There is no better time for small business owners looking to sell their closely held business. However, business owners hoping to cash out can quickly discover that issues with their internal financials can become a roadblock to a sale. Disorganized or missing financial or corporate records when selling your business can turn off potential buyers, who demand complete transparency when buying a business. Financial mistakes that can derail a transaction include:
Inaccurate inventory reports. With no one to hold them accountable, a small business owner’s main focus can be to minimize taxes. When business owners artificially lower inventory so the cost of their goods increase, it can cause tax issues at the end of the year. Over-reporting or under-reporting inventory, can lead to owners misreporting their taxable income.
Not using an accountant, professional bookkeeper or computerized account software? With a limited number of resources available, some small business owners try to be their own bookkeeper despite being unqualified. When small business owners don’t have a proper accounting system in place to track their income and expenses on a daily basis, it is difficult to get a good understanding of the earning potential of a business.
Failure to report all cash sales. Sellers can adversely impact the value of their business if they conceal cash transactions, such as pocketing cash from sales in order to avoid paying income and sales taxes. Since businesses usually sell for a multiple of cash flow, it’s in an owner’s best interest to report cash income in advance of a sale. A multiplier received on that cash flow will usually offset any taxes paid on the higher reported income.
Get Financial Religion. Beyond attracting potential prospects, organized and accurate financial records can help business owners identify what parts of their business need attention to prepare it for a sale.
The good news for sellers is that many of these mistakes are fixable, but getting the financial records in shape for a sale takes time and work. Correcting financial records to satisfy a buyer can take several years to fix. Some sellers may want to remove their personal expenses from the business financials and take steps to ensure their financial records match their tax returns. Owners should consider hiring an experienced bookkeeper and waiting until the business financial records appear credible to a prospective buyer.
Accurate financial records can also qualify your business for a Small Business Administration loan. If a business doesn’t have accurate and understandable financial records and tax returns, it won’t qualify for an SBA loan, Often, incomplete or inaccurate financial records can force a seller to offer seller financing, prolonging the seller’s exit.
While this is a great time to be selling your business, financial mistakes and inaccurate or incomplete financial records can quickly derail a sale. If you are serious about selling your business, there is no time like the present to get financial religion and begin cleaning up your business finances.
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Illinois Governor J.B. Pritzker has signed Senate Bill (SB) 672, which will be known as the Illinois Freedom To Work Act. The new law will significantly reform non-compete and non-solicitation law in Illinois. The Act imposes limitations on non-compete and non-solicitation agreements, and it provide employers with more clarity about enforceability. The new law has a January 1, 2022, effective date.
The Illinois Freedom To Work Act:
requires an employer to provide an employee at least 14 calendar days to review the agreement and “advise the employee in writing to consult with an attorney” before signing the agreement; ban non-compete agreements for employees making $75,000 per year or less (the salary threshold would increase by $5,000 every five years until reaching $90,000);
bans customer and coworker non-solicitation agreements for employees making $45,000 per year or less (the salary threshold would increase by $2,500 every five years until reaching $52,500);
authorizes an employee to recover attorneys’ fees and costs if the employee prevails in a lawsuit brought by the employer seeking to enforce a non-compete or non-solicitation agreement;
authorizes the Illinois attorney general to initiate or intervene in litigation and initiate investigations of potential violations; and
prohibits employers from enforcing restrictive covenants with employees who are separated due to COVID-19 or “circumstances that are similar to the COVID-19 pandemic, unless enforcement of the covenant not to compete includes compensation equivalent to the employee’s base salary at the time of termination for the period of enforcement minus compensation earned through subsequent employment during the period of enforcement.”
The Freedom To Work Act excludes from the definition of “covenants not to compete” the following:
trade-secret and invention-assignment agreements;
agreements entered into in connection with the acquisition or disposition of an ownership interest in a business;
agreements “requiring advance notice of termination of employment, during which notice period the employee remains employed by the employer and receives compensation” (i.e., “garden-leave clauses”);and agreements that “the employee agrees not to reapply for employment to the same employer after termination” (ie., “no-reapplication clauses”).
The Freedom To Work Act also codifies rules set forth in Illinois case law regarding non-compete and non-solicitation provisions. Specifically, the Act codiies the rule set in Reliable Fire Equipment Co. v. Arredondo (965 N.E.2d 393 (Ill. 2011)) that the “legitimate business interest of the employer” is a totality-of-circumstances test that should evaluate factors such as scope of restrictions and “the employee’s exposure to the employer’s customer relationships.”
The Freedom To Work Act also codifies the rule set forth in Fifield v. Premier Dealer Services (2013 IL App (1st) 120327) by defining “adequate consideration” as either (a) two years of continuous employment after signing the agreement; or (b) alternative consideration, such as “a period of employment plus additional professional or financial benefits or merely professional or financial benefits adequate by themselves.”
In addition, the Act allows courts to reform non-compete and non-solicitation agreements, rather than hold them unenforceable.
Employers with employees in Illinois should review their agreements with existing employees as well as update their business agreements before the end of the year to insure compliance with the Freedom To Work Act. While existing non-compete and non-solicitation agreements would not be impacted by this legislation, as the bill does not apply retroactively, employers may take this as an opportunity to update existing agreements before the effective date of the Act. Additionally, employers may want to become familiar with the changes that will impact the enforceability of these agreements after January 1, 2022.
Contact Lustig & Wickert at 847.509.9090, by email at Info@Lustiglaw.com or visit them on the web at www.Lustiglaw.com if you have any questions or concerns.