Thinking of selling your business? Maybe you are just feeling the need to move on to something new, or you might want to retire after running your business for many years. Whatever your motivation, the sale of a business can be a long, complicated and emotional process if you are not properly prepared.
Each year, tens of thousands of U.S. businesses change ownership or are up for sale. Studies indicate that 20% of small U.S. businesses are for sale at any given time. The sad fact is that only 1 in 10 businesses that go to market will actually end in a sale. To give your business the best chance of a successful sale, at a fair price, you need to ensure that you avoid all factors which could potentially devalue your business.
The sale of a business can often take longer than a year to complete. Openly disclosing the fact that it is in the market can have a detrimental effect on the business. Suppliers might get nervous and doubt the strength of the company’s cash flow, resulting in a reduction of credit lines. People have a tendency to expect the worst and your customers are no different. They might think your business is in financial trouble resulting in decisions to rather “jump the sinking ship” before it is too late – thereby taking their business elsewhere. The same can be said for employees. You do not want to find yourself in a position where most of your key employees leave the company before the sale is concluded. Confidentiality is vital for the successful sale of a business.
Employing Family Members
In the beginning, it is expected you might leverage your family, especially, if you can pay them less than a regular employee. The challenge is when you go to value your business, now a full cost employee has to be added back and this reduces the profit and the value of the business. Consider paying your family member full wages as soon as you can.
Having Many Businesses on One Tax Return
Actually, having multiple businesses on one tax return is not so bad, unless you do not have the income and expenses separated. It is even worse if you have multiple locations and those incomes and expenses are combined. This makes it hard to determine the value of one unit.
Changing the Way You Run the Business
Once the decision is made to sell your business, don’t stop what you are doing. It is easy to fall into the trap of leaving issues to be sorted out by the new owner. This can result in the sale of the business falling flat shortly before completion. Buyers are most critical of your most recent activity so don’t cut back on marketing or customer care. Run the business as if you will still own it in another five years’ time. Run your business in the same manner as you did when you built it up to be the successful venture you went to market with.
Taking out Too Much Cash
If you own a cash business, it could be tempting to take out cash which you do not declare. Apart from the legal implications of this action, it also affects the value of your business. In effect, you declare that the business turns over less than it does in reality, which means your profit is reflected as being lower than it is. Since the value of a business takes into account the turnover and profit, taking undeclared cash out will have a massively negative impact on the value of your business.
Making the decision to sell your business a few years before bringing it to market is a good idea. This gives you the time to ensure profitability is at a maximum and provides for the time to plan the sale carefully, avoiding all factors which could potentially devalue your business.