By Ron Buck, Regional Director, Murphy Business & Financial – Carolinas
If you are considering selling your company in 2023, back by popular demand are five (and three-quarter) things you should be doing (or not doing as the case may be) between now and year-end, as well as over the next few months.
First, here is a little exit planning background before we tackle the to-do list. According to a recent Business Enterprise Institute (BEI) study, “79% of business owners plan to exit their businesses in the next ten years. However, the survey shows that while most business owners understand the importance of exit planning, most have not identified the steps necessary to exit their businesses successfully, and fewer still have created written Exit Plans. Fewer still have (a) hired and/or trained employees to take over business responsibilities and (b) obtained a business valuation, both of which are critically important to a successful business exit, regardless of the chosen Exit Path.” So, if you are a few years away from implementing your exit strategy, now is the time to start planning, obtaining a valuation, and getting the company in shape to sell and maximize the sales price.
Now for the tactical steps you need to do in the next few months if you plan to sell in 2023, or even 2024.
First, plan now with your accountant to be first on their list of tax returns to be completed in 2023. Buyers and bankers prefer to see tax returns for the most recent year. They will not give full weight to internally generated P&Ls. So plan early, talk with your accountant, and get yours finished early – don’t get caught in the March/April crush with everyone else, and by all means, DO NOT plan on filing an extension. And three bonus corollaries: first, choose carefully before switching from accrual to cash method, or get a cash-to-accrual reconciliation or conversion. Here’s why: tax returns are the source of choice (as opposed to internal P&Ls), and the accrual method is the method of choice for buyers, bankers, and valuations, as this method provides a more accurate picture of the financials and profitability of a company. So, if you are using the cash method already for your taxes or are going to switch, ask your accountant for a cash-to-accrual reconciliation or conversion to go along with your tax returns. Or, have them put the cash to accrual conversion right there on the M-1. This step will provide the roadmap, via the balance sheet, of how the two methods relate. Second, do not file by paper! This can take 6-9 months to process. Third, now is the time to scrub and update your fixed asset list (known as the Federal Asset Report, Tax Asset Detail, or Depreciation and Amortization Report that your accountant keeps). Get the old assets that are no longer used in the company off the books.
Second, don’t Give Up $2 to Save 30 Cents by expensing unverifiable, undocumented personal expenses that we won’t be able to add back to your cash flow calculation. As the linked article explains, this is a terrible trade-off, as the title indicates.
Third, now is NOT the time to aggressively manage your year-end taxes, particularly if you simply accelerate expenses and defer revenue recognition. This is more detrimental to your overall financial gain than Giving Up $2 to Save 30 Cents. In this situation, you are only saving the net present value of the interest income from a year’s delay in paying the inevitable tax, but it could be decreasing your company’s valuation and your gross proceeds substantially.
At this point of your exit strategy, your financials should reflect the fundamental earnings capacity of the business so that potential buyers can clearly see the cash flow and profitability opportunity in front of them. Except for contributing to retirement accounts, paying for health, life, and disability insurance (all of which are easily documented and added back), and perhaps a few other items, have an in-depth discussion with your accountant and M&A Advisor and leave the tax and accounting gymnastics out of the equation.
Fourth, don’t let PPP and Employee Retention Tax Credits (ERTC) cloud the view of your financials. And if you have not applied for PPP forgiveness yet, apply for forgiveness as soon as possible. While PPP loans and the ERTC saved many companies in the last two years, make sure you are taking a clear view of your financials and recognize where these two items are showing up in your P&L. As for PPP loans, there are still hurdles to be cleared to close your sale with a PPP Loan still outstanding. The easier course is to get your application in and forgiven before your closing date.
Fifth, but not least important, continue to focus on revenue growth and bottom-line profitability. COVID-19’s impact on 2020, 2021, and even lingering effects of supply chain issues and inflation on 2022, have been difficult for many businesses. Positive trends show buyers that the company has a viable value proposition, is resilient, is competitive in its marketplace, and can generate the cash flow needed for the buyer to cover their debt service and earn a return on their investment. While for sale, the number one thing a business owner can do to improve the outcome is to keep their staff and customers happy and revenue and profit growing.
With a bit of planning, forethought, and discipline, your actions over the next few months can significantly improve the prospects of selling your company, successfully executing your exit strategy, and maximizing your net worth.