Buyers and sellers sometimes overstate, understate or "forget" to state

Like teachers and the proverbial “dog ate my homework” cover story, seasoned business brokers have also heard it all. Only our tall-tale tellers are taller. And they often don’t realize what they’re telling us is untrue.

Some are, in fact, keeping the truth from themselves.

It happens with those who want to buy a business and those who want to want to sell a business. Typically, their errors and omissions fall into one of three buckets: overstating, understating and “forgetting” to state.

 

What would you like to do after you sell your business?

Business owners will be selling into a very competitive marketplace, which means it's likely that only the most attractive and well-prepared businesses will sell for what they're worth.

You'll want your business to be one of them. Here are our top 10 tips to sell your business AND protect its value, increase your personal wealth and reduce the taxes you will need to pay on the proceeds.

And here's an extra one to start you off—for the best results, start planning three and a half to five years ahead, allowing at least six months to analyze the business, two years to build value and take advantage of tax strategies to maximize the proceeds of the sale, and another year to sell.

How many miles have you put in on your business journey? Are you still enjoying the ride?

Maybe you’ve started thinking about passing the wheel and your business to someone else.

Will you have enough money for what you want to do next? If not, what will it take as a business owner to get you there?

Putting value in your tank

If you don’t know what your business is worth today, on what basis are you making decisions for tomorrow?

Yet that’s the case for many small- and medium-enterprise owners in Canada who are counting on their business for their retirement nest egg.

Three out of four have started their business from scratch. They know how much hard work and effort they’ve put in, but not if it will translate into sufficient cash when they go to sell. Handing the business over to family members has become less of an option as more heirs-apparent are choosing a different career/life path.

 

 

How many of you remember Victor Kiam, the businessman who liked his Remington shaver so much he bought the company? Well, the three Inner Circles I experienced in the U.S. impressed me so much that I bought the company – at least the Canadian Master Franchise.

Kiam said (and showed), "Entrepreneurs are risk takers, willing to roll the dice with their money or reputation on the line in support of an idea or enterprise. They willingly assume responsibility for the success or failure of a venture and are answerable for all its facets. The buck not only stops at their desks, it starts there too.”

Membership in an Inner Circle group can substantially improve the odds for entrepreneurs like us rolling the dice. In a recent member survey, 97% reported better decision making ability; 75% reported higher revenues AND profits; 71% reported better work/life balance.

So what is the Inner Circle and its life- and business-changing power?

 

If beauty is in the eye of the beholder, then the worth of a business lies in the eye of the market.

For the market is really what decides the price an owner will get for their business when they go to sell – the scenario most have in mind when they ask what their business is worth.

Determining that value, the most probably selling price (MPSP), is an art that’s goes beyond straight valuation. You'll benefit by engaging a certified business broker with expertise in both.

Obtaining a formal appraisal before you are ready to sell can help build a roadmap for increasing value and minimizing taxes. The end result is more money in your pocket.

A formal appraisal can also provide the necessary valuation to buy out a partner or split assets in a divorce, for estate planning, an asset freeze for tax planning, or roll over into a family trust.

At Sunbelt we start by formally appraising the value of the business to determine Fair Market Value (FMV), using methodology of the International Business Brokers Association (IBBA), the Institute of Business Appraisers (IBA) and the National Equipment and Business Brokers Institute (NEBB). Sunbelt has staff certified by each; I am a Life Member of IBA and teach business valuation for IBBA and NEBB.

From the FMV, we determine the MPSP. This calculation represents a reasonable price, factoring the true (recast) earnings past and future, what the market is willing to pay, and motivation. The seller can then negotiate on an informed basis.

Value: is looked upon in current dollars; is the risk-adjusted amount; is not negotiated, but arrived at objectively based on determined value.

Price: does not consider risk and is not time-sensitive; is derived from value; may be negotiated.

Does your accountant dread your visit? Bad record keeping is, in fact, the biggest roadblock to selling a business.

Buyers want a business with a proven track record of consistent financial performance with solid/growing revenue and earnings. Yet, most of us are rather flabby when it comes to fiscal fitness. Spending some time with a trainer/coach can boost your strength and health and business worth.

Let’s start with some top financial drivers of business value. Focusing on these will make it easier for you to sell your business and get you more money--then as well as now. Assess your own business, determine which factors affect your business the most and prioritize what you want to work on.

Do you already own a business? Is much of what you need to operate your business “in your head”?

Businesses that rely on their owners for success have less value because replacing the owner is much more difficult and they are not ready for growth. Yet that’s how most small businesses still operate today.

Working ON the business, as well as IN the business can be hard when you are putting in 60 hours a week to keep the business running.

Many business owners are happiest applying the technical skills that got them there in the first place – the mechanic who started a garage or a baker who opened a bakery. They are in their comfort zone. Dealing with their business vision, market segmentation, planning, process development, systems development, documentation, training programs, quality standards, sales processes and collateral, developing customer feedback mechanisms, employee encouragement, tracking systems and the like is not what got them started and it may not be what they enjoy. Yet it’s what makes the difference between a successful very small business and a great business that is poised for growth and highly saleable. The existence of these processes and systems adds great value to a business. Lacking them reduces the business worth.