In today’s financial markets, hardly a day passes without news of one major acquisition or another.
Selling a business is easy when the economy is good, interest rates are low and companies are looking for a way to deploy capital.
But what about your small business? According to the Small Business and Entrepreneurship Council, firms with fewer than 100 employees accounted for 98.1% of all employer firms in 2019. That’s a lot more businesses that could or should be coming up for sale.
But a small business isn’t as desirable as a larger business for those in the industry of acquiring companies. If your business is profitable enough, or has a reputation that is top in its class, or occupies a unique niche that others may want, you may be an exception. Even then, to prepare your business for sale will take some preparation.
First, clean up your books and records. That may mean a few bucks to an outside accounting firm or an additional hire, but this may support a higher selling price. No one wants to buy a business where the books and records look like they were kept on the back of a napkin. In addition to getting three plus years of records into a readable and understandable format for buyers, there may be adjustments to the financial statements.
These adjustments may come in the form of expenses that may not exist after the sale. An example may be excess payroll, family or otherwise, along with expenses that a new owner simply won’t incur. A good example may be cars for owners/employees or expense accounts with little accountability to the benefit to the business. These expenses can theoretically be added back to profit and increase the selling price.
If you also own the real estate, another adjustment may be to the rent. I’ve seen owners that charge themselves too much and then others who undercharge their companies for rent. What a buyer wants to see is how much they’d have to pay if they didn’t own the real estate for that business.
The same may be true on the other side. If you’ve left years of deferred maintenance unattended or old machinery and equipment that will need replacing, that will often draw a lower selling price. Buyers generally don’t buy for what your business used to do. They are buying based on what they feel they can get out of the current structure. A buyer will feel that any future benefit that they take out of their business is theirs, and not something to give you a higher selling price if you haven’t done it yourself.
Last is finding the buyer. Based on your years in the business, you already know who may be a good candidate. But approaching them yourself can be a dangerous move. It is best to be represented by an intermediary who has the expertise and experience at selling businesses just like yours.
John P. Napolitano CFP®, CPA is CEO of Napier Financial in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and Napier Financial are separate entities from LPL Financial.
