For many business owners, thoughts of transitioning ownership of their company are often brushed off or ignored. It’s enough to run a business in the here and now, without considering something that seems so distant. The tendency is to deal with those issues “when the time comes.” Unfortunately, when the time comes, it can be too late.
Ryan Guthrie, Director of the Private Equity Practice, BDO USA, said, “The majority of business owners who sell their business don’t plan ahead in preparation of a sale. In most cases, a lot of things that could have increased the value of the business and decreased the risk for buyers were not done.” So what can be done to prepare for a future exit?
Know the Value of Your Company: Business owners should always have an idea of what their company is worth. A complete and credible valuation can help owners answer several questions, including:
- How is the value of my company determined?
- What variables or risks do I have the ability to control?
- When should I even consider an exit?
- Does a sale make sense considering I’m age X and have future needs of Y?
Complete Internal Due Diligence: Increased operational risk equals decreased value. Put on the hat of a potential buyer, and consider the areas where your company has holes.
- Are all important contracts accounted for and organized?
- Has proper attention been given to internal and quality controls over the financial and operational processes?
- Are you extending credit to customers that aren’t credit worthy? Eliminating unnecessary risks will pay off today and in the long-run.
Keep Sound Financials: Of course, quantitative aspects of financial information are of utmost importance to a potential buyer. Typical business owners are continually doing everything they can to increase margins, profitability, cash flows, etc, and these things certainly increase value. However, the importance of the qualitative aspects of financial information is often overlooked.
- Have the statements been audited by an outside CPA?
- Are the books and records organized and financial information readily accessible?
- Are internal controls in place to prevent and/or detect fraud or errors? Anything that serves to increase the reliability of the numbers can go a long way.
Consider Corporate Structure: Owners are advised to keep the end in mind and to determine what the optimal corporate form would be for their business. There are important tax consequences that come with selling C-Corp and S-Corp or LLC businesses. Be warned that there’s not a lot that can be done a year before the sale, but much can be done several years before the sale. Other maneuvers, such as separating out the company’s real estate holdings from the rest of the business can help ready a company for exit.
Rely on Trusted Advisors: Giving attention to the above items involves relying on a team that includes attorneys, accountants, insurance professionals, and other advisors that have your interests in mind. As a business owner, you are an expert at running and growing your company. When it makes sense, call on these professionals to help you through issues that distract from that.
It is more crucial than ever for owners to plan ahead to maximize the enterprise value of their company. Contact Mike Bromelkamp, CPA, ABV, MBA, CIA, CITP, or Tony Stinar, CPA at 651-483-4521 to discuss your business valuation needs, or learn more about our Business Valuation expertise here.