How do your books look? When you are aiming to sell your business, it’s worthwhile to take a close look at your record-keeping through the eyes of a potential buyer.
You’ll want to understand how your tax-saving strategies will look to a prospective buyer, for example. An accountant can view your records based on generally accepted accounting practices and tax issues, and of course, that is valuable. If you are planning to sell your business in the near future, it’s important to let your accountant know this.
A business broker, however, can provide a more in-depth analysis. A good broker will understand which tax-saving strategies may send up red flags to prospective buyers and lenders, and which are acceptable for your type of business.
Solid records make your business more attractive
It is important to have complete and understandable records, with an earnings history that buyers can review for trends. Well-organized record-keeping can give prospective buyers a higher level of confidence in the value and potential of a small business.
Good record-keeping is also what lenders require when they finance a business. A business that adheres to standard accounting practices may not only be able to sell for a higher price, it can widen its buyer pool when bank financing is an option.
There are two terms to become familiar with, E.B.I.T.D.A. for larger business (Earnings Before Tx, Depreciation, and Amortization) and for smaller businesses S.D.E.—Seller Discretionary Earnings. Also called owner benefits, SDE is part of the formula your business broker may use to come up with the business selling price. Business brokers also use your net profit, depreciation, interest, amortization, owner salary and “add-backs” (owner perks) to create an owner benefit figure. The difference is that EBITDA accounts for management staff in place operating the day to day operations of the business, whereas SDE accounts for one full-time owner/operator working within the business.
The more organized and complete your record-keeping is, the easier it will be for a business broker to put together a package for lenders and pre-qualify your business for a smoother sale. The cleaner the books and records are, the better. If much of the business is done “off the record,” with no documentation, there’s nothing to back up a higher selling price. When business expenses and the owner’s personal expenses are co-mingled, it’s harder to assess, and that can make the business less attractive to buyers and lenders.
Easier due diligence process
Audited financials are very expensive to produce and typically are required only in larger business acquisitions. Due diligence, however, is a component of any small business sale. During this process, the buyer has an opportunity to review your records. Typically, they will bring in an accountant to help them with the review. You’ll want to be well-prepared for this step, and your own accountant and your business broker can help you prepare. When you have your information organized, and are ready to answer questions that may arise, this should be a smooth process.
“One mistake small business owners make is focusing on tax-savings strategies, without considering how these might affect the sale of their business later on. “
– Bianca Evans, Senior Business Broker
I welcome you to contact me to schedule a free and confidential evaluation, whether you are thinking about selling your business now or are building an exit strategy for the future.