Business owners must remain aware of the things they can do now to ensure a rewarding sale of their companies later. Some considerations have long-term implications.
Both qualitative and quantitative factors affect a prospective buyer’s decision to purchase a business as well as determine what to pay. Most of the qualitative analysis involves internal operations, corporate image, competition, competitive advantage and the state of industry. While these are all factors buyers evaluate, the most common qualitative concern we see involves the extent to which an operation is “turn key.”
Having a strong management staff in place that handles day-to-day processes widens the range of potential buyers, creates more intrinsic value and results in a quicker and more lucrative sale. It helps to start grooming your staff to learn and assume greater roles and responsibilities. As long as your business can assume any additional expenses this might involve, it could be a good idea to slowly change current operations to eventually absorb the majority of the owner’s daily tasks. You’ll arrive at a point at which owners are needed only needed for high-level strategic oversight. The strategy for implementing this change depends on the size and type of the business.
The quantitative analysis for a prospective purchaser includes annual sales growth and profitability as well as marginal performance measures. While this varies with the type of business, the largest quantitative factor for a buyer is usually, “How much money do they make?” To answer this question, businesses are asked to provide three to five years of records for sales and net income. To present your numbers in the most attractive way, work on creating clean company books that show as much profit as possible prior to a sale.
The most urgent implication when getting your corporate financials ready for a buyer is to limit as many personal and unnecessary expenses as possible. This will show a greater profit at the end of the year, which in turn leads to a higher sales price.
There are some items that can be “added back,” or credited, to net income for a business, including owner’s salary, rent, depreciation, interest and taxes. Owners don’t need to worry as much about these costs since most buyers, appraisers and banks consider these valid expenses to add back to net income to arrive at earnings before interest, tax, depreciation and amortization as well as seller’s cash flow and discretionary earnings.
Such other expenses as the owner’s personal travel and entertainment, health insurance, automobiles, telephones or retirement contributions are more difficult to get credit for even when they might not be expenses directly correlated to the operation of the business. The company could incur additional taxes in the short term from not deducting these eligible expenses. But by limiting these personal costs as well as identifying other unnecessary expenses to eliminate, it will justify a higher sales price in the long-term. That almost always outweighs the additional short-term tax hits.
The other task to prepare your books for a sale involves organizing and gathering all the applicable items that will need to be in place or will be requested from a prospective buyer. Buyers and lenders often ask for three to five years of annual and monthly profit and loss statements as well as balance sheets, bank statements, depreciation schedules, equipment lists, tax returns and vendor agreements. Having the proper accounting and operational software in place early will help you meet these requests.
You can also start identifying personal property you’ll exclude from a sale and go through the legal process of placing these items in your personal name and removing them from the company books. These should be personal assets that aren’t needed for normal business operations. If an excessive amount of assets is removed from the company balance sheet, it could lower the value of the business.
While it’s often advantageous to start these evaluations early in the process, every business is unique. Timing is everything in determining the best time to sell and when to start preparing for that sale. Traditionally, it’s best to sell when a company is at it’s peak for sales and profits. But owners also must consider personal circumstances and other factors.
It could be beneficial to consult with an advisor or broker to gain additional insights on how the sales process fits into circumstances and ensure a sale yields the most success for owners, their companies and employees.