So, you’re working in your business, with no plans to retire. You might even believe it is too early to plan your retirement.
But hold on - at some point or other you will want to pass the reins to someone else (let’s be realistic, you are not going to last forever). The right time to start planning this is not just before selling.
You must begin the process of handing over the business, or setting up the sale, a few years before you actually do. As far as possible, keep your business in a ready-to sell mode at all times - you never know what circumstances will force you to put your store on the market.
Most owners want to exit the business almost as soon as they decide to sell. There is a mental change once the decision is made that makes it difficult to continue giving 100% to the cause. It often doesn’t take long from the moment the decision is made to start seeing a decline in sales and performance in a business. This is something you need to avoid.
In reality, it takes a while to find a buyer, even for a well-groomed business. You can imagine the time taken for a business that is not well-groomed! Then there are unforeseen circumstances to be taken into account. Prospective buyers expect at least 3 years of financials – it’s difficult to improve financial results after the event has happened!
So, when is a business in the ready-to-sell mode? It is common to get a little laid back if your business is doing well, but this is the time when you need to be especially vigilant on controlling your financials. Here are a few important things to pay attention to while grooming your business for sale:
1. Reduce your inventory to an appropriate level. What does “appropriate” mean? It refers to the level of inventory that is actually “needed” to run the business, as opposed to what you have. Chances are you are reasonably overstocked and all sorts of costs are associated with overstocking. These would include staff time, costs in handling and debt servicing. A redundant item of inventory costs you more than you think. $100,000 in surplus inventory can increase your business costs manifold. You need to get this under control to make your financials healthier.
2. Deposit all takings in the bank. While you may be doing this, a number of business owners do not. They pocket a little cash, assuming that the only drawback to this is the risk of falling foul of the IRS. However, this is not the only problem. Your profit is reduced by $1 for every $1 pocketed. Let’s assume that you sell the business for 4 times the profit. You take $4 off the sale price for every dollar taken out. If you take away $10,000 in the span of a year, you are actually taking $40,000 off the selling price of the business. No use telling the buyer that they add it back and pay you accordingly – only what is seen will be believed. Any unreported claims of income will be ignored by their financial advisors.
3. Analyze your overheads. Are you incurring unwanted costs? It is not unusual to pad out some personal expenses through the accounts. But if you show high expenses in the accounts for things that really aren’t important to the business, it affects the sale price, reflecting that the business isn’t as sound as it really is. To make the business appear successful enough for sale, this is not the type of tax minimization activity you should be undertaking.
4. Plan your tax with sale in mind. Sometimes the best decisions to minimize your tax are not necessarily the best in terms of how your financial accounts appear. Bringing forward expenses or increasing the claim on depreciation are both examples of costs that can help minimize your tax, but may impact negatively on your profit. You should discuss this with your CPA if a business sale is in the cards.
The above are a few guidelines to consider if you are planning on selling your business. It is highly recommended to take the advice of a financial advisor or CPA before you proceed any further with this.