The best way for a small business owner to “prove-up” business value is with verifiable financial statements that are consistent with tax return filings. Too often, the owner has non-business expenses coming off the bottom line. Managing the business to show lower profits does reduce the income taxes that must be paid. However, since business value is tied to profitability, business value is consequently reduced. Some buyers may acknowledge and accept that verifiable non-business expenses should be added to the bottom line. Bankers, however, are not so forgiving. Owners considering a sale in the future should discipline themselves to eliminate all non business expenses, and show their true profit on their tax returns for at least three years.
Three years of solid financial discipline allows time for other important succession planning. Consider for a moment a generic service business, maybe landscaping or industrial cleaning. Often owners of these kinds of business have great recurring revenue, perhaps with a limited number of their customers accounting for 40%, or more, of their business. Owners may take a great deal of pride in the fact that they have no customer contracts. Their business has been built on the foundation of solid personal relationships. Building a business is hard, and they are right to be proud. If the business success rests on the owner’s relationship with customers; however, that represents a lot of risk for a prospective buyer. Three years working to diversify the customer base, and convert customers to service contracts can greatly mitigate that risk, and adds business value.
In most cases the persons expressing interest in buying your business do not know your business. The inquiry is understandably flattering, but what they are really saying is they are interested in a business that provides your type of product or service. To sell your business, the business itself must be competitive in the market place. Assuring clean financials, and binding a diverse customer base with contracts are two examples of important succession planning. Inquiries are not offers to buy. Selling is not easy, plan ahead.
Written by Andy Montgomery, Murphy Business & Financial Corp, 12000 Ford Road, Suite 429, Dallas TX 75234, (214) 751-3901, www.montgomery-murphy.com