by Mark J. O'Donnell and Jim Schmersahl
Recall from last month’s article, we pointed out you will not own your business forever and that separation may happen in one (or more) of four events.
1. Orderly transfer of ownership to the family
2. Sale to a third party.
3. Death or disability
4. Disaster (financial failure, litigation, bankruptcy, divorce, etc.)
We touched on the first event last month and will move on to the second one this month.
As you prepare to sell your business, it’s crucial to consider the buyer’s perspective. Buyers are not just purchasing your business, they are investing in its future cash flow, expected growth rate, and risk. Understanding this viewpoint is key to a successful sale.
Cash flow results from your Key Value Drivers: operations, personnel, management team, marketing and sales strategies, technology, assets, etc. In other words, your people, places, things, and processes. Buyers will scrutinize and evaluate these key business values in a process called due diligence. This step offers two benefits to the buyer. First, it uncovers risk. Any substandard finding from the buyer’s point of view is a risk to future cash flow and may decrease the sale price. Second, it uncovers opportunities for improvement post-purchase, potentially increasing cash flow and giving your buyer a reason to be optimistic and motivated. We recommend using the years before selling your business to do a similar detailed examination of these areas, especially those that increase risk or impact the trend and variation of cash flow…and address any issues.
Stable, sustainable growth is not just a factor, it’s a critical factor in business valuation. It’s the semi-controllable item and a component of your ‘earnings multiple,’ significantly influencing your business’s value. Accordingly, monitoring and investing in cash flow growth must be a part of your business plan, providing a solid foundation for your business’s value.
A key aspect from the buyer’s perspective is the reliance on accurate, timely financial statements and reports. The quality of your internal accounting processes and staff and the quality of your financial statements will significantly influence the buyer’s decision. If your financial processes are lacking it creates uncertainty and concern, which leads directly to a lower purchase price. A highly qualified person will maintain excellent internal financial controls, such as regular audits and strict budgeting, and produce timely, accurate financial statements, and is well worth the investment.
Finally, about your timeline,
1. ‘Timing is everything’. National and industry economic cycles have a very significant impact on every business’ value. If you own any publicly traded stock, you are aware of this. Generally, expected high interest rates and slow or negative industry growth are not good; low or decreasing interest rates and positive industry growth cycles are great. Starting your preparation midway through a growth cycle may be best for maximizing your sale price, giving you a proactive edge in the process.
2. It’s critical to visit your CPA when considering selling your business. To maximize tax benefits, some planned tax-saving actions must happen as early as five years before the sale.
3. Many buyers prefer audited annual financial statements. They are perceived as having less risk of a material error than internally prepared financial statements.
When selling your business, having the right advisors can make all the difference. A potential buyer will likely be an expert in your industry. You’ll need the most knowledgeable advisors in law, accounting, and other relevant fields to guide you through the process, providing you with the reassurance and support you need.
Mark O’Donnell, CPA, is Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727. Jim Schmersahl, CPA, is a Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727.