Just like any other facet of your business, when it comes to a sale, planning is critical. In Part 1 of this series, I covered prioritizing shareholder objectives, getting a team in place and more.
Below, I share additional steps, so that you can get full credit for the strong business that you have built.
Identify and Eliminate “Non-core” Expenses
Closely-held companies can often be run for tax efficiency, which maximizes short-term tax benefits for shareholders by minimizing reported cash flow and earnings.
Strategies of running expenses through the business that aren’t critical to the day-to-day operations of the business — such as your car or a “company meeting” in the Bahamas — may soften your tax bill, but are ultimately detractors from sale value.
Businesses are typically valued as a multiple of cash flow or earnings. For a business that is valued at 6x cash flow, for example, saving the taxes on $100,000 from extra expenses (at whatever tax rate you pay, so some fraction of the $100,000) will cost you $600,000 of value in a sale.
Start cutting these non-core expenses two years prior to selling your business. If you are close to initiating a sale and it is too late to eliminate such expenses, work with your investment banker on what is called “pro-forma” financial statements.
This pro-forma will identify and add back the expenses that would not be needed by the new buyer. While a buyer might fight you on some of those, you should get at least partial credit for reasonable add-backs, enhancing your sale value.
Get Your Financials Audited
While an audit can be a lengthy and pricey process, it is critical for a sale of a business with any meaningful valuation (if you have more than $5 million of revenue, this means you). If your financial statements have not been audited by an experienced and reliable accounting firm, they are not typically regarded as trustworthy by potential buyers.
This can result in a worse deal for you in two ways:
- First, in financial terms, it can lower your valuation.
- Second, regarding business and legal terms, you may be penalized by having to make stronger guarantees and warranties as part of the transaction.
Have your financials audited for the last complete fiscal year prior to the year of the sale. If you are a bigger company, have at least three years of audited financial statements.
As a bonus, if you do an audit in the years prior to selling your business, it can point out weaknesses in your company’s financial operations and controls, giving you sufficient time to correct them prior to an exit.
Organize Your Key Documents
Many small and middle market businesses are guilty of letting their record-keeping slide a bit – or a lot. However, getting your files and documents in order will preserve value in a sale.
While you won’t get a higher valuation for your organizational skills, you will prevent “value leakage;” this is where a seller is financially or otherwise penalized in terms of part of the deal proceeds being held back or via onerous legal representations as the deal is finalized and the agreement is drafted.
The more administrative items that are unaccounted for or are in disarray, the more penalties you will likely incur from a buyer. These items include a wide array of documents and files, such as all contracts signed, technical drawings, and back-up copies of source code.
Also, examine your contracts on a regular basis and look for any special requirements, such as change of control provisions, which could have an impact on a sale by making a third party required to give consent to keep the contract valid (this could range from a vendor to a landlord, the former potentially affecting prices paid). Review your contracts and special situations with your service providers to make sure that they will not adversely affect your sale process.
Continue working on the steps above and stay tuned for our final installment of tips to help you prepare for a sale.
About Carol Roth
Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including
of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.
Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.