selling proposals that close more business · than how you court, quote and close new busi - ness....

JULY/AUGUST 2012 Volume 36, No. 4

Proposals That Close More BusinessDo you struggle to close prospects that seem to be a perfect fit?

I met with a successful retirement-age business owner last week to discuss representing him in the sale of his business. His business pro-vides specialty maintenance-type services to natural gas companies. As he shared with me the operations of his business, he explained that he doesn’t have written agreements with his clients. He said he learned long ago that written agreements just get in the way. All that’s needed is a gentleman’s understanding of the terms of service and verbal approval to start. Once you have this, begin the work and start billing. He said this way of doing business has served him well over the years, and he’s never encountered a serious problem.

As it turns out, I’ve been doing some reading, thinking and experimenting on the subject. Heck, problems arise even when we DO have strong writ-ten agreements, so why mess with them?

Customer agreements are misused and misunderstood. They shouldn’t become a barrier to doing business. For most businesses, they need not be filled with legalese nor require review by the prospect’s legal advisor. Goodness, no. Lawyers kill deals. Delays do, too!

Proposals shouldn’t be used to introduce yourself or your firm. Nor to gauge a prospect’s interest.

Similarly, proposals shouldn’t be spread out like trotlines. Writing and submit-ting proposals takes time away from what you need to be doing – talking to prospects, assessing needs, helping the prospects understand your unique abilities to deliver the results they desire, agreeing on the value you can de-liver to them, and performing the work.

A proposal is not a “starting point” or a document that’s a “work in progress.”

I don’t even like the name “proposal.” “Agreement” is a better word.

A proposal is a clear and concise summary of what will be accomplished for the prospect and the value they will enjoy.

S E L L I N G

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TheBusinessOwner.com

Proposals That Close More Business ............................ 1Business Brokers ...................................................................... 2From the Editor ........................................................................... 2C-Corp Status Kills Biz Sale Value.................................... 3The Balance Sheet ................................................................... 4Control and Minority Stakes ................................................ 7Q&A: Non-Deductible Retirement Contributions... 11

Information Service from FSPA for Its Members

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Tel: 505-839-7958, 800-843-608Fax: 505-839-0017Email: [email protected]: www.fspa1.com

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Borrowing a line from an old Van Halen cover of a 1960s Motown song (Van Halen’s back on tour with the original lead singer, Da-vid Lee Roth), “Summer’s here and the time is right for…”, well, in our case, im-proving our proposal strat-egy to book more business!

Nothing is more important to your business than how you court, quote and close new busi-ness. Yes, you must be able to execute and de-liver what you promise, but it starts with win-ning business at the most favorable terms. The lead article in this issue will challenge you to re-think the way you pursue new business, sub-mit proposals and gain their timely approval.

Our business culture has evolved into one that is extremely risk averse, and we’ve let the law-yers build barriers between us and our pros-pects. And so I ask, are you satisfied with your ability to efficiently turn prospects into clients?

This issue is filled with suggestions, cautions and ideas that will help you make more mon-ey, save more money, and get more out of the considerable investment you have made, and continue to make, in your business. Read it and reap!

FROM THE EDITOR

TO SUBSCRIBE, ORDER REPRINTS, PRIVATE-LABEL THIS PUBLICATION OR PURCHASE ARTICLES FOR PLACEMENT IN YOUR OWN NEWSLETTER: CALL 800-634-0605, email [email protected] or visit www.thebusinessowner.com. COPYRIGHT © 2012 BY DL PERKINS, LLC. ALL RIGHTS RESERVED UNDER INTERNATIONAL AND PAN AMERICAN COPYRIGHT CONVENTIONS. REPRODUCTION, IN ANY FORM, IN WHOLE OR IN PART, IS PROHIBITED WITHOUT WRITTEN PERMISSION FROM AN OFFICER OF DL PER-KINS, LLC. ISSN. NO. 0190-4914. VOL. 36, NO. 4. PRICE $149.00 PER YEAR. “The Business Owner” is a registered trademark of DL Perkins, LLC — Registered in U.S. Patent Office

David L. Perkins, Jr.Managing EditorThe Business Owner® [email protected]

This publication is owned and published by DL Perkins, LLC, PO Box 700570, Tulsa, OK 74170 918-493-4900; Fax 203-347-4056 [email protected]

Stephanie Coit, Publisher [email protected]

David L. Perkins, Jr., Managing Editor [email protected]

Image credits: iStockPhoto.com, Andertoons.com

Business BrokersB U S I N E S S S A L E

Beware of persons or companies that represent that they can sell your business for a high value if you simply pay them a substantial up-front fee. These companies prey on the hopes, dreams, naïveté and despera-tion (at times) of business owners. They ask for $8,000 to $40,000 in a single, up-front payment – before they have produced anything! They often tout a pipeline of overseas buyers, or “Wall Street buyers.” Ones you conveniently cannot verify.

