You may not be ready to sell your business today or accept a significant investment, but it’s a good idea to prepare as if you were, says Brad Holsworth, partner and assurance practice group leader at Burr Pilger Mayer.
“If you have a business, you never know when someone might approach you about wanting to acquire you or make a significant investment, or in a worst-case scenario you might be required to undertake one of these activities if your business situation changes,” Holsworth says. “If you’re not ready and you don’t have the necessary information available, you may lose out on that opportunity since the window for certain transactions can be small.”
Smart Business spoke with Holsworth about having a business that’s ready for the market.
When should you start preparing for the sale of your business or other ownership change?
You need to be thinking a good five years ahead about how you’re going to transition out of your business. You should always have in the back of your mind how that’s going to happen.
To do it properly, you need to plan ahead, because if you wait until the last minute, the business often doesn’t get monetized the way it should. That doesn’t mean you need to take a lot of action in the short run, but you do have to plan ahead and have a goal.
How do you start to create a plan to transition out of your business?
The first thing you need to do is get a general idea of what your business might be worth. Businesses are valued in a lot of different ways, and it’s very difficult for owners to understand how an outsider evaluates a business. Owners place a high premium on the sweat equity they’ve put into the business, but that often isn’t worth as much to a buyer.
Getting an unbiased view of the value means using outside advisers, such as a valuation specialist, a business broker, a CPA and/or an attorney, to help you understand the business’s value and whether potential buyers or investors will be more interested in the volume of your revenue, profits, cash flow, customer list or other elements. Valuation experts are going to look at your business very similarly to the way a buyer would. If you can provide the key financial information, who the key employees are and who the customers are, many times they can give you a ballpark figure very quickly.
It is also important to understand the tax consequences related to the transaction, because it’s not what you sell the business for, it’s what you’re able to keep. And if the deal isn’t structured correctly, there can be some fairly significant tax consequence in the way of higher income taxes owed.
Another factor to the buyer is determining how important the owner and the key employees are. Typically, if a business has been run by a dominant individual or a key management team, the owner and/or key employees must usually stay on for a couple of years under an employment agreement to help transition.
Once you understand the value of your business, what other information do you need to gather?
Typically, there are a number of things a potential buyer wants to see and often they cannot be completed or done instantly, thus this needs to be considered many years before the information might be needed. The buyer will want financial information on the company, everything from the internal reports to CPA prepared or audited statements and tax returns.
Many businesses also have a monthly financial reporting package, which includes the key business metrics including terms on key customers, suppliers and competitors, product line information and key employee data.
How long does it take to gather the information a potential buyer is looking for?
As you might imagine, it is typically much easier to assemble this information on an annual basis versus trying to go back in time and recreate it from old financial records, which might not even be on location anymore. For instance, if you have to undertake a financial audit for prior years this typically could take many months to complete and can be much more expensive than doing it annually. While often certain financial records are prepared annually, they should be stored in a safe and logical manner so that they can be quickly and easily accessed.
Having all this information prepared can save you time and money and, while you may not be planning to transition out of the business any time soon, you never know when it’s going to happen. The better prepared you are now, the greater chance you have for success. The bottom line is to have a goal for what you want to do and know what is required to accomplish it, and this will normally necessitate some action and reassessment every year.
Brad Holsworth is a partner and assurance practice group leader at Burr Pilger Mayer. Reach him at (925) 296-1004 or firstname.lastname@example.org.