By: Justin Sandridge, Certified Business Intermediary
Murphy Business Sales – Baltimore
I often receive calls from small business owners who are finally ready to sell their companies after decades of hard work and who want my help to do it. Unfortunately, for every seller who owns a profitable, desirable company, there are many more who have not properly positioned their businesses to sell. This is one such story.
In the start-up phase, Sam* worked with his nose to the grindstone to provide for his family. Retirement seemed far away, and Sam always had more pressing business and personal issues to handle.
For years, he was involved in the day-to-day operations. He enjoyed a comfortable life, purchased some luxury items through the company expense account, and kept his children on payroll until they finished college. Sam believed in showing as little profit as possible to avoid paying hefty taxes.
After his children were out of school and his mortgage was satisfied, his drive started to decrease. Part of this was due to his age, of course, but the other major factor was a lack of motivation; he just didn’t have the same need for money as he did when he was younger. That need had always kept him worried about the future, however, so he kept cash readily available for unexpected circumstances and never put a dime into a retirement account.
In the following years, the revenue was on a steady downward trend and accounts receivable started to rise. Sam didn’t pay much attention to this because he compensated himself regularly and always saw money in his bank account. He lived a modest life and was still able to pay his bills, so why worry?
At age 65, Sam decided he’d had enough, and he was ready to exit the business. His children didn’t want the company and none of his employees had the funds to buy it, though, so his only way out would be selling it to a third party.
Sam called his local business broker, who pointed out some challenges he would face:
Challenge #1: The business was dependent on Sam. When clients are accustomed to working exclusively with the owner, potential buyers will almost always decrease the purchase price and/or attach contingencies that continue after the sale to ensure the business will continue to perform.
Pro Tip: Start delegating responsibility to and growing your staff to take more of your responsibilities. Focus on being the owner, not the operator.
Challenge #2: Declining revenue and profitability. Flat or moderate growth is safe for buyers and their lenders. Sharp decreases (or increases) can be indicators of greater risk, and businesses experiencing these trends will likely receive a lower multiple of earnings to compensate for the increased risk.
Pro Tip: Don’t wait. Sell your business while the numbers are still strong to get the highest possible purchase price.
Challenge #3: Waiting too long to decide on an exit strategy. There are many ways to exit—selling your business is just one of them—but if you don’t know what your goal is, how will you ever know if you are on the right track?
Pro-Tip: It’s never too early to have an exit plan. It may change as time goes on and new opportunities or challenges present themselves, but always have an end in mind, even if it’s just to run your business until you’re ready to close the doors and retire.
Challenge #4: Not getting help to create and attain personal financial goals. Not having a personal financial plan that parallels your business exit plan means you may come up short when it’s time to retire.
Pro-Tip: Hire a trusted financial planner (and a business coach, if necessary) to ensure that the money you’re saving and the way you’re running your business today will support the financial goals you have in mind for your future.
Challenge #5: Tax returns that don’t properly represent the business’ true revenue.
While there is a short-term benefit to paying minimal taxes, this tactic will backfire when it’s time to sell. First, there is no proof of the revenue the business has actually made. This raises risk and will in turn decrease the price. Second, this will impact a borrower’s ability to get preferred financing terms, which may negatively impact cash flow and cause a seller to have to hold a note or lower the price of the business.
Pro-Tip: As the saying goes, “pay now or pay later.” Find an experienced business accountant who will help you take advantage of tax benefits and strategies that won’t hurt your company’s overall value.
In the next decade, 12 million business owners will transition out of their company. The good news is that if you’re planning to sell your business in the next 3 years, there is time to position it for a successful exit. With so many businesses changing hands, you will have competition with other companies looking to do the same, so make your business a lower-risk opportunity today to ensure that you enjoy the next chapter of your life.
Click here to download “9 Steps to Prepare your Business to Sell” from Murphy Business Sales.
*name changed for privacy