Resist Burying Personal Expenses and Assets in Your Company's Financials

Minimizing tax liability is a strategy all business owners think about. But when it comes time to obtain financing or sell the business, buried personal expenses and assets can create a problem in determining the true cash flow.

Buyers and bankers won't always give credit to many of these items. As a result, the cash flow can be suspect. And when you apply a multiplier to determine the value of the business, the results can be disappointing.

It is in the best interest of a business owner to show a healthy bottom line in the years preceding the sale of their business to get the highest price possible.

© 2009. Richmark Associates, Inc.

Beware of Understating Your Inventory

Reporting a lower inventory to their accountant is something many business owners have been doing for a long time. And many accountants just accept the number.

In addition to the obvious concerns, when it comes to selling the business, big problems can arise. How will the inventory be valued in the purchase allocations? And who is going to have to pay the various taxes on the larger amount?

Business owners should give their accountants an accurate inventory value each year, to avoid troubles at the closing table!

Realistic Expectations of Business Value

Unfortunately, most business owners have a very inflated view of the value of their company. And why not? They have put so much money, time and heart into it.

But they need to realize the price is based on what someone else is willing to pay for it. Periodically having a valuation prepared by a professional is a good way to help determine what the business owner needs to do in order to reach his or her goals.

Plan for the Future

Many business owners are so busy running their companies that they never seem to have time to plan for exiting the business.

Preparing a business for sale is very different than managing it. It can take years to properly prepare a business for sale to get the highest price. Business owners should start creating an exit strategy at the earliest possible opportunity and consider the assistance of professionals to expedite the process.

Where Are the Business Financials?

If business owners do not have all their financials and tax returns at their fingertips (and many don’t), it usually means they don’t refer to them to effectively manage their operations. It can also mean they don’t understand them.

Business owners should regularly review their financials with their accountant and other advisors to do the proper planning necessary for a successful business. And when it comes time to seek financing or sell the business, these all-important report cards must be immediately available.

Business Owners Must Make Bold Decisions in Tough Times

Business owners must be proactive to reverse any downward trends, and they must initiate a plan immediately! They cannot be complacent and just hope for the best. They must consider bold or even painful moves such as drastically cutting expenses and staff, adding new product lines or services, hiring a marketing consultant or even acquiring another company. But sitting back and not taking immediate action is not an option!

"My Business Could be a Gold Mine for a New Owner!”

The statement "with a little sales and marketing, a new owner could make a fortune with my business" has been heard over and over by prospective buyers. The question of course is: "Mr. Business Owner, why haven't you made that effort?"

Buyers are not willing to pay the business owner for their future efforts and investment necessary to grow the business. Business owners must take those steps themselves, which not only will increase their revenues and profits in the short term, but will greatly improve the value of their business.

Keeping Up with Technology

Not all businesses need to have cutting-edge technology, but a company can't fall too far behind. Buyers will be concerned if they must make a large investment in the latest technology to get the company to a competitive level.

A business owner should do the necessary research and purchase the technology to keep the company on par in its industry or be prepared to accept a lesser value for the business.

Special Relationships with Customers

Special relationships that business owners have developed with customers can be a real issue when selling the business. A new owner may have a problem continuing that relationship and this could jeopardize the sale of the business.

It is recommended that business owners begin delegating any special relationships with customers to other company employees as soon as possible.

Timing Is Everything!

Many business owners seem unable to let go of their company and wait too long. Some lose their entrepreneurial drive and the business starts sliding. Or the market starts to change and the company loses value.

To get the maximum price, owners need to do some serious planning to prepare selling the business at its peak.

What About That Big Customer?

Many companies have a single customer or a few large customers that dominate their overall sales. After all, nobody wants to turn down business!

But when it comes time to sell the company, this becomes a huge problem. Most buyers won’t look at a business whose revenues could drop dramatically after closing from the possible loss of a few big customers.

Somehow, someway, business owners have to find a way to diversify their customer base before they ever decide to sell their business.

Financial Statements Others Can Understand!

In too many cases, business financials are so confusing that no one can understand them or analyze them. And it’s not uncommon that the tax returns don’t match up with the profit-and-loss statements.

These can become major problems when the business owner tries to obtain financing or sell the company. It is absolutely critical that a business has a set of financial statements and annual tax returns that are easy to understand and make sense to anyone who has to review them.

Don't Let Your Customers Forget You Are
Out There!

When sales are slow, business owners have a tendency to cut back on marketing expenses. Unfortunately, not communicating with customers and prospects will only hasten the sales slide and reduce the value of the business.

Today, there are various ways of cost-effective advertising to keep in contact with customers and prospects that might be considered. Talking to marketing consultants, reading books or searching the Internet are ways to find out what is working for others. There are direct-mail campaigns, such as postcards or coupon books. Internet advertising or email campaigns can hit directly at the target audience.

Will the Business Numbers Look Good to Anyone Else?

Business owners can operate their company as they wish, but when they are ready to sell, will it appeal to buyers? If the numbers don't make sense or show profits, who would want to buy it?

Business owners who want top dollar for their company must be able to reveal all elements of owner cash flow that buyers and lenders will accept. Otherwise, there will be only disappointing offers or no offers at all!

Leases Can Make or Break the Sale of a Business!

The lease terms of the business space can be a major consideration for a buyer. For example, a retail business with a long-term lease at a good location can be attractive. But a long-term lease on a business needing more space to grow could be a detriment. Or there might be concerns for an expiring lease when the landlord might demand a large increase.

When it comes time to negotiating a new lease, business owners must carefully think through the timing of their plans for exiting their business.