Always keep in mind: if it sounds too good to be true, it probably is.

Few tenured, talented and competent business brokers will agree to rep-resent you purely on a percentage of the sale price, i.e., a back-end fee, like a realtor. This is because selling a business (if done correctly) requires a lot more time and effort than a sale of commercial or residential real estate. To begin, a broker cannot just put a sign up in front of your business and wait for their phone to ring. Second, businesses have a lot more moving parts. Business sale transactions are complex, and they’re not standardized like real estate purchases/sales. Buyers need a lot more handholding.

When engaging a business broker, insist that any up-front/pre-closing pay-ments be paid only as important deliverables are satisfactorily completed. The first deliverable should be a well-written summary of your business, i.e., offering documents. Pay no more than $5,000 for this. The important other deliverables are offers from buyers that visit you and actually meet with you and let you ask questions and verify their credibility and financial wherewithal. The next deliverable is a signed letter of intent.

Don’t pay anything for the buyer’s due diligence! Nor the broker’s!A success fee is, of course, merited if a sale is completed.

A skilled and experienced broker can do wonders. Business sales are not like real estate. They’re a lot more complex and, again, you can’t just stick a sign in your yard or post it on the multi-list. It requires a lot of work, buyer screening, handholding and time.

When you decide that it’s time for you to sell, ask your friends, advisors and peers if they know of any business brokers or merger and acquisi-tion firms that are credible, experienced and have a good reputation. Then, don’t fall for complex agreements or a lot of talk that is hard to understand. Good advisors keep it simple and explain the details so they make sense to you. Don’t pay lump-sum, up-front fees to slick-talking, out-of-town firms!

Buyers for businesses valued under $1.5 million almost always come from the community in which the business operates. Hire a broker that has deep ties to your community. Yes, you may be uncomfortable that they know a lot of people in your region, but the right professional will keep things confidential, and hiring a firm that has no representative that lives in your community will most likely be a waste of your time and money.

JULY/AUGUST 2012 3THE BUSINESS OWNER THEBUSINESSOWNER.COM

C-corporation status offers few benefits but substantial drawbacks for the typical private business owner. Why haven’t you switched to an S or LLC? It’s cheap and easy. Just file a form with the IRS. Talk to your financial advi-sor and if she agrees, get it done. If she doesn’t, get a second opinion.

Of course, the problem with C-corps is double taxa-tion. It can hit you while you own the business, but the real killer is when you sell it. Buyers want to buy your assets, not your stock. That means you pay tax on the proceeds at the corporate level and then again at the individual level when you dividend the cash out to shareholders. Ouch.

It’s too late? You’re selling your business right now and it’s a C-corp? Try these tax minimization strategies.

Sell Stock: True, this is easier said than done. Buyers jus-tify purchase price by the after-tax cash flow they expect to earn. If you require the buyer to buy stock, the price will be a lot lower. Why? Two reasons:

1. The buyer’s after-tax cash flow will be a lot lower because he’ll inherit the tax basis in the acquired assets and his depreciation expense going forward will, therefore, be lower. That is, he does not enjoy the step-up-in-basis that he would otherwise be able to enjoy (mainly in the furniture, fixtures, equipment and real assets) if he was able to consummate the transaction via an asset purchase.

2. The buyer will be exposed to more risk. And, as the buyer’s risk – or perceived risk – rises, the price they are willing to pay will fall. Simple finance. Higher risk means higher discount rate, which means lower present value.

Sure, every once in a while a buyer comes along who has more money than sense. But it’s very hard to get them to closing. And, as you know, there’s no such thing as a free lunch. That being said, if you’re one of the few private companies that can attract a public suitor, publicly traded companies are much more willing to buy stock. This is because many of them are less interested in tax reduction and cash flow and more focused on maximiz-ing near-term earnings. This will help your tax situation, but remember the free-lunch thing? Public companies usually want to pay you with shares of stock, not cash.

Shares you can’t liquidate immediately. So, in effect, you assume some of the risk.

Incidentally, some buyers just won’t buy the stock. Either sell the assets or say goodbye.

