Someone once said, The best time to start thinking about your retirement is BEFORE your boss does!” Sage advice, wouldn’t you agree? Yet, it is estimated that seven out of ten closely held business owners spend little or no time thinking about the value of one of their largest retirement assets: Their business!
Regardless of the number of years in business, whether you are the only employee, or you have hundreds of employees; one thing is true for all business owners. You will exit your business someday. Will your years of invested time and money return a significant financial reward at the time of your exit? The answer to that question depends upon whether or not you are paying attention to some very important aspects of your business right now.
I have read articles suggesting that between now and the year 2015, an estimated three trillion dollars will change hands as the torches of business ownership are passed to the next generation of entrepreneurs. How much of that three trillion dollars will belong to you? Ask yourself another very important question: Is my business positioned to adequately provide for my family and me if I need to leave the business unexpectedly during the next year?” Will you control the circumstances of your exit? Or, will the circumstances of your exit control you?
How do you go about preparing your business for saleand keep it ready for sale? A great question for which there is no single solution. Here are some good points with which you should become familiar:
Paying income taxes in the three to five years before you sell your business is a good thing. Most business owners do everything possible to show the business is NOT making money. But, if your tax returns are showing small to no profits…it may be very difficult for a buyer to convince a lender to lend money on the purchase of your business. Don’t be tax-wise” but value-foolish” when you KNOW you are going to want to sell your business in the next couple of years. Report all income and stop running all the personal expenses through your books.
Have a qualified and licensed CPA prepare your tax returnsrather than an unlicensed bookkeeper. Avoid having business returns prepared by the store front tax preparation firms. Many of their employees are only part time tax preparersand not experienced business tax consultants or preparers. Your prepared returns must show credibility. No credibility on tax returns often equals no sale of the business (or at least no sale for a good price).
Have a certified public accountant prepare (at minimum) a compiled financial statement for your business no less than once per year. A buyer for your business (and the buyer’s banker) will have much more confidence in the numbers and the business, knowing that you cared enough about the business to do things right. This can add value to the business.
Ask your CPA to prepare a special supplementary statement to your annual financial statement: Statement of EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). The EBITDA is often what bankers and other financial analysts look at when determining the health and value of your company. It is far better for your accountant to prepare these annuallyso they can be reviewed by bankers and other advisors, than to force the bankers or other advisors to attempt preparing a statement of EBITDA for your business. And, many times buyers will actually make offers on businesses at some multiple of EBITDA. It is much better to give the EBITDA number to themthan have them try and come up with it on their own.
Prepare and maintain internal organizational chartsshowing the levels of management from the top down. This will easily assist a qualified buyer to understand your organization (it takes away some of the unknownsthus reducing perceived risks associated with the business). The greater the perceived risks associated with your businessthe lower the price.
Does your company have operating manuals for business operations? If not, consider preparing them and keeping them updated. I have seen businesses actually sell for a premium because the owners had complete operating instructions for the business. Sound too far out? It’s not. Why do you think franchises are so popular (and bought by willing buyers)? The documented operating systems remove certain risks associated with the operations of the business. You can do the same thing for your businessand increase the value of the business.
Learn about and measure the six key elements of your business (every business has these components):
1.Liquidity of the Business
2.Profits and Profit Margins
When was the last time you had a Financial Performance Review of your company? The six key financial and operating elements of your business should be measured every year and compared to other similar sized companies (a peer group) within your industry. If your CPA firm does not do this type of management consulting, find someone who can perform this important task for you. If your company does not compare favorably to your own peer groupthis is a strong indication that the current value of your company is not up to par. By knowing exactly in which aspects your company is sub-par, you can make changes that will improve profits, performance and the value of your company. Your financial management consultant can give you tips and other helpful suggestions for improving your company…and its value.
Don’t think that you have all the time in the world to begin preparing your business for sale. We are all granted only a specific period of time to be here on this earth. When is the best time to begin preparing your business for sale? The very day you open the doors. If you are like most business ownersthat hasn’t happened. But it is never too late to start. From many years of experience as a CPA and a Business Broker, I can tell you that once you begin looking for ways to increase the value of your companyyou will also discover how to immediately improve your profits. And, increased profits will add to the value of your company.
I hope these points of consideration help you to organize and clarify your thinking. One of your most valuable assets may be your business. Why not spend a little more time and effort to add value to an asset you already have?