Preparing a business sale

A simplified analysis that looks at three categories to determine salability

Exiting your business requires pre-planning to maximize the value of the sale, ensure an orderly closing and avoid any complications during the sales process.

Here’s a simplified analysis that requires business owners to look at three categories to determine which factors might impact business value and salability: income statement items, balance sheet items and capitalization items.

Income statement

• Cash element: Some businesses may have cash revenues that are not reflected accurately in the financial statements. While this may have immediate tax benefits you can’t “double-dip”: Buyers won’t pay for profits that can’t be proven. If the cash element is significant, it may have a material impact on salability, especially if the cash component is the difference between business profitability and break-even. Buyers will be wary of any business with a large undeclared cash element because it could be indicative of other parts of the business that are also not fully documented.

 • Rent: Many business owners also own the real estate occupied by their business. Generally, they are kept as two separate entities, with the business paying the real estate entity lease or rent payments. There are advantages to this arrangement, but often the rent payment does not reflect “fair market value” of the space; the owner is either overpaying or underpaying for a variety of reasons. You’ll want to normalize the rent to both accurately reflect business cash flow and real estate “net operating income.”

Each are primary drivers for business value and property value.

 • “Related employees” cost: If you have family members working in the business, taking a paycheck or providing services, make sure that the service or cost is normalized. A spouse filling a key sales role without a paycheck or a brother in-law plowing your parking lot for free distorts your actual business expenses. Conversely, if you are overpaying relatives or family members, you should normalize that to improve business cash-flow. 

 • Barter: Do you trade for services? While that may be beneficial to you as the owner, you can’t expect a buyer to want or need those exchanged products or services. If the services or products received are essential to your business operations, consider moving the relationship to a traditional payment arrangement prior to selling.

Balance sheet

• Inventory: Overstating cost of goods can reduce your taxable income, but it will also create understated inventory value on the balance sheet. Misstated inventory could impact working capital estimates and may require an amendment to a past tax filing or a large one-time adjustment at closing. This could have considerable tax consequences and should be discussed with your accountant. Additionally you’ll want to accurately represent the true inventory value of “clean and salable” inventory to a prospective buyer.

 • Depreciation recapture: Recent IRS allowances have allowed businesses to aggressively write off depreciable assets far faster than their useable life. Buyers may want an adjustment to asset values in the allocation negotiation to create their own “depreciation tax shield.” Like an inventory adjustment, a depreciation adjustment could create a significant taxable event for the seller.

Capitalization

• Deferred maintenance: It’s difficult to move ahead with needed capital investments when you are thinking of selling your business. To a seller it may seem like spending money they’ll never see returned in the sale proceeds. But keep in mind that aging systems, unsightly exteriors or broken equipment will hurt the salability of the business and require additional capital from the buyer. Buyers could be dissuaded from the acquisition if they feel that the seller has neglected the business, and at the least, they can use the deferred maintenance to negotiate a lower price of the business

 • IT/software: Are your IT systems and website up-to-date? Are you using deskbound software systems that require costly support and upgrade expenses? If there are better IT solutions for your business you should at least identify them for interested buyers.

 • Curb appeal: Last but not least, don’t ignore the obvious. A well-maintained and clean property, groomed landscape, ordered production and operations floor and presentable employees do add to the appeal of your operation. Buyers will recognize a seller that takes pride in their operation and will help assure them during the acquisition process. 

Brian D. Hanson, president of Maine Business Brokers, can be contacted at 603-570-6160 or through MaineBusinessBrokers.com.