Selling your business?

Make sure your financials are in order. Take legal deductions wherever you can but, be sure to keep reporting above board to increase value!

Many people are ready to sell their business, but their financials may not be. At ROI, we help business owners determine a range of value for their business. One such method is to determine all cash flow available to an owner above and beyond the ordinary expenses needed to run the enterprise. There may be expenses that are “discretionary” to running the business, such as tickets to sports games, car expenses, pensions or travel expenses. A good CPA can use the tax code to legally expense these items through the business. The higher the value of these discretionary expenses when added to income, the higher the value of the business.

However, sometimes people do not report all of their income. This is not a good idea for several reasons. A couple of examples of this may be; a business where cash is not reported or; an owner expenses or decides to “bury” items to cost of goods sold that are not business related. This makes the company harder to finance, as the lenders and most buyers only look at the tax returns of the business.

Hiding revenue or exaggerating expenses in addition to not being a “best practice” also reduces the value of the firm in the eyes of a lender or a potential buyer. Naturally, this makes it seem as though the company is less profitable. Reducing income taxes, but tough to impossible to convince a buyer or a lender!

If you have a year or two before you want to sell your business, make sure to clean up your taxes and cost of goods sold to make sure your company is defendable and provable to potential buyers or lenders. It’s not only the right thing to do, it will improve value. As an example, a business may be worth two to three times the value of the owner’s discretionary earnings (SDE) or cash flow. Say for example, the business falls in the 20% tax rate. For $10,000, reported in additional taxable income, an owner may pay an additional $2,000 in taxes. But the selling price would increase by $20,000 to $30,000! Either you are paid for the value of a business by saving on taxes or you pay your taxes and reap a higher sale price. But you don’t get it both ways! Not to mention the fact that the IRS will be much happier with you should you ever be audited!

Share this post:

Comments on "Selling your business?"

Comments 0-5 of 0

Please login to comment