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The Center for Financial, Legal & Tax Planning,
Inc. |
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Articles ·
Identity Theft: The New Financial Nightmare (08-05) ·
Maximizing Your
Business (05-05) ·
LLC, S CORP., & C CORP.:
WHAT’S THE DIFFERENCE? (05-03) ·
American
Jobs Creation Act: Explanation and Strategies (04-12) ·
Conditions
Favorable: Consider Selling Your Business Now (04-12) ·
EXIT PLANS: HAVING ONE IS
ALWAYS IMPORTANT (04-11) ·
Is There “Value” in a
“Valuation”? Part 2 (04-08) |
Maximizing Your
Business’s Value: Improving Your
Operation and Profitability By: Bart A. Basi & Marcus S. Renwick Introduction The time is ripe to sell a
business! With interest rates being
low, the economy growing, capital and ordinary gains tax rates being low, and
tax rules as they are, now is the best time to sell a business. Sellers under these circumstances will get
maximum value for their business and buyers will be able to borrow money at
low interest rates to help in financing the acquisition. Still, with all of these favorable
market conditions, financing, and tax conditions in place, sellers can do
even more to maximize the value of their business to potential buyers. Specifically, sellers can: 1) Improve the
operation and profitability of their business, 2) Recast their financial
statements, and 3) Have their business valued by a professional. This article will focus on improving
the operation and profitability of your business and will be the first in a
three part series on the topic of maximizing value. The key thing to remember in maximizing
value is to be buyer oriented while not losing sight of your goal. Business buyers want good cash flow, solid
earnings, an easy ownership transition and they want the operation to be a
turnkey operation, just to mention a few wants of buyers. You, the seller on the other hand want low
taxes on the exchange, an easy transition, and above all, value
maximization. Reading this article
will inform you as to what is involved in this very important process. Getting Started The first thing you will want to do when
adding value to your business, is to take a hard look at the operation as a
whole and ask yourself questions such as the following: Who can help me? What
are my businesses strengths? What are
my business’s weaknesses? What can I
possibly improve? What is just going
to have to be eliminated? After
examining the business and answering those questions, you can then begin the
process of maximizing value. |
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Choosing Professionals The absolute best time to get professionals involved is at the beginning. Experienced professionals can help the
process along in ways that you can not imagine. Attorneys and accountants are excellent to
have on board from day one. Just be
sure when choosing a professional, that the professional has a background in
tax law and handles business sales for a living. An attorney that defends DUI cases and
practices family law is probably not the best choice for an attorney in a
business sale. Probably the best way to find an attorney or other professional is
through word of mouth. If you are a
member of a business association, members are happy to provide you with
recommendations on who to choose as a professional. This way you can get a thoughtful
recommendation regarding the professional.
Many times professionals also give seminars and lectures at these
associations. Being that they are
affiliated with the association is usually some indication that the
professional is familiar with the issues that businesses in your association
are faced with. Try sitting in on
these seminars to preview the professional and see if you can talk with him
or her afterwards. To find relevant
associations, you may look up associations that are relevant to your business
on the internet. Whoever you choose, make sure the professional is someone you feel you
can work with and will work hard for you.
Sometimes, the task of maximizing value and selling a business can be
an arduous event. Therefore be sure
you and the professional are comfortable with each other. Once you have looked at your business and
chosen the correct professionals to work with, the next step is to begin the
work which will increase the value of the business. Improving Income Before the sale of a business, you will want to increase business
income to add value. Income of course,
is revenue minus expenses. Unless you feel that one or both variables are at
their pinnacle of performance, you will be best served by attempting to
modify both of them. Increasing revenue tends to be a longer term strategy than cutting
costs, but if you have two or three years to plan, you will be well served by
it. You will want to analyze all
aspects of you revenue situation. For
some this may mean more advertising, hiring or firing salespeople, or simply
being open more hours if you are a consumer level business. Manufacturing and farm type businesses may
want to invest more in machines and investments that increase output. If you do not have enough labor to carry
the load, consider hiring more people.
The bottom line is, raise your revenues. In one case, it was recommended that the
owner buy more customers from another business. The other parts of the equation, expenses, can usually be cut quickly
and easily. One of the easiest and
most substantial expenses to cut is your own system of company perks. If you are contemplating laying off people,
now may be a good time to do so. Your
accountant can also help you cut expenses.
Suggest to your accountant that he capitalize some assets as opposed
to expensing them immediately.
