Are you financially ready to sell your business? Getting a business to a place where you can present it to potential buyers can be an exhaustive process. There is legal preparation before selling to be handled, determining the right time to sell, and reading up on every aspect of things owners should know prior to an acquisition. The financials of a business are the hinge upon which almost every other detail of the transaction rests upon. Because of their prominence, it is imperative that you and the business are both financially ready. Here are five key steps to take to assist with financial preparation.
1. Have the business professionally valued
How do you know what your business is worth? You might have an idea of what you think the business should be worth, however, the best way to get an accurate estimate is to have the entire operation professionally valued. A business valuation will give you a realistic and objective proposition of the worth of your company. This valuation can then be used to come up with an offer price as well as figure out the final amount that you would be ready to negotiate with buyers.
A valuation is an excellent tool that reveals your business’ current market performance, position, strengths, weaknesses, and financial situation. As a qualified business broker, Sun Acquisitions can perform your business valuation to give you the data you need as you financially prepare the business for a sale.
2. Create a buyer strategy with an experienced business broker
Leading business brokers like Sun Acquisitions can help you put together a list of business buyers. Advisors with sufficient experience have connections and links with people who might be interested in purchasing your business. Access to such an extended network is one of the key reasons to bring an M&A advisor on board when you’re preparing for a sale.
That’s not all, but when you select the right advisor they can also help you create an all-star team to facilitate the purchase of your business. Get recommendations for reputable legal, business, and tax experts. Don’t try to figure out things by yourself when a business broker can simplify life for you.
3. Develop a tax plan with assistance from a tax advisor
The sale of a business precipitates a change in your financial status which has a direct bearing on your taxes. As part of your financial preparation, it is recommended that you sit down with a tax advisor to establish a tax strategy to handle the different tax situations that will present themselves post-sale.
For example, if the expected gains from the sale are long-term you will be liable to pay federal tax rates that can be 23.8% or higher. In addition, local state income taxes on the gain may also apply. In the event of your death, any value you may have acquired from the sale of the business will be taxed. Your heirs should expect federal estate tax rates of 40% or more. It’s also worth noting that there are other states that have inheritance tax that your beneficiaries will also have to pay.
4. Remove non-business related items from your financials
Part of the process of getting your financials in order includes removing all non-business related financial items such as salaries for extended non-working family members and insurance for them from your operations. These items have no direct bearing on the business and should be eliminated from the financial records that will be presented to buyers. To be removed as well are expense accounts and discretionary expenses. How do you know if it’s an element you should probably leave out? If it’s not directly related to the business and the buyer derives no profit from it then it shouldn’t be in your financials.
5. Have an accountant review your financial statements
Your financial statements are of great interest to any potential buyer of the business. For this reason, they should preferably be reviewed, and in some instances, audited statements. There are three types of financial reviews that can be conducted. Let’s look at each one to understand which is better suited when preparing to sell a business.
Compilation: as the name implies, a compilation is simply a preparation of financial statements compiled into one document. This task is carried out by a certified public accountant. The accountant compiles financial statements provided by the seller but gives no professional opinion about the information provided. This is the least formal assessment and is great for sellers who simply want to evaluate how the company is doing so they can drive internal goals in the right direction.
Review: the difference between a review and a compilation lies mostly in the fact that the accountant offers an in-depth analysis of the financial statements they have compiled. The accountant provides a written opinion regarding the financial status of the business including any problem areas. This review is the accountant saying that they did not come across any serious financial issues. The review gives ‘limited assurance’ only.
Audit: audits are the most formal type of assessment that can be carried out on a business’s financial statements. This is a critical look at the company’s management. The CPA does not only look at the information provided by the seller about the business but also relies on information from an independent inquiry to help formulate a professional judgment. For buyers and sellers, such an audit provides the highest assurance level that all is in order regarding the business’ financials.
Get financial preparation help from qualified advisors
Business brokers are well aware of the fact that when selling a business you have to be both emotionally ready and financially ready. This comes through in the counsel that we give would-be business sellers. Would you like to discuss how to prepare financially for an acquisition? Our team of M&A advisors would be happy to consult with you. Get in touch with us today.
Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.