Owner-Compensation Catch-Up: Because you own a company organized as a C-corporation, you know that the way to get cash out is through compensation and ben-efits. Dividends aren’t the ticket because they trigger a second level of tax. So, could this method be used to reduce double taxation in the sale of your business? Yes, it could. All you must do is figure out if you’ve been un-derpaid. If so, catch it up after you sell all the assets to the buyer but before you liquidate your company.

So, if you calculate that you underpaid yourself by $750,000, pay it to yourself as salary. You’ll avoid the dou-ble tax on this amount. Of course, the IRS is not keen on pie-in-the-sky calculations that reduce their take. So you’ll need to put together a defensible case. For example, ob-tain credible data on what was fair compensation for a person with your talent, experience and duties, and use that to calculate the underpayment.

Personal Goodwill: If you’re actively involved in your business and a portion of your company’s goodwill can be found to reside with you, personally, rather than with your company, then your company has no right to sell that por-tion of goodwill. Your “personal goodwill,” which is your services, talent, cooperation, experience and know-how, must be purchased directly from you. By doing so, the buyer pays money directly to you and you thereby avert double taxation on that money.

Post-Purchase Compensation Paid to You: Related to the above, the buyer certainly could pay you handsomely – directly to you and not through your company – for any services you provide after the purchase date or for any agreements, such as a non-compete.

Stock-Buying Middleman: For a while, there was a little cottage industry that developed to help C-corp sell-ers that had buyers that insisted on buying assets. The middleman would, for a fee, come in and buy your stock and then sell the assets out of it to your suitor. You get your stock sale, and your suitor gets their asset purchase. The middleman had a certain tax situation that would al-low them to use the stepped-up basis of the assets in

C-Corp Status Kills Biz Sale ValueB U S I N E S S S A L E

continued on page 10

JULY/AUGUST 20124 THE BUSINESS OWNER THEBUSINESSOWNER.COM

Accounting is a system for measuring the results of busi-ness activities and communicating them to interested parties. Interested parties may be internal or external to the business. When the interested parties are internal, such as the manager(s) of the business, there are ba-sically no rules or restrictions on what or how financial reports are created. When the audience is outside par-ties, however, rules and guidelines dictate how transac-tions should be recorded and what and how information should be reported.

Outside, or external, parties may include vendors, credi-tors, insurance underwriters, investors, regulatory bodies and taxing authorities. The accounting rules and guide-lines that dictate how financial transactions are record-ed and how financial statements are prepared and pre-sented are referred to as Generally Accepted Accounting Principles (GAAP). This article focuses on one common report type – the balance sheet, which is required under GAAP, is universally requested by outside parties and is very useful for internal/managerial purposes. Statement of Financial PositionThe balance sheet is also known as the Statement of Financial Position. It presents the financial position, or condition, of the business at a single point in time. This is in contrast to the Income Statement, which presents the performance of the business over a defined pe-riod of time, and the Statement of Cash Flows, which presents the sources and uses of funds over a defined period of time.

The basic organization of the balance sheet is the group-ing of the firm’s resources (assets) and claims on those resources (liabilities and owner’s equity). The term “bal-ance sheet” draws its name from the fact that it shows the following balance or equality:

Assets = Liabilities + Owner’s Equity

As the above equation depicts, a firm’s resources (as-sets) are always in balance with (equal to) the claims on the assets by creditors (liabilities) and owners (equity). Incidentally, and interestingly, the following equations are true for any company (or individual, government, etc.):

Liabilities = Assets – Owner’s Equity

Owner’s Equity = Assets – Liabilities

In addition, as one can see in the accompanying Exhibit 1, the balance sheet can also provide detail as to what types of assets are held by the business and from where the capital was obtained (trade creditors, lenders, equity providers, etc).

Of paramount importance is the definition of an asset, liability or equity stake. That is, at what value should one record items on the balance sheet? Only when all bal-ance sheets are prepared using the same rules and meth-odologies can viewers fully grasp the data presented, and compare one company against the other and glean useful and reliable information, assuming the reader un-derstands the rules and methodology under which each balance sheet is constructed. Of course, this is why busi-ness owners are often asked, “Are these statements pre-pared according to GAAP?” It’s also why some creditors and investors require the statements be audited. The pur-pose of an audit is for an outside party to verify that the statements were prepared in conformity to GAAP and, if not, where and how they deviate.

Asset Classification:After the assets that qualify for inclusion on the balance sheet have been identified and valued, accounting stan-dards call for them to be listed or grouped by class. In other words, assets with similar characteristics should be grouped together.

