Articles

By Ron Buck, Regional Director, Murphy Business & Financial – Carolinas

If you are considering selling your company in 2022, back by popular demand are five (and a half) 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 study by Business Enterprise Institute (BEI):  “79% of business owners plan to exit their businesses in the next ten years.  However, the survey shows that a majority of all business owners have not identified all of the steps necessary to exit their businesses successfully, and fewer still have created written Exit Plans.  Despite understanding the importance of planning in a successful exit, most owners have not identified all necessary steps to exit their businesses successfully.  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 2022, or even 2023.

First, plan now with your accountant to be first on their list of tax returns to be completed in 2022.  Buyers and bankers prefer to see tax returns for the most recent year and 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 a bonus corollary:  while the 2018 Tax Cuts and Jobs Act expanded the number and types of companies eligible to use the cash method of accounting for filing taxes, weigh that choice carefully.  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 different methods relate to each other.

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 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.

A corollary to this is the opposite approach of accelerating revenue and delaying expenses in order to minimize the impact of potential future tax increases.  While the proposed increases not only have a long way to go, they will also only affect most sellers at the margin, and for those with capital gains over $1 million, there are reasonable and time-tested ways to mitigate those taxes.  So, while accelerating revenue into 2021 and delaying expenses into 2022 may sound like a good idea to avoid higher future tax rates, think about what that is going to do to the YTD comparisons for the rest of 2022, and then if still for sale in 2023, the 2022 comparison to 2021.  In an extreme case, it might make the sale transaction unbankable.  In a more modest case, you may end up not Giving Up $2 to Save 30 Cents, but giving up $2 to save only 19.6 cents.

Fourth, if you still have a first or second-round PPP loan outstanding and have not applied for forgiveness yet, apply for forgiveness as soon as possible.  While the October 2, 2020 SBA guidance provided a path to consummating a transaction without defaulting on the PPP loan, 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 hopefully forgiven, before your closing date.

Fifth, but not least important, continue to focus on revenue growth and bottom-line profitability.  2020, 2021, and COVID-19 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.

With a little 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.