Most business owners in any five year period can answer yes to at least one of these life event questions that would cause them to need to know what their company is worth.
1. Are you contemplating the sale of your business?
2. Are you working with or bringing in a partner?
3. Are you contemplating or currently going through divorce proceedings?
4. Are you potentially going to have to defend yourself or your company in court?
5. Are you looking for financing?
There are other possible reasons of course, but the point is that there are many times a business owner finds himself or herself needing to obtain a proper business valuation for their company. Unfortunately, it’s often an afterthought until they are forced by a judge or a lawyer or a bank to do so, when it actually should be a target on a scoreboard in their office! A certain business value should be set as a goal and every decision they make should be in alignment with not just profits and day to day operations but should also include asking themselves, “Will what I’m about to do help this year’s bottom line, but hurt my company’s overall value?”
An example would be a retail business that stops worrying about building maintenance or curb appeal. It might save a few dollars to stop spending that money, but after some time, new or even existing clients can be driven away by the obvious disregard for those components. Would you want to buy a cake from a baker who has not fixed his broken store window, but instead just taped up the crack, and who has not mowed the store lawn or planted flowers and has allowed both to be overgrown with weeds?
When it comes to selling a business there is a path that successful transfers should take, and the timeline is years, not weeks, if done correctly. What we often see is a heart attack or divorce leading to an owner who tries to sell within the following months. That’s a shame. What they should do is bring in a transition specialist while the thought of selling is on the far horizon. That specialist should develop plans to increase the value of the business, so that the two prior years’ tax returns reflect those higher values, as that’s what most buyers and financiers of buyers look at. That transition specialist can also help them identify many issues that may not even be on their radar screen.
Selling a business can a very difficult and complicated transaction, and failing to understand the tax consequences is one of the biggest mistakes many business owners make. They negotiate a great price, but then do not know that the terms and asset descriptions of what’s being sold can make a HUGE difference in the final after tax amount they will receive if proper plans are not put in place ahead of time to help mitigate those taxes! Engaging a professional who has helped many other owners successfully sell their business will help ensure that less mistakes are made.
I’ll take a day hike up a local hill without help, but to climb Mount Everest takes extensive planning and a Sherpa to help guide you. In the same way, selling your business, if done properly, requires the help of a tax Sherpa! If you’re thinking about selling your business in the next few years for whatever reason, make the call today to an experienced business transition specialist who can help you deal with all the issues described above, not a business broker who is strictly in it for the commission.