Most business owners want to sell their business at some point. Unfortunately most fail to plan effectively for this eventuality. In many cases owners cannot find a good buyer and end up liquidating their business for only the value of the assets. Prepping a business to sell for a premium price takes a significant amount of both time and effort. Business owners should think about their exit strategy even in the beginning stages of their business. However, effective positioning three to five years prior to selling is critical in order to maximize value. It is important to address the following areas.
- Maximize profits on tax returns. CPA’s encourage their clients to minimize profits therefore reducing their tax liability. However, business valuations are often based primarily on profits and cash flow. Goodwill, which is any value attached to a business over and above that of the assets, is typically based on cash flow. Paying higher taxes in the short term is critical to gaining value on the sale of the business.
- Identify and groom an internal management team. In many cases a business owner has a hard time identifying a potential buyer. Often the most suitable buyer comes from inside the company. Employees purchasing businesses they work in is becoming more and more common place. If the seller has time he can either groom a current employee to be a viable purchaser, or bring in a new employee and slowly teach them the business.
- Work them self out of the business. If the business is so dependent on the owner it cannot run without him, it has very little value to a buyer. The owner needs to implement systems that will allow the business to run smoothly in his absence. It is important that the customers become comfortable doing business with the business and not just the owner.
Time spent focusing on these areas three to five years prior to selling will maximize the selling price of the business. Making these improvements creates another reward for the owner. Working on these areas often has the added benefit of improving profits and cash flow prior to selling the business.
(Source: David Lewis, SBDC Brunswick Office)
