This is the third story in a series of articles about selling a business during the pandemic. The first story discussed the value of improving markets for business sales and the second focused on the financial information buyers will want to review.
This article will review other types of information potential buyers will request or a seller might wish buyers be made aware of to increase the value of the transaction. The influence of some of these items may well be reflected in the financial statements, but much of it has to do with fundamental aspects of a business’s operation.
At the beginning of sales negotiations, even before financial statements are shared, sellers should consider having buyers sign a non-disclosure agreement (NDA) which is a legal contract that describes the confidential information a seller is asked to or wants to disclose to a potential buyer and its advisers but which cannot be shared with others outside the transaction. “Some of these details may relate to expenses a buyer might incur,” notes Mark Dunsmoor senior vice president of Legacy Bank “while others relate to revenue opportunities.”
The expense side includes costs currently incurred by the seller. While a new owner may eventually switch providers for some of these products or services, the categories of expenses required to operate the business will most likely remain the same. “Expenses might include mortgages or lease agreements for buildings and property occupied or used by the seller, as well as, leases for or amounts due on equipment or machinery used in the business,” adds Dunsmoor.
“Insurance policies covering property, vehicles and equipment fall into this expense category, as well as, professional liability insurance, workman’s compensation and product liability,” remarks Dunsmoor. Other typical expenses most sellers may disclose include employee-related expenses such as salaries, health insurance, retirement plans and perhaps employment agreements with certain individuals.
“In this day and age, it may be important to have ‘work from home’ arrangements disclosed that highlight fees the company incurs for crucial communications technology that facilitate emerging remote work lifestyles,” adds Dunsmoor. Some, but not all, of these costs may be based on contractual arrangements, the details of which should be shared. There are also other operating expenses such as utility costs, building and equipment maintenance as well as federal, state and local permits and licensees that might be required to operate the business.
If the company has union employees, the union agreement is an important element to consider. The buyer must also be made aware of any pending legal action against the seller.
“Potential buyers will wish to review files documenting the selling firm’s formal business status including bylaws, resolutions, operating agreement and stock ownership if this is relevant. This will confirm the seller’s ownership and its authorization to sell,” explains Dunsmoor.
In addition to expenses, sellers may have information to share related to its revenue stream. This could include a list of current customers and the amount of revenue they represent featuring a list of viable prospects and vendors or any long-term contracts that may effect the transition.
“Sellers who hold patents, have unfinished patent applications or operate with other trade secrets, which make its products or services unique in the market may be asked to share that documentation,” added Dunsmoor. “These types of documents can hold a high level of value to the right buyer.
Most business will have marketing programs that support the sale of its products and services such as advertising, trade association membership, trade show participation and public service/ community relations activities that are usually requested. While this category might be classified under expenses, it is directly related to the seller’s revenue generation and competitive advantages which together offer a high level perspective of daily expectations.
Mark Dunsmoor is a senior vice president of Legacy Bank with 40 years of banking expertise. Dunsmoor has been recognized as the Greater Pueblo Chamber of Commerce Charles W. Crews Business Leader of the Year and volunteers in many capacities including on the local hospital board.
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Are you one of the 19% of U.S. cellphone holdouts who according to Pew Research doesn’t use a smart phone? Maybe you are a part of the 4% who still have no cellphone at all. No matter which category you fall in, you can still bank remotely through what is commonly referred to as online or internet banking. All you need is access to a computer.
In today’s busy society, many people who bank remotely use both services; online and mobile banking. Fifty-three percent of the people who responded to a recent BankChoice Monitor survey reported using their bank’s mobile app weekly and more than 88% of those individuals also reported logging into their bank’s online website during the same time period. Still, online banking doesn’t require a cellphone of any kind to give you remote access.
Today 71 percent of Americans have online bank accounts for good reason. “Online banking provides you an extremely convenient way to check your balances, transfer funds or pay bills at any time of the day,” says Mitch Brown, Pueblo West Branch President for Legacy Bank. “All of your past and current financial transactions are available for review including those pending. If you have more than one account, you can automatically transfer funds between them and when necessary you may be able to transfer funds from your bank to another bank.”
People who use online banking normally use a desktop or laptop computer to securely connect to their account portal on a bank’s website through the Internet. “Banks work hard to make their websites exceedingly secure understanding the sensitivity of personal financial information,” comments Brown. “From the moment you connect through the website, a variety of technology is in place to keep you safe and secure.”
Still, you have some obligation to help protect your information. Once you find your bank’s website online, secure internet based banking starts with a strong user name and password. Keep in mind, if you sign in from a different computer or if you have cleared your browser’s cookies, your bank may require an additional step to access your account.
Sometimes one-time security codes typically sent by the bank to a smart phone are required at time of log-in to help authenticate your identity. This step is called two-step verification. If this appeals to you, ask your bank if it can offer two-step verification every time you log in. You can also set up your own two-step verification through many of the major browsers. “If you do not own a cellphone, banks can use landlines, security questions, and phrases as supplemental ways to authenticate your identity. Be sure to state those needs when you setup your online account,” states Brown.
Mitch Brown is the branch president of Legacy Bank Pueblo West and has more than 16 years in banking and finance. Brown holds a master’s degree in business administration and is an active part of the Pueblo West community. His involvement includes Rotary Club Pueblo West and Young Life among others.
