Most business owners underestimate all of the issues involved when it comes to the sale of their business. They do not have an exit strategy. Why? We’ve found that the business owners we work with are usually preoccupied with the day-to-day operation of their company. They tend to think in the now as opposed to the future. They make decisions, both consciously and subconsciously, that impact their ability to monetize their hard work.
We believe that their lack of a plan is not their fault. Most successful business owners struggle to get their company off the ground.
As a business matures, they find it hard to believe that the business they created might be desirable for someone else to purchase. This is their company. They sometimes have a hard time visualizing someone else owning it. We have found that this mental road block can derail potential liquidation opportunities for the owner.
When contemplating a business sale, the first question a business owner should ask themselves is: “How am I going to get my investment back?” Sure, the goal should be to make money in excess of the initial investment, but the business owner’s return of capital should be the top priority. The vast majority of businesses are not going to go public. It is up to the business owner to put the business in the best position to be sold.
There is no reason that a well-run business should not be the business owner’s most valuable asset that can be used to fund their retirement.
The most successful business owners involve key professionals in the formulation of an exit strategy. The following professionals should be involved in the process of selling your business:
A Certified Financial Planner
This practitioner is the quarterback of a professional team. A CFP will typically start the process by discussing the idea of a business sale with each individual company owner.
During these discussions they will work with the client to determine if selling their business makes sense. For some clients, it will make sense and for other clients it will not.
The professional will then work with business owners who would like to explore the possibility of a business sale.
Jeff Eckroth is a branch manager and financial advisor at Reno Wealth Advisors. He states:
“We start the process by reaching out to the business owner’s professional advisors who are already in place. Most of our business owners already have a CPA and an estate/business attorney. We collaborate with them to make sure that we do not miss anything that would adversely affect the client. We also enthusiastically refer other professional advisor specialists to the team when necessary.”
Another important role the CFP plays is to work with the business owner to model different scenarios regarding the sale of the business.
The financial plan is only as good as the inputs that go into it. The CFP should work with the business owner’s team members to make sure that only realistic assumptions are considered.
Certified Public Accountant
A business owner should work with their CPA to determine the potential impact the sale of their business will have on their personal tax situation. The CPA will also help evaluate the tax implications of a lump sum payment versus an installment sale of a business.
Entity structure will also most likely affect your tax bill. Scott T. Wait, CPA, is a partner at RS Wait.
According to Wait, “A seller’s CPA’s understanding of the tax planning implications of a business sale is critical for optimum results to the seller. For example, if the seller is a C Corporation compared to an S Corporation or LLC Partnership, there are significant tax planning differences that should be addressed early in the process.”
It is also important for the business owner to work with their tax professional to ensure that all of their tax records tie to the company financial statements.
You would be surprised how often they do not match up. This problem might prevent a buyer from securing bank financing. In today’s regulatory environment, the lending institution will insist upon accurate records.
How much is your business really worth? We believe that it is important to hire a valuation specialist to help determine an accurate number. The world of valuation is changing constantly. A CPA that specializes in tax and audit work does not typically keep current on all of the intricacies that encompass formal valuations.
Many of the CPAs we work with use a “back of the envelope” approach to valuations. Rule of thumb approaches are sometimes very useful but not in the case of business valuations. There are too many variables that should be considered and are often ignored in a less formal approach.
Michelle Salazar, CPA, is the owner of Litigation and Valuation Consultants, Inc. According to Salazar, “the best way to determine the value of a business when selling is to determine whether the underlying information is accurate and reliable.”
If so, consideration should be given to the assets in place and the debts owed. Additionally, the normalized income and/or cash flow for a period of five years (if available) should be determined. Often times the historical income/cash flow is used.
However, in some instances, the future forecasted/projected earnings/cash flow may be used. To the income/cash flow stream, a value is derived.”
Many business owners try to go on their own when selling a business. A reputable business broker can potentially help the seller find and qualify a suitable buyer.
This is particularly important when there isn’t an heir apparent to buy the business. Experienced business brokers typically have an established network of entrepreneurs who have bought or sold businesses using their services in the past.
Good business brokers, like good real estate agents, have been part of the process of selling a business many times. Be sure to ask them if they have had experience selling a business such as yours. A professional services firm is much different than a high-tech manufacturing company.
Brad Bottoset is a business broker and owner of The Liberty Group of Nevada.
He believes that a business seller needs to have the following things in place to prepare for the sale of a business: good records, bank statements that tie everything together for at least the last three years and documentation of all financial transactions.
Bottoset says that it usually takes less than six months to sell a business if everything is in good order.
Jim Marren is a certified financial planner with Reno Weather Advisors, which is affiliated with Raymond James Financial Services. He can be contacted at firstname.lastname@example.org .
Use the comment form below to begin a discussion about this content.
Sign in to comment