Selling Your Business in the Future
Written by: Patrick Findaro
Last Updated by
Marina Longo: August 18, 2022
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Operate a Business Like You’re Selling It
According to the current industry statistics, most small to medium businesses in the United States will change their owners every five years. A new business owner could apply a different approach or idea that can result in a better future selling price and quicker sales. The owner must make buying the business an easy process in order to sell it properly.
A problem now is a problem later
Take an objective view of your business to see if there are any potential problems that would hurt your chances of selling the business later, which may include poor relationships with suppliers or employees, high customer concentration, bad monitoring systems or lease expiration dates.
Whether or not you are going to sell the business, it is still a good idea to look at the business from a buyer’s perspective. Identifying issues in your business and finding the solutions to the problems will naturally help improve the overall worth of the company.
It is important to clean up mistakes that are not easily visible to an outsider.
Bookkeeping is Key
The best advice from a business broker is to make sure that your business bookkeeping skills are clean, or better yet, hire a professional bookkeeping service. This makes the selling process much easier and also makes your business more attractive to buyers. Because bookkeeping is one of the most common reasons business deals fall through, the business with the best-kept books has a history of selling faster than other companies. It is good practice to keep tidy records for your business from the first day so that you know what is happening in your cash flow and other activities.
Policies and Procedures Systems
An important rule is to keep the company policies straightforward enough that even the lowest level employees will have no problems understanding them. A reliable and updated company policy manual would be a valuable tool to train new employees or to expand the business.
A sound training manual is valuable and appealing to the buyer because it will make the buyer’s job much easier to get to know the business and its policies in order to run the operations of the business as quickly and smoothly as possible.
What if you die tomorrow?
Very often, business owners neglect to have a sound backup plan of what would happen to the company if they suddenly became ill or died, making it difficult to continue the business and sell the business.
The transfer of knowledge or transition would be much easier if the buyer is familiar with the business, a partner or even an employee. It is important for a company to have a straightforward training process for the potential new business owner to pick up the business operations and functions quickly. Try to document your operations like it is a franchise that could be licensed to franchisees. What would a franchisee of your business need to know?
Statistically, people tend to buy businesses that are in new industries, but when they are digging through the business operations, they will become overwhelmed by how much they do not know, making it susceptible for the business owner to drop out.
Unreported Income can hurt selling price
Many business owners can move cash in creative ways, by making some money and not reporting it to the IRS. While this practice is a dangerous way to operate a business, it is also a much harder way to prepare that business for sale. Although creative bookkeeping may be able to provide “proof” of the income, the process itself may not be that easy.
While an owner may save in taxes by not reporting the money, an owner could potentially suffer a loss soon when it comes time to sell the business. For every dollar stolen, the owner will save approximately 30 percent in taxes. However, if the owner reports $30,000 by bookkeeping correctly, the total amount will also be added back into the business valuation. The important part of this is that when a business sells, it will sell at a multiple of the money it has earned. For example, the same $30,000 will end up doubled at the time of the sale. Some businesses sell for 10 times the earnings so imagine that $30,000 illegally saved could cost you $300,000 in the business valuation and more in penalties if caught.
Conclusion
The money that is being pocketed could also have been used to help improve the overall worth of the business, such as advertising or other building projects. While it is tempting to take the cash now, it is not the best approach to prepare your business for a potential sale in the future where you could potentially make more money.
If the business owner begins to operate the company with the intent to sell the business, then earlier that one can implement the type of plan to improve the business valuation, the more money an owner can make once the sale of the business takes place.
