, it is not uncommon to discover some aggressive or "undisciplined" expenditures. Commonly, these are found in travel, meals and entertainment, excessive rent (if the operating entity leases space from property owned by the shareholders), and vehicle or cell phone expenses for the shareholders and their family members. Although these expenses will reduce taxes, and some of these expenses may be able to be added back during the recasting of the financial statements, many of the aggressive expenses will be discounted by the buyer and the lender. This may ultimately result in a lower value being attributed to the business, an increased amount of seller financing necessary to close the transaction, or both. As most methods of valuing a business include a capitalization of earnings, the money saved by reducing taxes can be significantly less than the enhanced value of the business that results from showing an accurate profit. If you have a significant amount of these types of expenses, it may be beneficial to have your accountant treat the discretionary expenses as a distribution to the owners.

Equipment Purchases - Even if you are planning a sale or are already on the market, it is wise to run your business as if it were not being sold. You need to concentrate on the continual and profitable operation of the business. So if you need a piece of equipment that will enhance the business, you should acquire the asset. This is different than buying a new vehicle at the end of the year just to take accelerated depreciation. As most businesses are sold "cash-free/debt-free," a buyer typically will not assume any equipment loans. Also, the increased amount of equipment value will not usually translate to a comparable increase in business value. In lieu of purchasing the asset, it might make more sense to consider leasing the asset, as buyers will sometimes be more willing to assume a lease.

There are many things to consider when developing a year-end tax plan. We strongly suggest that you visit with your tax advisor to address your particular circumstances. There are numerous tax mitigation strategies, such as retirement accounts, that can reduce tax liability, but still leave a paper trail that will justify an add-back to the buyer and the lender, so as not to diminish the value of the business.

Although we are not a substitute for your tax adviser, the FBB team is available to meet with you and your accountant to confidentially discuss strategies to maximize the after-tax value of a potential sale. Our initial consultations are at no cost to you.
Specialty Vehicle Maintenance and Repair #1718
This  well-established vehicle repair business specializes in in class 6, 7, and 8 truck products and repairs for commercial accounts, as well as the general public. With several la rge bays, the company is able to accommodate very large vehicles. The company is well known for providing the best full-service truck parts and repairs to Southern Colorado.  Well diversified customer base with minimal concentration. This should make an excellent acquisition candidate for an industry acquirer looking to expand their operation into Southern Colorado or an individual acquirer with mechanical experience.
  • Purchase Price...To Be Suggested by Purchaser
  • Real Estate...$598,000
  • Gross Sales...$1,553,530
  • SDE...$332,508

For more information contact Rob Amerine rob@fbb.com.
eCommerce Distributor of Consumables #918
This Rocky Mountain business specializes in commercial distribution of office-related consumables to contracted clients.  With its steady history of growth in both sales and profits, this rapidly expanding business is set up  to offer its services not only nationwide, but also internationally.  Excellent opportunity for not only a synergistic acquirer, but also an entrepreneur looking for the next venture.  Sales of $19+M for the first eight months of 2018 were up nearly 12% over 2017; Adjusted EBITDA of $872k was up 58.4%!
  • Purchase Price...To Be Suggested by Purchaser
  • Down Payment...To Be Suggested by Purchaser
  • Gross Sales...$25+M
  • Adjusted EBITDA...$1.1+M

For more information contact Lynn Lage, lynn@fbb.com.
Specialty Distribution Business #1818
This well-established, full-service Denver area business has a long history of growth and strong, secondary management in place.  The company not only provides residential and commercial installation services with field supervision, but also design, design center and account management, warehouse and administration services, and top notch customer service.  Products include flooring, cabinetry, countertops, wall finishes, and window coverings.  Customers include builders, property managers, contractors, and homeowners.  Real estate available to purchase along with business for $3.5M. YTD September 2018 sales up approximately 15% over same period of 2017; Adjusted EBITDA up 36% approximately. 
  • Purchase Price...To Be Suggested by Purchaser
  • Down Payment...To Be Suggested by Purchaser
  • Gross Sales ...$14,060,041
  • Adj. EBITDA...$1,159,807

For more information contact Lynn Lage lynn@fbb.com.
**Terms & Definitions

TBS (To be suggested by Purchaser) - Seller, in his/her sole discretion, has the right to accept or reject all offers.

Seller's Discretionary Earnings (SDE):  A term used to denote a business's cash flow or the amount of pretax money a buyer can expect to earn in first-year operations.

EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization):   All interest, tax, depreciation and amortization entries in the Income Statement are reversed out from the bottom line Net Income (It purports to measure cash earnings without accrual accounting, canceling tax-jurisdiction effects, and canceling the effects of different capital structures.)
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