What needs to be done before selling a business

Published 9:12 am Wednesday, September 29, 2010

I recently went with my wife for the first day of our daughter’s kindergarten and couldn’t help myself as to how proud I am of my daughter. Many parents were probably thinking the same thing, as they have the smartest, cutest and best-mannered kids. Business owners are in many ways the same way when they look at the value of their business. It has been said many times that my business is my baby. In many ways, business owners have worked with the business to nurture, grow and deal with setbacks that are bound to occur.

Recently, I had a prospective client come to see me regarding two espresso stands that were for sale. He wanted an independent point of view on the value of the businesses. These are the type of assignments that I enjoy. I began to study the tax returns and was astounded to find the business had substantial losses and the price was very high in relation to the cash flow the business was generating. My thoughts raced as to why someone would pay the price the seller was asking when the performance was terrible.

I concluded that the business owner is like the proud father who sees the good in his child. The fact is that as a father, I need to work on my daughter to prepare her for school, just as the business owner has to work to prepare his business for sale before he or she actually sells.

I read a quote that says every day you have a business is a day you should be working to sell it. So many entrepreneurs worry about taxes, so we do all we can to make the business have a low net income for tax purposes. A business owner needs to not just focus on the tax return but on building the value of the business so when the day comes and he wants to sell, there is some real value that someone will be willing to purchase at a high price because of the business’ strong cash flow.

A seller needs to have the mindset of what a buyer or the buyer’s bank wants to see. Remember, the rules of banking are tougher than ever before. For a buyer to get the financing they may need, the banks more than ever will be looking very closely at the business’ financial reports. This is a challenge that the seller must meet if he or she is going to meet their goal.

Here is how I would advise a business owner to get ready for the day they want to cash in:

1. Keep your financial data complete and up to date. Numerous times I have seen a business owner trying to sell the business without a current tax return or estimated numbers.

2. Get a business valuation by an independent expert. How do you know where you are going if you don’t know your starting point? Many times the first valuation the business has ever had is the one in order to sell it. That can be a costly mistake. If, say, five years earlier the owner had chosen to make this investment, he or she could have seen the comparisons to others in their industry and then had the time to work to improve key financial measurements that would lead to a higher valuation when the day comes to sell.

3. Build a business that doesn’t depend on you, the business owner, to be there every day. The book “The E-Myth” does a great job of explaining most business owners don’t build a business but just create a job for themselves. If you have a business that doesn’t depend on you to operate it every second, then you have the start of business that you can sell.

To many business owners, their business is their retirement plan or certainly a large chunk of it. Just as you need to adjust and monitor your financial plan, you need to monitor how the value of your business is or is not growing. This is an area where your advisor can help set goals and explain what key performance goals need to be met and help you step back and look at the business more objectively.

That is a challenge that we as parents and business owners share alike.

David Rumsey is the owner of Pettis Rumsey Inc., a Marysville accounting firm that works with small-business owners. For a free report on the top 20 questions a small business should ask before hiring a CPA, go to www.PettisRumseyCPA.com.