One of the questions I get most often from business owners is: How can I get my business ready for a potential sale? If you were selling your house, you would want to make it look as nice as possible before the first open house. In the same vein, you’ll want to get your financials in the best possible shape before you negotiate the sale of your business. Here are a three key items that will help maximize the sale price.
1. Eliminate or reduce discretionary expenses
If you can remove personal items paid by your business — including expenses for meals, entertainment, vehicles and other luxury items — and consider them discretionary, they increase the value of your business by a multiple. For example, if we assume an earnings multiple of 5x, if you remove $20,000 in personal expenses, you just increased the value of your business by $100,000.
Discretionary expenses may also include compensation to you and/or family members, as well as rent payments for real estate owned by you (or entities controlled by you and your family). If you believe these amounts to be above the market value, you might consider adjusting these payments for the same reasons.
2. Improve your financial statements
Many business owners have limited financial statements, and manage their business by how much cash is in the bank and how much money they receive. This may work for a period of time, but potential buyers will look at your financial statements as the road map of what your business is worth.
I worked with some business owners years ago who had several companies with different year-ends. When it came time to negotiate a sale of those businesses, it was difficult to pull the information together because they had never produced combined or consolidated financial statements to see what income is being generated as a whole. While it may be expensive to have a consolidated audit or review of your financial statements, when you consider the amount as a percentage of the total value of your business, it may be worthwhile to have the right financial statements to present at negotiation.
3. Report cash receipts
I often hear from business owners, when it comes time to sell, that they have cash income that doesn’t show up on their financial statements. There are a number of reasons why this is wrong, but in this scenario a potential buyer is going to base the value of your business on your tax returns. You cannot claim that the reported numbers are too low. Start properly reporting your actual cash receipts so you don’t have to spin a tale about your financials. The statements will show what the business really generates.
While there are many components of a business valuation, these are a few key items that can be addressed right now. Get your business sale-ready so when it comes time for your “open house,” the buyers will see the real picture and the potential value.