Must Know Lessons for M&A Success - SB Liftoff 12 Things to Know Before Selling Your Business by Sharon B Heaton

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Summary

In this conversation, Sharon Heaton, an M&A advisor, discusses various aspects of selling a business. She emphasizes the importance of building a transferable company and transitioning from an owner-dependent to a management-driven company. Sharon also explains the factors that affect the valuation of a business, including EBITDA and company characteristics. She provides insights into valuations in government contracting and the challenges of earnouts. Additionally, Sharon discusses the contentious issue of networking capital and the tax considerations involved in converting ordinary income to capital gains. In this conversation, Jon Stoddard and Sharon Heaton discuss the topic of seller financing and its implications for capital gains tax. They explore the concept of the installment sale doctrine and how it allows for the payment of taxes over time. They also highlight the importance of having an interest rate on seller financing to differentiate between ordinary income and capital gains. Overall, the conversation provides valuable insights into the tax considerations involved in seller financing.

Takeaways

Building a transferable company is crucial when considering selling a business.
Transitioning from an owner-dependent to a management-driven company increases the value of the business.
Factors such as EBITDA and company characteristics impact the valuation of a business.
Understanding valuations in government contracting requires industry-specific knowledge.
Earnouts can be challenging to structure and should be fair and clear.
Networking capital is essential for the functioning of a business and should be neither an increase nor decrease to the purchase price.
Converting ordinary income to capital gains can result in significant tax savings. Seller financing can be a strategy to manage capital gains tax by spreading the tax liability over a period of time.
The installment sale doctrine allows for the payment of taxes on seller financing as it is received, rather than upfront.
Having an interest rate on seller financing helps differentiate between ordinary income and capital gains.
It is important to consider the potential risks and benefits of paying taxes over time, as tax rates may fluctuate.

Chapters

00:00 Introduction and Background to Sharon
01:13 Deciding to Sell and Understanding the Value of the Company
04:44 Factors Affecting Valuation: EBITDA and Company Characteristics
07:06 Importance of Building a Transferable Company
08:49 Transitioning from Owner-Dependent to Management-Driven Company
10:12 Scoring Characteristics of a Business for Valuation
12:56 Negotiating the Purchase Price and Value of the Company
14:55 Determining Market Comps and Valuation in Government Contracting
17:35 Factors Driving Valuations in Government Contracting
20:22 Stock Sales vs. Asset Sales in Government Contracting
22:12 Considerations for Strategic Buyers in Government Contracting
24:56 Earnouts and Challenges in Structuring Deals
27:47 Valuation Examples and Importance of Recurring Revenue
35:06 Contentious Issues in M&A: Networking Capital
40:45 Tax Considerations: Converting Ordinary Income to Capital Gains
42:29 Seller Financing and Capital Gains Tax
43:26 The Installment Sale Doctrine
43:54 Paying Taxes Over Time
44:13 Interest Rates on Seller Financing