Boost the value of your business before you sell
If you are considering selling your business, it's logical to ask, “What is it worth?” The proverbial answer is: “It depends.” Whether you plan to sell your business through a commercial broker or hope to pass it on to a family member, the process can take years. In many instances, this is good news because it gives you time to work on boosting your business's value.
A thoughtful and well-constructed exit strategy will help you maximize the value of your business. It will also benefit your company and its future management long after your involvement.
Beginning the transition out of your business can be overwhelming and typically takes several years to actually close a deal. This early stage should be about defining your goals and cleaning up any areas that might be undesirable to a future buyer. In the case of passing the business on to a successor, addressing these issues now will put new management on stronger footing when they take the reins.
If you are a few years out from selling your business, here are some proactive tips that will improve the overall value of the business:
1. Determine the preliminary value of your company
Placing a price tag on a business is part science and part art. But before you dive into a formal business valuation process, you can work with your CPA to determine a preliminary value by taking a look at your “value drivers.” This will help you define your goals and identify how you should position the company in the future to maximize value.
Value drivers are critical elements that contribute to your business' overall performance and value. They include areas such as growth; management depth (for instance, are there any other managers to run the business in your absence?); competition; human capital (do you have a knowledgeable team?); and financial history.
Identifying the value drivers is essentially a reality check about your business's strengths and weaknesses. This might be the time to implement some operational changes that improve your company's systems and procedures or work on customer-satisfaction programs or sales goals.
Identifying your value drivers also will identify the value of good will — your intangible value that can't be attributed to other business assets, but will be a consideration for a future owner.
2. Clean up your books
Any buyer will evaluate the financial health of your business, and lenders typically require at least three years' worth of financial reports. Now is the time to sit with your CPA and look at your financial statements through the eyes of a prospective buyer. Review the reports and identify any undesirable areas or financial weaknesses that might be correctable now. For example, your CPA might identify areas to address, such as:
- Reserving for uncollectable accounts receivables.
- Writing down old or obsolete inventory.
- Writing off capital assets no longer in existence.
- Reserving for warranty costs and compensated absences.
Think about the buyer's goal: They will ultimately be buying the future cash flow of the business, so you'll need to be able to prove the reasons why you have forecasted future cash flows.
3. Address any skeletons in the closet
Many businesses have something undesirable that would be better addressed prior to selling. Or if you hope to pass your business on to family, dealing with these issues now will only make their transition into ownership easier. Legal claims and litigation related to the business, non-compliance issues or even employee issues are among the factors to consider.
As you move closer to transitioning out of your business, the next phase will include a formal valuation and selection of a valuation method. This is typically performed two to three years before a sale. Taking a proactive approach will help boost its overall value.
David V. Jean, CPA, is a principal with Albin, Randall & Bennett CPAs in Portland. He can be reached at djean@arbcpa.com.
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