Matter & Substance
  December 28, 2021

Creating Wealth in the Sale of Your Business

With corporate buyers hoarding record amounts of cash and interest rates at historic lows, the current market conditions are perfect for turning your business into your retirement plan. If you feel ready to sell, you want to make sure your efforts translate to the most dollars—whether that means creating wealth or just making ends meet. Today, we are going to explore how to maximize the proceeds in the sale of your business.

Start planning and preparing early

The average business sale takes six to nine months, but experts recommend starting even earlier than that—three to five years ahead of your target sale date—to fully maximize proceeds.

Keep in mind that the business principles which make a company attractive to a potential buyer will also set your business up for ongoing success. Since you never know when a buyer will make you an offer you cannot resist, adopt a mindset to be prepared, always and any time.

Pay special attention to:

  • Keeping your financials clean. If your business is not large enough to support an internal accountant, outsourcing monthly accounting work is a way to stay within budget while keeping up with your financial reporting.

  • Investing in your management team. Ideally, your management team should be able to run your business in your absence. Investing your time and resources into building strong leadership will ease any concerns a potential buyer may have about future revenue streams and growth potential.

  • Fine-tuning your systems and processes. The cleaner your software, systems, processes, and procedures are to follow, the easier continuing business operations with minimal interruptions will be for a buyer post-close.

  • Creating wealth. Be careful to avoid common pitfalls (discussed later) that can diminish or consume, rather than create, wealth from your business.

Complete your due diligence

A sophisticated buyer will include legal documentation, financial reporting, management team, operational processes, and IT systems in their due diligence. Some sellers will engage advisors to perform sell-side due diligence to identify any financial, legal, or operational areas of concern that may arise during the transaction.

A little anticipatory diligence will go a long way in allowing management to address these matters prior to going to market, saving everyone the frustration and headaches that accompany failed transactions later.

Create—rather than consume—wealth

Throughout the years, your tax advisors have stressed the importance of minimizing your overall tax liability by maximizing the cash available from your business to fund your lifestyle. This is excellent advice—until you are trying to sell your business.

In the years preceding the sale, pay special attention to making it most attractive—this might mean paying a little extra in taxes to avoid artificially lowering profits or taking too much cash out of the business to fund your lifestyle.

Instead, focus on increasing profits and investing cash in the business. With the help of a financial advisor and a solid investment strategy, you can stretch the cash you do draw further. Remember, keep your business a means of creating wealth rather than consuming the revenue as you go.

And for the unavoidable personal expenses: remember to document, document, document! The due diligence of a buyer will often allow for adding back to EBITDA (earnings before interest, taxes, depreciation, and amortization) one-time or non-recurring expenses and clearly documented personal expenses. Without documentation, there are no add backs.

Depending on the risk involved in the business, you may also have a sizable multiplier when figuring the potential sale price, increasing the impact these expenses can have.

For example, a business with EBITDA of $1M and a multiplier of 5 has a potential sale price of $5M. If this business were able to add back $250K in personal expenses, the sale price would be $6.25M. By closely tracking any expenses eligible for add-back treatment in the years leading up to a sale, you can ensure you are creating wealth rather than simply consuming it.

View your business as a buyer

From a buyer’s perspective, one of the main concerns is whether the business will continue to thrive without you. Any steps you can take prior to sale to maximize continued cash-flow will maximize stakeholder value, and in turn maximize the purchase price.

Do not discount the impact the right tax, advisory and wealth management team, as well as the right succession plan, can have on getting the most out of your business. Give us a call today to help, and stay tuned for how to invest your proceeds next!