January 16, 2015
How many times have you said, “If someone walks in the door and offers me the right amount of money for this business, I’m out of here”?
Let’s explore each of these questions.
What is the right amount of money?
Most business valuations involve calculating the present value of the after-tax future cash flow the business is expected to generate. Usually, the best indication of future cash flow is prior history. However, buyers may make adjustments to eliminate expenses, such as payments to the owner, that may not recur in the future.
It’s a good idea to always have in mind a reasonable estimate of the true value of your business. Your CPA can assist you in making these calculations. That way, if a prospective buyer comes along and you know your business is worth 25 percent more than the buyer can afford to pay, you won’t waste a lot of time with the negotiations. On the other hand, if the buyer is offering a 25 percent premium, you may want to get the deal moving along fast.
What will you do after you sell the business?
Will your business be worth as much when you’re gone as it is while you’re working there? A buyer may ask you to stay on as an employee for a period of time. Are you willing to stay? For how long?
Are you ready to stop working and retire? Would you likely start a new business venture? Will you be able to start a new business if the buyer asks you to sign a noncompete agreement?
Is your business ready to be sold?
Consider three areas where problems could arise — assets, liabilities and people.
- Be sure you have clear title to all key business assets.
- Review all critical contracts and licenses to be sure they are transferable to a new owner.
- Make sure you are qualified to do business in all of the jurisdictions in which you operate.
- Check to see that your business has paid all required sales and use taxes and income taxes in the various jurisdictions in which the business operates.
- Have a well-trained management team in place, one that can function properly if you decide to retire.
Since historical financial information is the starting point for business valuations, make sure your financial records are in order. Annually, the financial statements of your business should be reviewed, or preferably audited, by your CPA. It is much more efficient and cost-effective to have the reviews or audits performed annually, rather than having your CPA go back over prior years’ accounting records.
By planning ahead, you will be in a much better position to react if someone makes that hard-to-refuse offer.
This article was originally posted on January 16, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at firstname.lastname@example.org.