Selling your business? Set goals and maximize profits

For a business owner who has nurtured a company for years, making the decision to sell can be difficult. But whether it’s for financial security, health reasons, retirement or a transition to the next generation, many owners eventually need or want to make a change.

What are the goals for the sale?

The type of preparation a company makes for ownership transfer depends on the owner’s personal, financial and corporate goals. For example, if the owner wants to achieve the highest possible selling price to build personal wealth, the preparation would be different from a founder passing a business in good financial health to his children. Recognizing and setting goals for the transaction is the first step in considering a business sale, whether the sale is five months or five years away.

Take a hard look at the business

A business owner must evaluate the business with an eye toward changes that could enhance the company’s value to buyers. The assessment should encompass strengths, weaknesses, employees, markets, products, management and actions that should be taken before the company goes on the market. At this stage, an experienced business broker can often contribute critical market knowledge and advice that will help build value for the company.

Maximize sales price by maximizing profits

Typically, the sales price for a company is based on a multiple of projected cash flow or profits. If a business is selling at a price equal to six times earnings, a $50,000 increase in annual profits will bring the seller an additional $300,000 in sales proceeds.

Increasing profits by bringing in new customers makes a company more attractive, especially if the new revenue diversifies the company’s customer base. Buyers consider a company more risky (and less desirable) if a small number of customers comprise a large percentage of the company’s revenues.

Another effective way to increase profits is by controlling expenses, a process that can be as simple as reducing unnecessary travel and overhead expenses or as complicated as trimming the work force. A company on the market should consider deferring growth-oriented capital expenditures. Capital expenditures may reduce the owner’s net remaining equity in the business if the expected increase in profits resulting from the new equipment is not realized prior to the sale of the company.

Planning for sale

There are other steps a business can take to prepare for a successful sale. For example, if key personnel are integral to the company’s success, owners may wish to ensure their continued employment with an incentive compensation plan and written employment contracts.

Federal and state income taxes can extract a huge bite out of the proceeds from the sale of a company. Experienced, knowledgeable and careful tax planning before the sale is essential for this process. Disputes related to tax consequences between business buyers and sellers often result in failed transactions. A business broker who is also a CPA with tax expertise can plan for and structure a business sale transaction to maximize net after-tax proceeds to the seller without eliminating the future tax benefits to the buyer that are necessarily a part of the proposed purchase price.

Financial statement analysis & market comparables

In order to accurately compute the true value of a business for a new owner, the company’s financial statements should be analyzed for “recasting adjustments” to reflect the company’s sustainable earnings potential in the hands of the buyer. Analysis like this, when handled by a skillful, experienced professional, can make a dramatic difference for the value of the business. Further, just as a good real estate broker has “market comps” to value your home when you sell it, a good business broker has access to comparable business sales in your industry to make you an informed seller.

Conclusion

A knowledgeable business broker can help company owners navigate the complex issues of evaluating, pricing, negotiating, selling and transitioning a company successfully to a new owner.

Selling a business can be an expensive process. But the payoff – financial security, reduced stress, time to travel and relax – can be worthwhile if the sale is conducted with skill and planning.

For more information on selling your business, contact John Trowbridge using his information below.