By Ron Buck, Regional Director, Murphy Business & Financial – Carolinas
If you are considering selling your company in 2025, here are five essential steps you should be taking (or not taking, as the case may be) between now and year-end and over the next few months.
First, a little background on exit planning before we tackle the to-do list. According to a Business Enterprise Institute (BEI) study, 79% of business owners plan to exit their businesses in the next ten years. Still, most lack a written exit plan and haven’t taken the necessary steps like valuation and employee training. So, if you are a few years 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 them in the next few months if you plan to sell in 2025 or even 2026.
First, plan now with your accountant to be at the top of their list of tax returns to be completed in 2025. 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. Here are 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 already using the cash method for your taxes or will switch, ask your accountant for a cash-to-accrual reconciliation or conversion to accompany your tax returns. Or have them put the cash to accrual conversion 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 the company no longer uses 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, chasing short-term tax savings can harm long-term value, 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 (despite some accountant’s well-intentioned but generic year-end newsletter advice). This is more detrimental to your overall financial gain than Giving Up $2 to Save 30 Cents. In this situation, you only save the net present value of the after-tax interest income from a year’s delay in paying the inevitable tax. Unfortunately, it could substantially decrease your company’s valuation and gross proceeds.
At this point of your exit strategy, your financials should reflect the fundamental earnings capacity of the business so that potential buyers can 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. While PPP loans and the ERTC saved many companies over the last couple of 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 and how they could be giving a higher-than-normalized view of your company’s financial strength. ERTC can be particularly hard to find as it goes by several names and hides in different places.
Fifth, but not least important, continue to focus on revenue growth and bottom-line profitability. Growth and profitability are always important, but even more so in the year or two leading up to a sale. 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 some 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. Feel free to contact me for a confidential consultation on how we can maximize your company’s value.