Current Assets: Assets expected to “turn into cash” or be sold or consumed during the normal operating cycle of the business are referred to as “current as-sets.” The normal operating cycle of a business is the time that it takes for the business to turn cash into sell-able goods or services, which are then sold and turned back into cash. For simplicity, it is generally accepted that the business operating cycle is one year. Any as-set that’s expected to be turned into cash within a year is listed as current. Notice the various types of current assets grouped together in Exhibit 1. Common current assets include cash, receivables, inventory, and pre-paid expenses such as payroll and taxes, etc.

Investments: Equity ownership in other business-es – generally ownership interests of less than 50 percent of the total equity of the business (i.e., mi-nority positions in other business ventures) – are recorded as an asset on the balance sheet at the amount that was invested.

The Balance SheetF I N A N C E


Property, Plant and Equipment: Tangible assets not expected to be sold for cash within a year, i.e., not held for resale, such as inventory, and used in a firm’s operations are placed on the balance sheet as prop-erty, plant and/or equipment.

Intangible Assets: Items such as patents, trademarks and goodwill are intangible assets. Expenditures made by a firm to develop intangible assets are not usually recognized as assets due to the difficulty of ascertaining the existence of future benefits. As such, only identifiable intangible assets acquired in trans-actions with third parties, such as a patent acquired from another business, are recognized as assets – at the acquisition price.

Asset Recognition and Valuation.According to GAAP, a firm may record on its balance sheet an asset when:

A. It enters into a transaction with a third party, and said transaction…

B. Gives rise to a benefit, and

C. Said benefit can be valued objectively and measured with a reasonable degree of precision.

A benefit is something that has the ability to generate future cash inflows or reduce future cash outflows. The definition of value for GAAP-conforming statements is net present value when the asset is classified as current (see below), and is acquisition cost when the asset is classified as non-current. The benchmark for “objective” and “reasonable” is the value at which various randomly picked experts could agree. Usually, it is assumed that the most conservative approach or conclusion would be, or should be, the result. This conservative standard is set based on the premise that when others look to a firm’s financial statements to assess whether to enter into a transaction with the business that could expose them to financial risk, a more conservative approach is merited.

Example 1: XYZ Corp. sells merchandise from their inventory for $5,000 to be paid in cash in 30 days. A receivable of $5,000 can be recorded as a current asset because a transaction gave rise to the benefit of receiving $5,000. Of course, this is only true if the customer has the financial wherewithal and commit-ment to make the payment.

Example 2: XYZ Corp. acquires equipment in ex-change for a $10,000 down payment plus the obli-gation to pay an additional $90,000 over two years.

ASSETS 2002 % 2003 %

Cash $30,000 8% $5,000 1%

Accounts Receivable $85,000 23% $95,000 25%

Inventory $75,000 20% $90,000 24%

Other Current Assets $5,000 1% $15,000 4%

Total Current Assets $195,000 53% $205,000 55%

Investments $50,000 $50,000

Building and Equipment (cost) $200,000 54% $200,000 53%

Accumulated Depreciation ($75,000) -20% ($80,000) -21%

Total Non-Current Assets $175,000 47% $170,000 45%

TOTAL ASSETS $370,000 100% $375,000 100%

LIABILITIES AND EQUITY

Trades Payables $20,000 5% $25,000 7%

Salaries Payable $10,000 3% $11,000 3%

Other Payables $5,000 1% $5,000 1%

Line of Credit $50,000 14% $50,000 13%

Current Portion of Long-Term Debt $10,000 3% $10,000 3%

Total Current Liabilities $95,000 26% $101,000 27%

Interest Bearing Debt (Long-Term Portion) $120,000 32% $110,000 29%

Deferred Compensation Agreement $10,000 3% $15,000 4%

Total Liabilities $255,000 61% $226,000 60%

Paid-In Capital $50,000 14% $50,000 13%

Retaining Earnings $95,000 26% $99,000 26%

Total Owner's Equity $145,000 39% $149,000 40%

TOTAL LIABILITIES AND EQUITY $370,000 100% $375,000 100%

Exhibit 1 - XYZ CompanyComparative Balance Sheets for December 31


XYZ may record the asset on its balance sheet at $100,000. Inherent is the assumption that XYZ paid roughly what the assets are actually worth to XYZ. Looked at in another way, it is assumed that XYZ will conservatively receive at least $100,000 of benefits from the equipment over time.

Example 3: XYZ Corp. has been in business for 75 years and is well known and trusted in the market-place. This market recognition and reputation is ex-pected to provide XYZ with benefits in the future by way of higher sales and lower required marketing expenditures. This asset cannot be placed on the bal-ance sheet, however, in that no identifiable transac-tion has given rise to the benefit and it would be very difficult for persons to agree on a method for quantify-ing the future benefit.