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Credit histories and credit reports are issued by businesses known as credit bureaus. The most prominent credit bureaus are Equifax, Experian, and TransUnion. They each gather information from a person’s bank(s), credit card issuers, automobile finance companies and public information resources such as property and court records. The three firms are independent from each other and rely on different sources for their reporting. Because the credit bureaus differ in sources to compile their reports, the content of one credit bureau’s report may not be identical to another.
Mark Dunsmoor, senior vice president of Legacy Bank suggests that people check their credit reports at all three credit reporting bureaus annually and immediately dispute any errors. “The FACT Act (Fair and Accurate Credit Transactions Act) stipulates that each legal U.S. resident is entitled to a free copy of his or her credit report from each credit reporting agency once every 12 months,” cited Dunsmoor. Since incorrect information on a report can negatively impact your credit score, a yearly checkup is a smart way to stay on top of your results.
Be clear however, that credit reports and credit scores are not the same thing. “Your credit score, often referred to as your FICO score, is a number calculated by a credit bureau as a measure of your creditworthiness,” comments Dunsmoor. “Credit score is determined by using a commonly accepted formula developed by Fair Isaac Corp. (FICO) and based on the credit information that the credit bureau has compiled.”
Scores range from 300 to 850. A score below 650 is often considered a problem while an excellent score is considered to be 750 or above.
Your FICO score may vary from one credit agency to another for several reasons. Reports may have been produced on different dates or the credit bureaus used different FICO scoring models. Some lenders provide information to all three major credit agencies while others do not. If you are seeking credit and your score differs greatly from one agency to another you should check into the basis of each score.
According to Dunsmoor, there are three steps you can take to maintain a positive credit report and FICO score or improve either if need be. “First, pay your bills on time including credit cards, loan payments, mortgage payments, and similar charges,” said Dunsmoor. “If you’re behind on any payments, bring them current as soon as possible. Late or missed payments appear as negative information on your credit report for seven years.”
Second, Dunsmoor says keep credit card balances small to maintain a low credit utilization ratio. “Credit ratio is calculated by adding all your credit card balances at any given time and dividing that amount by your total credit limit,” adds Dunsmoor. “For example, if you typically charge about $2,000 each month and your total credit limit across all your cards is $10,000, your utilization ratio is 20 percent. Lenders typically like to see low ratios of 30 percent or less. This does not mean you cannot use your full credit limit, it is just important to be cognizant of the balance at the end of the statement cycle to determine your credit utilization. ”
Finally, be mindful of the accounts you are opening and/or closing Canceling unused credit cards with no annual fees may increase your credit utilization ratio.
Mark Dunsmoor is a senior vice president at Legacy Bank and has 40 years of banking expertise. He has been recognized by Greater Pueblo Chamber of Commerce which presented him with the Charles W. Crews Business Leader of the Year.
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In 1974, the federal government approved a bill that created a new type of financial savings account, known as an Individual Retirement Account to encourage people to save for retirement. Today these initial IRAs are known as traditional IRAs and can be opened at banks, credit unions, investment firms and other financial institutions. These firms are known as custodians.
Individuals can lower their taxable income by putting money into traditional IRAs every year. These funds earn ongoing interest and generate income but IRA owners can delay paying any income tax on their annual deposits or earned money until they turn 70½ years of age. For many people, their age 70½ tax bracket is much lower than when the money was earned resulting in lower taxes when the money is withdrawn. At that point, they must begin withdrawing a portion of the money each year. These funds are considered income and are taxable. If for some reason a person chooses to withdraw money at an earlier age, a penalty is assessed by the Internal Revenue Service.
“Traditional IRAs include a wide range of investment opportunities, including stocks, bonds, mutual funds, annuities, unit investment trusts and exchange-traded funds,” said Mark Dunsmoor, senior vice president of Legacy Bank. “As companies started eliminating pension benefits, IRAs helped the average person invest in these products with tax savings to better prepare them for their future.”
To help those closer to retirement, allocation amounts are increased based on age. “If you are under 50, you can deposit up to $6,000 yearly into a traditional IRA as of 2019,” said Dunsmoor. “If you are over 50, you may deposit up to $7,000.”
“Since 1974, changing regulations have morphed IRAs into several different types of investment accounts, however the logic remains the same for each; save money for retirement while reducing your taxes,” said Dunsmoor. “Yet, all IRA accounts do not utilize the same tax advantages. The Roth IRA is a great example.”
Individuals can deposit funds into a Roth IRA and pay income taxes upfront on the initial investment. However, later when the owner withdraws those funds, no further taxes are paid on the financial growth.
“Roth account owners who withdraw after 59½ years of age and whose accounts have been open for five years or more pay no taxes on any funds withdrawn. Equally important, you are not required to start withdrawals at 70½ as with a traditional IRA,” said Dunsmoor. “Roth IRA’s appeal to people who believe their tax rates at retirement age will actually be higher than when they opened the Roth IRA.”
In 2019, the annual contribution levels for a traditional IRA and the Roth IRA are the same. Roth contributions however, are limited to the extent of your income versus the $6,000 to $7,000 for a traditional IRA. For example, if you earned $4,000 in income that is the most you can contribute. The IRS also places restrictions on high income earners using a formula known as modified adjusted gross income and tax-filing status.
Mark Dunsmoor is the senior vice president of Legacy Bank and has 40 years of banking expertise. He has been recognized by Greater Pueblo Chamber of Commerce which presented him with the Charles W. Crews Business Leader of the Year.
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