When planning to exit your business, it will be important to have a current independent business valuation. Whether you’ve had one done recently or not, you will want to have one within the three years prior to the sale. This isn’t a law, or even part of the official tax code, but the IRS does look at gifts made in the three years prior to your estate passing your designated heirs, for certain estate tax purposes.
And buyers tend to focus on the three-year window prior to purchase, with respect to your business’ financials and tax returns.
So, take advantage of this awareness and begin the process of preparing your enterprise early.
Business Valuation
You might think your business value is a matter of revenue and EBITDA ratios, but there’s a lot more that a comprehensive valuation should take into account.
Your valuation specialist should also factor in:
- Market conditions and trends
- Your management team
- Margins
- Whether your business can function effectively without you
- Personal goodwill, which is owned by you, and business goodwill, which is the property of your business.
All of these factors will be of vital importance to potential buyers, and, if your business’s valuation comes up short on any of them, you have some time to make corrective adjustments. It’s worth your time and effort to make your business as attractive as possible.
Whether you’re selling outright, or decide to transfer all or part of your business to family members or via an Employee Stock Ownership Program (ESOP), as you transition out of it, you’ll want to ensure the business can still thrive in your absence (though you may want, after the sale or transfer, to remain in a part-time consulting role, or even a full-time one for a specified period).
Business Financials & Records
In addition, you will want to:
- Ensure your business financials are clean, audited or at least reviewed for consistency of accounting and normalcy of add-backs.
- On the subject of add-backs, this is a good time to eliminate your own or other family members’ “perks” and personal expenses from your business books. While it’s quite normal to include at least some personal expenses, as long as they’re properly accounted for on your tax returns, buyers won’t like seeing this―and it muddies the picture of your business’ financial position.
- Make certain your corporate documents, licenses, permits, and business plan are all current.
- Ensure all policies, processes, and procedures, as well as current job descriptions, duties, and functions, are documented. Cross-train team members to cover one another’s duties and responsibilities in case of absence.
- Check all employment agreements or contracts for accuracy and currency.
- Do the same for all leases, loan agreements, client engagement agreements, and supplier contracts.
Other Considerations in Pre-Sale Planning
Some other things to start working on now:
- Business management. If that currently consists of yourself alone, your business may scare buyers. You’re too crucial to operations. Consider hiring one or more experienced managers for your business team, and give them time to settle in. Or promote from within your current team.
- Any planned restructuring of ownership. If you’re thinking of transferring some or all of your stock to family members or charity, either directly or via trust(s), do that prior to or within this 3-year pre-sale window. It’s vital that you do this before any letter of intent is signed.
- Evaluate the timing for your sale, based on industry and market conditions and trends. Consult with your fractional CFO, your estate and business attorney, or other trusted financial advisor who understands your industry and market.
You’ll soon come to appreciate what an experienced advisory team can add to your business’s value, and the smoothness of your sale process.
Rigby Financial Group has helped clients prepare for, negotiate, finalize, and follow up on sales of their businesses to best advantage, We have worked closely with business and estate attorneys in these and other instances, and if you don’t yet have one, we can offer guidance and, if you like, referrals.
If you are considering a potential sale of your business within the next decade, please don’t hesitate to call upon us. We can help you through every step – it’s what we are here for. Call us at 866.690.4061 or 504.386.3050 to schedule a consultation or click here to email us directly. Let us know how we can help you―serving your needs is our passion and our pleasure.
Until next time –
Peace,
Eric
See also:
Valuations – What Is Your Business Worth?
When Should You Start Planning to Exit Your Business?
Top Tips to Consider When Selling Your Business
