Are you thinking about selling your business? If you are planning on keeping the company for at least one to three more years, there are several financial ideas that you should consider. Outlined below are five ideas that will add value before you sell your business to someone, whether it be inside your family or outside the family.
1. Take a hard look at your corporate balance sheet. Are there any entries in the assets or liabilities sections that should be corrected? Many of the industries that we work with have a lot of inventory on their balance sheet. Over the years, the inventory may have fluctuated and now that you are thinking about selling the company, it may not be accurate. There may be some obsolete or unsellable items that a buyer would not want to purchase.
If the inventory on the balance sheet is low, then you need to be prepared to explain the adjustments to a potential buyer. A hard count of inventory usually happens at the time of closing, but during negotiations you want your inventory as accurate as possible. Look at the accounts receivable. Are any of the accounts over 90 or 120 days? An outside buyer who is not part of the family may not want to purchase accounts receivable that old, unless there is a good reason.
Are there any “loan from shareholders” or “loan to shareholders” entries? If there are any entries on the balance sheet dealing with the owners/stockholders, there needs to be a good reason for those entries.
Try to clean up the balance sheet in the last three years, because any buyer will want to look at that information as part of their due diligence.
2. Work on the profit and loss statement in the last three years before you sell the company. This step is very important, because this document will show any potential buyer how much cash flow the company can generate. You may think that your inventory and all your furniture, fixtures and equipment are important, and those assets are important, but it takes cash flow to pay for them.
Probably your largest expense is payroll. Try to make sure that your payroll does not exceed the national averages for your industry. For example, if the national average gross margin is 40%, then your payroll should not be more than 20%. This includes all employees and all the owners. Over the years, I have worked with many store owners who have a 38% gross margin and a 28% payroll expense. These store owners are not making any profit. Try to keep your payroll within national industry averages, along with all the other expenses.
Adding the most value to a company in the last three years before you sell is probably the most important task to work on. In the last three years, if you can increase your gross margin by one percent per year, not only are you adding profit to the business, you are increasing the selling price.
In the last three years before you sell the company, if there is any way to reduce your expenses by 1-2%, you will also increase the value of your company. Over the last 30 to 40 years, if some of your business expenses have gotten out of hand, now is the time to identify them and make adjustments.
By increasing your gross margin by 1-2% and decreasing expenses by 1-2%, you have added a lot of value to your business. Keep your payroll and rent in line with national averages.
3. Make a list of all “add-backs” that would apply to your company. This is also something to work on in the last two or three years before you sell the company. Add-backs are generally items of which the company pays and deducts for the benefit of the stockholders and family members. For example, common add-backs would include gasoline expense, car expense, cell phones, health insurance, life insurance premiums, travel and entertainment, inventory for personal use, country club dues and any other personal items that would apply to the owner or family members.
These add-backs can become a large number. It is common at our firm, Castle Valuation Group, when we are preparing a valuation for one of our clients, that the add-backs could be at least $10,000 to $20,000. Sometimes many of the add-backs total over $100,000. The total of all of these add-backs will increase the value of the business. $30,000 in accumulated add-backs could easily increase the value of the company by over $100,000. Over the next three years, while you are getting ready to sell the company, make a list every year of all of the add-backs that you and your accountant can think of and be prepared to show that list to a potential buyer.
4. Are your employees an asset? The first things that a potential buyer looks at in the business are the balance sheet and the profit and loss statements. The second item that a potential buyer wants to know information about is the employees. How long have they been with the company? What is their specialty? What special training have they attended? Well-trained employees are an important asset of any company. Your best employees should be well-trained, and the compensation should be in line with national averages for someone that has their job description. When you get ready to sell the company, you want all the right people with the right training and with the right salary working for your company.
5. Get your facilities updated. After any potential buyer takes a hard look at the corporate financial statements and all the employees, the next items to look at are the facilities, buildings, equipment and maintenance. In the last one or two years before you sell the company, make sure that the inside of the building is well painted and looks good when customers walk through the door. Make sure the outside of the building is clean and the parking lot looks good.
By doing all this homework in the last three years before you sell the company, you will increase the value and make it more appealing to any potential buyer. You will have cleaned up the balance sheets and the profit-loss statements and you will have a list of all the “add-backs” for the last three years. Hopefully, your gross margins are up 1 or 2%, which means your profits are up and the company is more valuable. You have cleaned up the inventory and all the furniture, fixtures and equipment are well-maintained.
Any potential buyer is going to be impressed when they see your facilities, your employees and your financial statements. All these items outlined above add value to your company.
Gary Pittsford, CFP®, is president and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely-held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information, visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary@Castle3.com.