Note: In preparing informative reports for managers or owners of a business, or those that are meant to supplement GAAP-conforming financial statements, assets and liabilities may be reported and valued on a balance sheet using any method deemed valuable or informative by its creators. Alternatives to GAAP-conforming asset valuation methods include:

• CurrentReplacementCost

• CurrentNetRealizableValue

• PresentValueofFutureCashFlows

Liability Classification:After the liabilities that qualify for inclusion on the bal-ance sheet have been identified and valued, accounting standards call for them to be listed or grouped by class. In other words, liabilities with similar characteristics should be grouped together.

Current Liabilities: Obligations expected to be paid or discharged within one year. Common current liabilities are obligations to suppliers, employees and lenders.

Long-Term Debt: Obligations having due dates or ma-turities of more than one year are generally classified as long-term debt. See the accompanying Exhibit 1. Bond, mortgage and bank borrowings are common types of long-term debt.

Other Long-Term Liabilities: Obligations not properly

considered current or long-term debt are classified as “other long-term liabilities.” Included are items such as deferred income taxes and deferred com-pensation obligations.

Liability Recognition and Valuation:A liability arises when a firm receives benefits and in exchange promises to pay the provider, through cash, goods or services, a reasonably definite amount at a rea-sonably definite date. If the liability is to be discharged via payments of cash within one year, the obligation is recorded as the sum of the payments to be made. If the payment dates extend longer than one year, the liability is recorded at the present value of the future payments.

If the liability is an obligation to deliver a service, such as the delivery of fabricated equipment, the liability is record-ed when the transaction takes place that gives rise to the certain obligation. The price at which the liability is record-ed is the price paid by the customer. Once the obligation is fulfilled, such as the satisfactory delivery of the equip-ment, then the liability is removed from the balance sheet.

Example 1: XYZ Corp. purchases merchandise from a supplier in exchange for a promise to pay $8,000 in 30 days. The $8,000 is recorded as a liability (cur-rent account payable), and the assets purchased are recorded as an asset at the purchase price ($8,000).

Example 2: XYZ Corp. borrows $500,000 from a bank to purchase a building. The $500,000 is recorded as a liability because XYZ received the benefit and is now obligated to repay the $500,000 on a payment sched-ule stipulated in a promissory note (note). The portion of the note that is due within a year is recorded as a current liability (i.e., note payable – current portion). The amounts due to be paid on dates more than a year from now are recorded as a long-term liability (note payable – long-term portion). The asset is re-corded at the total purchase price. So, if the total was $600,000, i.e., XYZ paid $100,000 of the price in cash, the asset (building) is listed at $600,000.

Example 3: XYZ Corp. provides a five-year warranty on its products. Past experience allows XYZ to estimate with reasonable accuracy the warranty expense it will bear, on average, on each unit that is sold. As such, with each sale of their $10,000 product, a $250 liabil-ity obligation is recorded. This account is also reduced



Control of a company refers to the ability to “control” the operations and activities of the business. Control allows the controlling person, entity or group to influence or dictate:

• Theappointmentofofficers(whomanagethebusiness)

• Howthecompanyismanaged

•Whatthecompanydoesandwhereitoperates

• Boardmembership

• Officerandboardmembercompensationandbenefits

•Whetherprofitsaredistributedtoshareholdersorre-tained in the company

• Investmentsmadebythecompany

• Howthebusinessiscapitalized(debtorequitycapitaland the terms of such)

•Whether, when and at what price (and terms) thebusiness is sold

As you can see, control is an incredibly important and powerful quality of ownership. Conversely, lack of control is a materially impaired position indeed.

Generally, control is associated with an ownership per-centage that exceeds 50%. This is because the control-ling shareholder can win votes that require a majority. Keep in mind, however, that the matter of control or non-control ownership position is not an either/or proposition. Rather, it’s a matter of degree. Things that shift the pen-dulum one way or the other are:

• A company’s organizational documents, such as itsarticles of incorporation, bylaws, and any shareholder agreement

• Statutes (laws) of the state of organization, suchas supermajority voting requirements and what are known as “dissolution statutes”

• Distributionoftheequityownership

The distribution of the equity ownership of a business can significantly impact the amount of control that a shareholder may exert. For example, if there are only two equity holders, one with 66% and one with 33%, the 33% owner will have virtually no control, in most cases. However, if there are three owners with equal owner-ship, any one can provide effective control to any other.

This position in itself lends power to the minority. In turn, none of the shareholders has ultimate control so no own-er’s shares will command a premium unless paired with the shares of another.

