It’s a familiar scenario to exit planners: a small business owner in the suburbs has owned a business for many decades. Now they’re seriously considering an exit. Their sales are up and the economy is thriving. New entrepreneurs are eager to invest in quality businesses. But there are liabilities, too: the owner’s tax returns do not align with their profitability thanks to unreported sales, personal expenses, and other creative tax management approaches. This tax minimization has been highly successful, but it now presents a serious barrier to highlighting the full profitability of the company.
What You Can Do Now To Increase Sellability
Prospective buyers look to net income on the books. So what does a business owner need to do to increase the likelihood of a successful and lucrative sale? A handful of concrete steps can help every owner make their business more appealing. Here are some good starting points:
- Report all supplier cash rebates, cash bonuses, and sales in 2020 and for every year thereafter. This shows the full monthly revenues a business brings in, potentially making it appear more lucrative and attractive.
- Consider returning slow-moving inventory to suppliers. Replace these items with faster moving items to help reduce the overall inventory value.
- Stop burying undocumented personal expenses in the company. Instead, clearly record these fringe benefits so that you can add them back to cash flow.
- Identify records of parts, tires, and other supplies that the business purchases and then installs on company vehicles, as well as vehicles of friends and family.
- Look into amendment options for your current lease, particularly if you only have a few years remaining. Many buyers want to see at least 10 to 15 years remaining on a lease, since this offers significantly more business security.
Recasting Into the Future
While prospective buyers are interested in the past of your business, they really want to know that it can succeed into the future. Devise an action plan that fully prepares your business to be marketable. A 2019 tax return should show reasonable ordinary business income, which you can then use to calculate seller’s discretionary cash flow. Or use a process called recasting to calculate the full owner benefit of the business.
One common mistake is simply giving prospective purchases a copy of unadjusted financial statements or the business tax returns. This gives little information about how the business is actually run, and whether and to what extent a change might make it even more successful. Buyers need to be able to appreciate the full profitability of the business. Recasting financial statements for marketing purposes can be highly successful. You can, for example, increase cash flow with legitimate add-backs like personal expenses, non-recurring costs, depreciation, interest payments, and other expenses the buyer would not have. This reveals the fully available cash flow, and can get the buyer excited about the income-generating potential of the business.