What are the most important things for a business owner to do to maximize value of the company and prepare for acquisition? Read on to find out.
All entrepreneurs have those days… It’s been another long week. You have a great business that has afforded you a good living but you’re tired. Next week doesn’t look any easier. So you pick up the phone and call a broker. “I want to sell my business as soon as possible, and be free of these headaches! I’m finally gonna take that cruise!”
Not so simple my friend. It takes thoughtful exit strategy to sell a business at the right time, reaping the full value you have sown. After you pay off the business’s debt and considering the cost of the sale, will the proceeds support the lifestyle you and your family have come to expect? Have you considered the tax ramifications of the sale? If not, you may want to contact a financial professional for advice. Planning is essential to ensure you are ready for what will likely be the largest financial transaction in your life.
Annual Cash flow is simply the amount of cash your business produces before taxes, when interest, depreciation and discretionary spending are added to declared earnings. While some buyers are concerned with asset value, the vast majority of buyers we interview are concerned with the earning potential they may realize from your business.
So, you’ve got a good business that is providing decent cash flows. The most important thing the buyer of your business will want to see is a three year history of clean, consistent and understandable financial documentation. All small businesses minimize reported earnings and tax liability through legitimate deductions. Claiming reasonable discretionary expenses on your schedule C or 1120S to reduce tax implications will not affect the value of your business. What will drain the value of your business at sale time are sloppy financials, a history of not claiming income (typically cash), and/or charging personal expenses to the cost of goods sold of your business. Bankers, buyers and investors are savvy folks that will almost always want to verify your cash flow using what is reported on your corporate tax returns. “Trust me, the cash was there” with a wink and a nod is a non-starter with most buyers, and banks won’t finance the deal.
Selling a business is a long process. You cannot wake up and sell your business tomorrow. It typically takes 6-12 months to sell a business when done properly. FSBOs take even longer. Buyers require leverage, so don’t expect a cash sale on anything but the tiniest of businesses. Once you have a willing, able and motivated buyer, buyer financing will take 3-4 months to move through the glacial banking system. Recently enacted laws and regulations have made the loan process even more slow and bureaucratic. Your broker will be prepared for a long process with many hurdles for the buyer and seller.
If the time is right to sell your business, or you simply have questions for a professional business intermediary, give us a call. All inquiries are handled directly and discretely by a broker.