State of OrganizationNon-control shareholder rights vary from state to state. Some state statutes stipulate that a simple majority can approve major actions such as a sale of the business. Other states require a two-thirds majority. This means that if your company is domiciled in certain states, a non-control interest of just over one-third has the power to block many corporate actions. This characteristic adds to the power of the minority share, detracts from that of the majority, and improves the relative value charac-teristics of the minority. States also vary in the power they provide to minority stockholders that dispute value received in a sale of their business, and in the power provided to minority stockholders to force a buyout of their shares.

Control Impacts ValueControl interests will sell for higher prices than non-con-trol positions. This is what gives rise to what is referred to as control premiums or their counterpart, minority discounts. Studies have documented lack-of-control dis-counts averaging 25% to 30% for publicly traded com-panies. Similarly, studies of publicly traded interests that move from non-control to control reveal a premium of 35% to 45%. The discounts and premiums for inter-ests held in private companies are greater. Sometimes, much greater.

Control discounts and premiums are widely misunder-stood and commonly misapplied. When a private com-pany sells, it’s usually for a 100% interest and the price paid is for total control. If the price paid is $1 million and the business has a single shareholder, no premium or discount has been paid. The price paid was simply the value of the business. But if a 33% owner of a business that’s worth $1 million wishes to sell, what would the 33% position be worth? One could argue it’s $333,333, but finding someone to pay such a price for a non-con-trol position would be improbable. This is because the buyer would not be able to enjoy any of the liberties listed at the beginning of this article. Moreover, the mi-nority owner would suffer at the whim of the controlling interest holder who is able to fully exercise all the privi-leges of control listed above.

Control and Minority StakesB U S I N E S S V A L U A T I O N



Yes, the proposal will become the main part of your agreement with the prospect, once they approve it. It will also be a document that you, they, and others can refer to as a guide for what is being done and what will be gained. It should be brief – no more than three pages at the very most using standard margins, spacing and font sizes. Preferably, a single page. It shouldn’t look “legal” but it should be clear and professional.

It should NOT contain any mention of your fees!

Each agreement should be 100% tailored to the sub-ject project. It should NOT be written by a lawyer, and it should not be designed to provide unilateral protection for either party.

When the desire is to bring in more business and spend less time chasing prospects, you need to break down the barriers that lie between your prospects and the pen they use to write the check. Here’s the simple formula:

your commitment, and the process you will work. Then, explain that all the details will bog down the agreement, and that’s not good for anyone.

2. Provide in your proposal three options for accom-plishing what the client desires – one with a minimal-ist scope of services, one with a middling scope of services, and one with an extensive scope of ser-vices. For our merger and acquisitions advisory ser-vices, here are the three sets we provide for seller clients, in summary form:

A. Analyze the business; provide an estimate of market price and terms; prepare summary of-fering documents; and then introduce the client-seller to three buyers that are a good fit. The cli-ent handles it from there. Of course, we don’t recommend this one!

B. Analyze the business; provide an estimate of market price and terms; prepare best-of-class offering documents; select three top buyers can-didates; and represent the seller in working with the buyers and closing a transaction.

C. All of b above but instead of limiting the buyer work to three, we run a full buyer search; attempt to secure offers from ten buyers; and then work them all to maximize the sale price. The time re-quired of our firm is much greater here, but it typically results in the highest sale price.

Of course, the fee requirement for each of the above will be different. The lowest fee choice (and lowest value delivered) will be option A. Option C will offer the highest value and require the highest commit-ment (fee) from the client.

One great benefit of the “multiple options” strategy is to get the client to move from “who do I choose?” to “which option of yours do I choose?” For you, the proposer, it’s a choice of yeses.

3. Identify and work only with the decision maker/ulti-mate buyer. The person that can approve the agree-ment and sign the check. Proposals to non-buyers are a waste of time, paper and ink. When a non-decision maker explains that you have to work with him, explain that your company policy prohibits you from working with non-decision makers. You are only able to work with decision makers directly. The reason is there is a

continued from cover page

Proposals That Close More Business

Get the prospect to clearly articulate what he wants to accomplish

Get the prospect to agree on an estimate of the value, in dollars, the project will earn or save

Get the prospect to decide when he’d like to have the project completed, i.e., enjoy the benefit(s)

Get the prospect’s go-ahead for you to begin the work necessary to deliver the results

Your fees should only be presented AFTER you and the prospect have agreed on everything else. The agreement on your fees can be attached as an addendum. Here are some other suggestions for formulating proposals that close more business:

1. Do not include details about what you will do to de-liver the benefits outlined in the proposal. The client should already trust you and be convinced you can deliver the desired results. You can talk about pro-cess, develop methodologies, and help them under-stand what you will do, but this does not need to be in the proposal/agreement. If the client has a need to add great detail in these areas then you have a trust problem. Spend more time helping them understand you, your firm, your experience, your capabilities,


lot at stake and you cannot risk miscommunication or errors that can occur by not working directly with the decision maker/per-son that will ultimately be judging the results.

