While operating a small business, most business owners like to show as little profit as possible to minimize taxes. Wanting to avoid taxes is understandable; however, it can cause concern when the time comes to sell the business.
The idea is that if you reduce the risk for a buyer, this will increase the purchase price and result in a quicker and smoother sale.
Below are things to consider when you begin to position your business for an exit strategy:
Reduce Non-Business-Related Expenses. To a certain degree, processing certain personal expenses through the company is understandable (for example, a company car; business or private trips). However, it can cause trouble when it gets excessive (trips to Disneyworld, boat rides, dinners, etc.). Lenders will become suspicious when addbacks get out of control, and buyers will become wary when proof of these expenses is missing.
Eliminate unnecessary expenses. Take time to examine longstanding vendor relationships and pricing. When was the last time you researched your insurance prices? Can you get a better price for internet or phone services? Are you paying for an employee whose job could be given to others? Having loyalty to vendors and employees is respectable, but you need to make your business as lean and mean as possible when it is time to transition. If you don’t make adjustments now, the buyer will do it when they take over and keep the savings. Remember, you will make 3 dollars for every 1 dollar in unnecessary expenses you eliminate.
Clean up the books. Do your books accurately reflect what is happening in your business? Are they easy to understand and do they make sense? If you can’t understand them, then how can a buyer? Sloppy books increase the risk to a buyer and will slow down the due diligence process. Time kills deals. Clean and verifiable financials will speed up due diligence and increase the likelihood of closing the deal.
Reduce excessive inventory. If you have an inventory-based business, there are two things a buyer will evaluate. First, is your inventory saleable? Does the merchandise have dust on it? If so, it’s not saleable. A buyer is not going to purchase obsolete inventory they cannot sell. Secondly, do you have too much stock? What is the acceptable inventory turn rate for your industry? Inventory is cash sitting on a shelf. People want their money to make money, not depreciate, and inventory takes up valuable space on a rack. Generally, a higher turn rate shows greater efficiency and the ability to turn inventory into cash quickly. Too low of a turn rate may mean there are supply management issues, an unnecessary cost to store products (building may be too large), or overall low demand for the product. Discount excessive or obsolete inventory and evaluate the related expenses.
Replace family employees who will not continue after the sale. If your aunt runs the show and has no intention of sticking around after the sale, you need to replace her early. That may sound like a tough thing to say, but the buyer will need a lot of help in the transition phase post-closing. Losing the owner and a key employee at the same time will raise tremendous risk and will increase your obligations to stay for an extended period of time after the sale, or require to earn out a portion of the purchase price based on the business performance post-closing.
Decrease owner dependency. Are you a jack of all trades? The Chief Everything Officer? Does every aspect of the business have to run past you? As alluded to previously, a business owner wants to manage the company, not be the person hammering nails or baking the bread. Delegating can be challenging if you are used to being the one in control. Start with small things and mentor others so they can make smart Notice I did not say the right decision. Be patient and let them make mistakes so they can learn from experience. You cannot sell the business if you are the business.
Document processes and procedures. Is there a documented process on how your business operates or is it all in your head? If you went away tomorrow, can someone pick up a document and have a general understanding of how you do things? Sales, order processing, manufacturing, all have a process whether it’s written down or not, efficient or not. Examine where everyone fits in the process. Having a documented process gives the buyer clarity of what is happening now and what to expect when they are in charge. Again, not having this documentation increases risk and could lead to an extended transition period, a lower purchase price, or a hold-back of post-closing funds until performance is proven.
If you need help in determining your business value, please contact us to learn how we can assist.
Justin Sandridge, CBI Murphy Business Sales – Baltimore
100 West Road, Suite 300
Towson, MD 21204
410-558-6365