Whether you started your business from scratch or bought an existing business, it represents a significant asset into which you have invested a lot of time, money, and effort. Owners want their business to be as profitable as possible, and to one day sell it and use the proceeds to help fund their retirement. As a business owner, you want to make your business look as appealing to potential buyers as possible.
The first step is to take a good look at your business to try to identify any aspects of the business that would be a negative if you were buying the business.
Nothing can kill a deal faster than poor financial controls and reporting, so now is the time to get this in order. If you do not have adequate bookkeeping skills, then a qualified bookkeeper is critical. Buyers will want to see accounting records, so it is vital to have this information appropriately prepared and available for them to review.
When a potential buyer is seriously considering purchasing your business, they are going to want to see financial statements for the past three to five years, and they will place emphasis on the past three years.
They will be looking for positive financial indicators, including:
- Steady or growing sales;
- Healthy profit margins;
- Current accounts receivables;
- Low bad debts;
- A reasonable level of inventory, and
- Positive working capital.
Your goal should be to make the most current three years look the best they can.
A critical aspect that any buyer will be focusing on is profitability
The business needs to be profitable enough to service the debt they will take on to purchase the business, provide them with enough to live on, and give them a return on their investment.
To make the business as profitable as possible consider the following:
- Increase profit margin by obtaining discounts from suppliers or by changing suppliers;
- Review pricing to see if there is room to improve profit margins;
- Review staffing needs to identify whether staffing costs can be reduced, and
- Review expenses line by line to determine if there are ways to reduce operating expenses.
Consider forgoing the tax advantage of flowing discretionary costs through your business
It is much easier to show the actual profit than to try to convince a buyer that some of the expenses on the income statement are not actual expenses of the business. Key expense categories that this relates to would be personal vehicles, meals and entertainment and travel. (Value is often calculated as a multiple of earnings, so it is often beneficial to forego the tax savings of these expenses to increase the purchase price.)
Ensure source deductions, HST, corporate taxes are filed correctly and on time.
A buyer is going to be looking for a business that is well organized and well run. Key indicators include a solid business plan, documented growth strategy, strong credit management policies, documented procedures and policies, robust inventory management, documented training procedures and a database of customers and suppliers. Buyers also want to see that there are qualified non-owner managers in place that deal with the day to day operations of the company. Proper documentation will give them confidence that the company will be able to replicate the profits with a new owner and that the goodwill that they are paying for does not disappear when the current owner leaves.
Just like when you sell your house, the curb appeal of your business is important. When you see the business every day there are things that you might not notice that a potential buyer would. Consider asking someone you trust to take a tour of your business to see if they identify anything negative that catches their eye. They may identify cosmetic changes that could be made that would impact a buyer’s perception and be well worth the time and money to improve (fresh paint, getting rid of unnecessary clutter, improving the layout of storage and workspaces, etc.). Ensuring your facilities are in great shape provides the buyer with confidence that you care about the business and run it well.
Another aspect of curb appeal relates to the condition of furniture, equipment, and your website
If these are outdated, you will need to consider whether it is worthwhile to invest in updating these to make it more appealing to a potential buyer. You should also compile a detailed list of these assets, so a buyer knows what assets are being sold with the business.
If a potential buyer sees financial and operational weaknesses, this increases their perceived risk, which in turn reduces how much they are willing to pay for the business.
To build more value in your business and put you in the best position possible when you are ready to sell, there are several areas that need to be reviewed and potentially improved. Our team of professionals at McCay Duff LLP are ready to work with you throughout this process. Contact your McCay Duff advisor today to get started!
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