4. Establish and include in your proposal the proj-ect’s business objec-tives. Not deliverables, methodologies or “tasks to be performed” but objectives that will be ac-complished for the client.

Include the value to the client of completing each. The items can be for either the company or the per-son you’re working with (or both). For business seller representation, it’s a sale price or range of sale prices for the business.

5. Include measures of success for the project. These are the things that you’ll both look to evaluate to see that progress is being made. For business sellers ad-visory, it’s x number of offers in x price range, and then a signed letter of intent with a qualified buyer in the target price range.

6. Don’t deliver the agreement until everything that’s in it is agreed to between you and the prospect. Each time they ask for a proposal, drill down on the terms that need to be clearly agreed upon. Explain that once you agree on terms, you can deliver a proposal that contains the agreed-upon terms. When you have an agreement and they’re excited to get started and see the results, tell them the proposal will be on their desk, in writing, the next day. Make it happen. No need to present it in person –-- they’ll need time to review it anyway.

7. Include in the written proposal that agreement is con-tingent on agreement of the fees to be paid. When the client asks for the fees, tell him or her that you need to agree on what you will be doing before you can provide fees. Then, once they’ve reviewed the proposal and agreed to all the terms and said they want to get it going, provide the fee proposal, in writ-ing, with an investment stipulated for each option (as described above). Include in your fee proposal

ROI estimates for each option. Then, agree with the prospect on when you will follow up (after he’s had a chance to review the fee proposal), in the event you have not heard from him already.

After submitting the fee schedule, follow up at the agreed-upon time. When you reach him or her and com-plete the initial greeting and niceties, don’t say a word. Just wait for a response. If he beats around the bush, ask which option he has chosen. Don’t agree to reduce any fees without removing some of the deliverables or meth-odologies, whether or not they are outlined specifically in the agreement. Refer to the ROI for each. You are selling value, not price. It’s about ROI to the client!

Ask if he is ready to get started. Signing of the docu-ment and payment of the initial fee is secondary to get-ting started on the work. Once you begin, the agreement is basically in place. Or, at least that’s the way I suggest you handle it. Of course, the client will want to get the agreement finalized as well. And he will. If, however, you simply receive a check, don’t bother with the signature. Add to the proposal that payment for services constitutes acceptance of the agreement.

Are you skilled at getting new business booked? If not, there’s no better place for you to improve your skills. The people that close business enjoy the spoils.

Your industry does things differently? Well, maybe you can be a pioneer. Maybe a non-traditional method can be an innovation that helps you earn more business and grow faster.

By the way, the business owner-seller mentioned at the beginning of this article hired me to represent him in the sale of his business. We shook hands on it and got start-ed immediately. I followed up with an email that docu-mented our agreed-upon next steps and the agreed-upon compensation. He does not even need to respond to my email affirmatively. I trust him (or I would not do business with him) and what is most important is we get started. An oral agreement is a legally binding agreement. If, in the worst-case scenario, he tried to wiggle out of the fee, I have documentation of our agreement and will have ample documentation of the work I do on the project that will have clearly given rise to the business sale. I’ve worked in this manner with other clients and have never had a problem.

Each proposal should be 100% tai-lored to the subject project, not written by a lawyer, and not designed to provide unilateral protec-tion for either party.


your C-corp and then they’d close it down. You, the seller, would get a little more than you would have otherwise (by selling the assets directly to your suitor). I never quite understood exactly how the middleman would make it work, and I did not fully trust it, but it’s moot now anyway. A few years ago, the IRS made this type of transaction

continued from page 3

C-Corp Status Kills Biz Sale Value

as warranty services are rendered and sold units pass the warranty date.

Example 4: XYZ Corp. recently discovered that the warehouse that it has rented and used for 20 years sits over groundwater that has been found to be contami-nated. XYZ’s attorney has informed XYZ management that a lawsuit has been filed against the owner of the property and that XYZ will likely be named as well. Le-gal defense costs will almost certainly be required and, if XYZ is found to be responsible in whole or in part, the cost for clean up could be substantial. This event does not yet merit recording of a liability on the balance sheet because there has not been a transaction and the costs are at this time too difficult to estimate.

