You’ve started thinking about retirement and what you’re going to do with the business you’ve built. Do you want to give it to your children now, make it part of your estate, sell it to someone else entirely? What if you want to keep working for a while but let someone else deal with the biggest headaches?
Maybe you’re getting a divorce, and you need to know what the business is worth for the property settlement, whether or not you decide to sell. Or you want to buy out your business partner, or vice versa.
Maybe a bigger company is eyeing your business for acquisition. Or maybe you’ve realized that you’re going under and you want to get whatever you can first.
Or consider this. When the principal of a company dies, someone has to put a value on the estate.
The reason for selling is one of many factors that go into business valuation. Whatever the reason or the circumstances, accountants say, business owners should make sure their records and their operations are in order, and they should seek expert advice.
Also, begin working toward an exit strategy sooner rather than later.
All of the above situations require that a realistic, independent value be put on a company before a sale can be considered, says Ashley Taylor, senior manager with the Jackson Thornton Litigation and Valuation Group. Jackson Thornton CPAs & Advisors has offices in Alabama, Tennessee and Kansas.
“Get your financial information in order,” Taylor says. Advance preparation will save money in the long run when you turn everything over for a business valuation.
“If you can get your financial records in shape, it makes our jobs a lot easier. We usually like to look at tax returns and financial statements over the last five to seven years, depending on the industry. Being able to analyze those quickly and easily makes it a lot easier.
“If we’re given really sloppy data, it might take us a long time to get it to a point to where we can actually analyze it. We’ll just spend more time prepping the data than we would have, had we gotten good data to begin with.”
A potential buyer will demand all the records, including taxes, and will scrutinize everything, says Sue McGlynn, a CPA in the tax division of Warren Averett CPAs and Advisors. Warren Averett has offices in Alabama, Florida, Atlanta, Houston and the Cayman Islands. A buyer wants to determine cash flow after taxes and expenses. Nor is the sale the end of the owner’s involvement.
“I’m in there from almost beginning to end and even beyond, because I’m the one doing the tax return afterwards,” McGlynn says. “A business owner ought to know what the tax ramifications of the transaction are.”
Despite what one might see on the internet, there is no single formula to put a value on a business, the experts say. If the company’s regular accountant and attorney don’t already have expertise in valuation process and in the industry itself, the owner needs to find a consultant.
“Find people who know about your business, who know about your industry and understand taxation,” McGlynn says.
If your existing advisers can’t recommend one, ask potential consultants about their credentials. The American Institute of Certified Public Accountants and the National Association of Certified Valuators and Analysts are two of the major professional organizations that offer certifications in related specialties and maintain directories of members on their websites.
In preparing to sell, the owner also should consider the condition of the facilities and equipment necessary to the industry. Similar to a homeowner preparing to put a house on the market, the physical condition of a business and whether updates are needed will affect the price.
Any environmental or legal issues should be resolved if possible, as these also can lower the price.
How the business is managed also affects its value. There should be some sort of management structure even in small family operations.
“Say I’m the owner of the company,” Taylor says. “I know the ins and outs and hold all the client relationships. If I got hit by a bus tomorrow, what would happen to the company?”
Lyle Simons, corporate advisory consulting manager at Warren Averett, says basic issues such as who owns what should be clearly delineated. “Sometimes there can be some confusion as far as the legal structure of a company,” he says.
Whether a building is owned, rented, or owned by a related business needs to be considered. Part of a good management structure also includes not mixing personal business with company business.
Simons considers timing to be a crucial part of valuation process. “Quite often you find out that tomorrow isn’t the right day to sell,” he says.
Waiting to deal with issues such as updating equipment, resolving legal and accounting questions, and making other changes and improvements can pay off in the long run, according to Simons. General industry conditions also may dictate staying off the market until things are better.
The sales price is usually a multiple of revenue or income, taking all the variables into consideration.
“We get into the nitty gritty of who’s their competition, how much market share do they have? In what shape are your facilities and equipment? Do they need to be replaced soon?” says Taylor.
Comparable sales prices for similar businesses are important, and so are projections. Revenue forecasts should be based on what can be proven, not on how much money the owner wants to get out of the sale.
Says McGlynn, “Sometimes in those initial meetings, you’ll say, ‘Do you have a forecast? Do you have a budget?’ Sometimes they’ll say no. That is a factor in determining value, having some robust forecasts as to what you think your company is going to do.”
The price set by the owner should be “realistic and defensible,” according to Simons. Prior earnings and future contracts are some ways to support the asking price.
Once the price is set and the business owner has specified what deliverables will be included in the sale, the buyer signs a letter of intent. But that’s not the end of the deal, only the beginning of negotiations. The buyer will want to “look under the hood” and verify everything, says McGlynn.
Not everyone who goes through a valuation process actually wants to sell. They may be years away from retirement, or it may be that one principal in the company wants out but the others don’t. Whatever the reason, though, accountants say education, preparation and not being in a hurry are the keys to getting the right price.
Jane Nicholes is a Daphne-based freelancer for Business Alabama.
