PCA Magazine 2022 Show Issue

PREMIUMCIGARS.ORG VOLUME 2 2022 | PCA The Magazine 41 had the vision of retiring when I turned 67. That birthday comes up this October. I have over the past few years been reading articles in trade magazines that pertained to the selling of a business, trying to get an understanding of what is involved. I never wanted to be in a position where maybe my health forced me to sell or I felt pressured and may not receive what I wanted for the business. But I never really expected to have a customer come back to me and ask me if I was serious about selling the store. The first thing he asked me was how much. Well, at that moment I did not have the answer. So how do you go about determining the selling price? Most businesses are sold based on EBITA. That is earnings before interest, taxes and amortization. So, you go to your last three years’ returns and remove your salary, your wife’s salary, and any fluff—personal cars, personal insurance, etc.— anything that is not essential to running the business. This is the number you use. Then a typical valuation is two to six times that EBITA. That is your range of numbers to pick from. That sounds really simple, right? One thing I picked up on out of the articles I read is that if a business does not report all of its sales to the IRS, this will affect your EBITA valuation. You may still be able to ask above the valuation; just remember, if your buyer is financing the purchase, the banker will review your tax returns and may not make the loan if your reported numbers are not supported by tax returns. Therefore, it could affect what your business could sell for. My advice: First, I would hire a financial advisor to do a full review of your financial position and what you are looking to have as a monthly income for retirement. Work the numbers, then produce the number that meets your future retirement needs. Getting professional help for the valuation process is important. The next step is have an attorney draw up a non- disclosure agreement. If you were to engage a broker, he may vet your potential buyer’s finances before you share your selling price or share any financial documents. This is where the negotiation begins. If you’re not comfortable with this aspect of the sale, you may use a broker to help you. I was comfortable with negotiations and was comfortable with my buyer’s ability to purchase the business, so I handled the sale myself. A typical broker charges around 10 percent of the selling price. We were ready to present the selling price to the buyer so I had my financial advisor prepare the selling price document. In my case, we had the retail business, lounge and bar that operates as a separate business within our shop, and we owned the building. So the selling price was broken down into three separate values for a total purchase price. This included a detailed description of what was included in the sale. My buyer then had his lawyer draw up an asset purchase agreement in response to our selling price. This document detailed everything the buyer expected to receive for the price he was offering. If you do not use a broker, I advise having an attorney draw up all documents between buyer and seller to be sure that everything is properly represented. This provides a detailed understanding of what items do not convey with the sale. (Are your employees’ jobs protected?) And there are details pertaining to the name of the business, phone numbers, website names. Responsibilities for any liabilities that arise before or after the sale. Employee vacation days, sick days owed, as well as any legal issues that may be on the seller. Also, this covers releasing the seller from anything that arises after the sale. It details responsibility of the seller to have given accurate information in all the documents provided to the buyer—details right down to spelling out who gets the cash in the register at the close of the sale. This document goes back and forth until both parties agree. This can take time while each party reviews the offers. So, an offer has been accepted. Now more work begins. If your buyer is financing the purchase, you will be required to supply mountains of documents and answer lots of questions supporting the business. Remember, the bank is going to be sure the business can support the buyer's loan. There are business valuations, so specific questions may need to be addressed. One thing the bank asked us was why 2021 showed a substantial inventory increase over previous years. Well, with cigars in short supply most of the year we increased our inventory to avoid out- of-stock issues with several manufacturers, as well as supporting increased sales. We have a large donation to charities every year; the bank wanted to know why. (Simple answer: Because we elect to.) We received PPP monies; we needed to supply documentation showing the loans were forgiven. Appraisals were necessary for the building. Proof of insurance, EPA questionnaires, deed and parking reviews, inspections of the premises. Preparing asset lists, supplying power bills, phone bills, bank statements, information on point-of-sale systems, copiers and equipment lease, and the lease being assumed by the buyer. Any repairs to be done that were in the asset purchase agreement. My buyer was approved, so we entered the process of transferring our accounts, removing our billing information, credit cards, ACH information for all our suppliers, phones, internet, utilities, etc. Also all the recurring fees that are charged to your credit card, monthly or yearly. Changing over credit card processors, web card processing, preparing the final inventory for the sale. S U C C E S S I O N P L A N N I N G A TOBACCO SHOP CHANGES HANDS WAYNE ANSTEAD, until recently owner of Anstead’s Tobacco Company in Fayetteville, North Carolina, has just completed the process of selling his business. The story of how this transaction came together illustrates the arduousness of the selling process.