Companies with low expenses are attractive to buyers, because if
anything goes awry with the revenues, the new owner will be able to handle
the downturn without losing too much money. Improving Your Assets Examine the assets in your business and their productivity. Buyers want to buy businesses that have
productive and profitable assets. Non
productive assets and obsolete inventory does not add value to your business
in the eyes of a buyer. Personal
property should also be removed as well.. Your company car may look great when
reducing your tax liability; but to a buyer, your personal car is of no
interest. Therefore, remove assets
from your company that are not productive or profitable and therefore run up
the cost of your business while not adding value. The losses you take now could be netted
against the gain from the sale of the business creating a tax asset for you
to use. Real estate is also another big consideration as far as assets are
concerned. The real estate should not
be part of the sale, remove the real estate from the business. If you think the real estate should be part
of the deal, it may be wise to talk to your professional. When buildings are sold, they tend to
generate income which is taxed at a higher rate. Therefore, it may be better to hold onto
the property personally as opposed to selling it in a business. Also, many buyers want to buy productive
assets and not real estate. There is also the maintenance aspect of assets. New buyers tend to like to see all assets
in good working condition. Look at all
your assets and fix what needs to be fixed for efficient operation of the
asset. Assets which are not broken,
but are currently not being operated should be check to see if they are
operational. Certainly you will not
provide a warranty that everything is in perfect working order, but operating
equipment is worth more to a buyer than nonoperating
equipment. Also included in assets are accounts receivables. If you have receivables that are overdue,
you will either want to collect the accounts or write them off as
uncollectible. Buyers tend to want
accounts receivable that are clean and are going to require no effort or
legal action on their part to collect.
A clean accounts receivable will add value to your business. Reducing Debt A company that has little debt is the sign of a healthy company. Buyers like to see little debt, because it
is a sign of health and past profitability.
By cutting your perks, you can send money which would otherwise go to you
to liabilities such as accounts payable and credit cards. Other long term obligations such as auto
and building payments may not be able to be reduced, but if that debt is the
only debt you have, it could be acceptable to buyers. Monthly payments on debt tend to confirm
the existence of the assets, and if a buyer is going to make money on the
assets which he is paying for, the debt verifies the existence of the
asset. Long term obligations such as pensions can be frightening to
prospective buyers. Since pension
liability has become so large, many buyers will not look at a company with
large, looming pension payments. It is
best to offer your employees a present value amount to get out from under the
payments and perhaps close out the fringe benefits. United Airlines recently received an
approval to eliminate their pension program essentially eliminating millions
of dollars of debt from their books. Eliminating Potential Legal Liabilities Other than financial liabilities, there are taxes, lawsuits, and
environmental liabilities. No buyer
wants to see a potential lawsuit. If
your company holds real estate, be sure to have an environmental Level I done
on the property and have the report handy for a buyer to look at. Pending lawsuits greatly dampen the value of a business and they take
a long time to resolve. Waiting until
lawsuits are resolved is a good strategy if you want to bring the value of
your business to an optimal level.
Settling can be costly. Often,
attorneys will want more to settle a lawsuit in advance as opposed to right
before trial. The IRS can be another liability buyers do not want to be involved
with. Tax liabilities tell a buyer
that this company was not very profitable or the cash was insufficient to
handle the taxes payable. If the
company had been profitable and provided positive cash flow, the taxes would
have been paid. Therefore, you will
want to see an attorney to deal with tax matters before you attempt to sell
your company and be sure these matters are settled. Employees Make sure your rank and file employees are employees that a future
employer would want. If one employee
is having problems or is underproductive, reform or replace that person. Walking into a potential personnel problem
is not the desire of buyers. On the
other hand if you have star employees, be sure to emphasize their strength to
a potential buyer. If your company is a business that will have an independent manager
from the buyer, you may be well served by hand picking a manager from your company
and grooming that individual. Having a
manager ready can add value to your business.
I would strongly recommend grooming an individual to take the reigns
of the business for many other reasons as well. Housekeeping Last, but not least, clean house.
It will pay off big to clean and keep the physical location of the
business clean. Further, it may be
beneficial to redecorate the areas the public sees and generally make the
place look nice. Remember, a first
impression is lasting Conclusion There is plenty of value to be gained by fine tuning up your business. Ideally, these changes should be started four years before the business is put up for sale. If you have that type of a time frame, you can maximize your value. Otherwise many of the changes suggested should be implemented as rapidly as possible. If you are considering selling your business, consider these points and don’t hesitate to contact the professionals at The Center for assistance in strategic planning and all other aspects of selling your business. |
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The
Center for Financial, Legal and Tax Planning, Inc. |
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Satellite Office: Longboat Key, FL |
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(618) 997-3436 Fax: (618) 997-8370 © Copyright 2005. All rights reserved. |
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