When it’s time to sell your business, the worst things to encounter are surprises. Whether you have a solid exit plan or dream about someday being able to sleep in during the week, the time to start preparing your business is now.
Preparing for a Sale
Many business owners are experts in their product or service, and have developed their business around it. Understanding the limits of their expertise when it comes to running the business, they’ve learned along the way to count on professionals to guide them when financial or legal expertise is needed.
Once you adopt the perspective that you’ll be selling your business at some point, it’s time to take stock of what needs to be done. While planning is great, sometimes opportunities arise for a sale earlier than expected or circumstances change that require a rapid priority shift that necessitates a sale.
Inventory Your Moving Parts
To get the best valuation for your business and align your expectations with potential offers when the time comes, here are a few things you or your financial professional will need to do:
- Learn how your industry values your type of business (it’s sometimes expressed as a multiple of annual revenue)
- Dissect all financial activities and reports at a daily, monthly, quarterly and annual level
- Move to monthly reporting if you aren’t currently doing so and make sure cut-offs are clean
- Examine all compliance obligations (tax filings and payments, business registrations, contracts, legal and accounting governance, etc.)
The whole scope of your operations is revealed during a sale. Taking the time to prepare for that day will help you enter negotiations with much more confidence while also providing you with the tools to run your business more effectively to make better decisions now.
Buy Side Opportunities
While looking at your exit strategy is important as you think about selling your business, understanding—and perhaps becoming—a buyer may also be in the cards for you.
The pandemic may have jumpstarted exits, but by 2030 all baby boomers will have reached at least age 65, with many of them seeking to enter retirement. This presents an unusual landscape of opportunity for those wishing to expand their businesses.
When viewing the buy side, you not only need to be aware of the business you’re interested in, but you also need to understand what you can afford. Your cash flow statement will take center stage and modeling different scenarios of the combined businesses and your financing options may be helpful in both the purchasing decision and in obtaining any financing.
Financial, Tax, and Nexus Due Diligence
Regardless of which side of the transaction you’re on, a deep understanding of the business includes becoming knowledgeable in their state and local tax (SALT) status, particularly when business operations run across state lines. Beyond its physical location, today’s compliance requirements often extended to where products are warehoused and where remote workers reside.
State laws vary wildly but getting a firm grasp on what’s necessary is a required part of a thorough due diligence process. Nexus—the term used when a relationship is established—can be created by either physical or economic presence in a state. Once nexus is created, the state can assess a tax. Sales tax is normally top of mind when it occurs but things like unclaimed property, payroll taxes, personal property tax and registrations also must be reviewed. Purchasing a business without knowing its obligations exposes the new owners to risks that may have been avoidable.
The Finish Line
As exciting as it is, buying or selling a business is far more complicated than finding a buyer and seller and agreeing on a final selling price. Taking the time to prepare for it will help the transaction go smoother and can send you into your next chapter with more confidence and less stress.
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We help business owners like you increase profitability, optimize tax strategies, implement succession planning and gain advantages in mergers and acquisitions. Contact us today to learn how we can help you prepare for a sale.