Owner’s Equity Classification:Generally, businesses will separate the equity section of the balance sheet into two distinct categories:


The Balance Sheet

A. The capital contributed by the equity holders

B. The earnings or profits earned by the company

See Exhibit 1 for an example.

Owner’s Equity ValuationThe owner’s equity of a firm is a residual interest, mean-ing the owners have a claim on all assets not required to meet the claims of creditors. The assets and liabilities recorded on the balance sheet, therefore, determine the valuation of the owner’s equity. This can be seen by view-ing the basic balance sheet formulas at the beginning of this article. The value of the equity is simply the assets left after the debt is repaid.

A working knowledge of the balance sheet is essential for business owners, investors and persons or firms that extend credit. To the extent you can master balance sheet basics, you may be able to set yourself apart, just a bit, from your peers and, hopefully, make more informed decisions.

What would be the fair market value for a 33% interest in our example company worth $1 million? Somewhere between $0 and $333,333, depending on the particular characteristics. Namely, the state statutes under which the business operates; the company’s organizational doc-uments, i.e., the company bylaws and any stockholder agreement that might be in place; the distribution of eq-uity ownership of the company, etc.


Control and Minority Stakes

Control premiums really don’t occur except when a public company is purchased and a premium is paid over the share price at which individual non-control shares are traded on the open market, i.e., an exchange such as the New York Stock Exchange or NASDAQ. Shares purchased in public companies are at non-control prices. That is, un-less the buyer, by purchasing your shares, will move from a non-control position to control.

illegal. After all, it was just a transaction designed to avoid taxes. So, avoid this little trick. It’s illegal.

These strategies can help you reduce your tax bill when you sell a business organized as a C-corporation, but the best solution is not to be one in the first place. C-corporation status can really kill company value when calcu-lated at the shareholder level on an after-tax basis. Consult your tax advisor.


Q:The limit on how much I can contribute annually into my retirement account, on a deductible basis,

is pretty low. Does it make sense to make contributions that are not tax deductible?

A: The short answer is, yes. Although additional con-tributions may have to come from after-tax income,

the money contributed to your retirement account will earn and grow tax-free. Let’s look at the tax-deferred in-come growth from an annual return point of view. In the table below, we show pre-tax equivalent returns of earn-ing 8% in a tax-deferred account. The overall tax rate is an estimate of your total federal and state taxes.

The tax deferral enjoyed on income generated on after-tax retirement account contributions increases your comparable pre-tax return by 66% if you’re in a 40% tax bracket, 54% in the 35% tax bracket, and 42% in the 30% tax bracket.

The higher your tax bracket and tax rate, the more tax-advantageous it is for you to make voluntary contribu-tions. Compare the 40% tax rate column (which yields a pre-equivalent return of 13.3%) with the 30% column (a pre-tax equivalent return of 11.4%). That’s 1.9 more per-centage points.

Note as well that if your investments earn more than 8%, your pre-tax equivalent return will be higher as well. For example, at the 35% tax rate, the 8% return is equivalent to a 12.3% pre-tax return. Increase the 8% return to 10% and your pre-tax equivalent return increases from 12.3% to 15.4% (10% return divided by .65). That represents an additional 3.1 percentage points on top of the 12.3% rate.

To further illustrate the value of making voluntary contri-butions, here is the total payoff if you annually invest an additional $2,000 per year into your retirement account

Q&A: Non-Deductible Retirement Contributions

R E T I R E M E N T

Your Overall Tax Rate

Annual Return

Pre-Tax Equivalent¹

Bonus Return

Percent Increase

40% 8% 13.3% 5.3% 66%

35% 8% 12.3% 4.3% 54%

30% 8% 11.4% 3.4% 43%

(we assume the $2,000 IRA contribution is made at the end of the year).

Just as with tax-deductible retirement plan contributions, non-deductible contributions compound tax-free every year the money remains in your account. That’s why they should be a significant part of your retirement planning.

The long answer? Well, there may be some situations where your excess cash could be better used by paying off high-interest debt, such as credit card debt. Talk to your financial advisor. But always remember: monies held in re-tirement accounts cannot be seized by creditors, even in bankruptcy. This is especially valuable to people, such as business owners, that take and bare risk.

# of Yearsof $2K

ContributionsSum of the

Contributions

Total Value at End of Term at 8%

Annually

10 $20,000 $28,973

20 $30,000 $54,304

30 $40,000 $91,524

40 $50,000 $146,212

¹Formula: Annual Return of 8% divided by 1.00 less tax rate (0.40, 0.35, and 0.30).

Showdown at the 401K corral

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