At some point, many small business owners will want to sell their company and exit. When this happens, the owner will want value for the company he has grown. But when a business owner starts thinking about business value when he is ready to sell, it is often too late to affect the value. Small business owners who believe they will want to sell their business in the future should begin now to understand what will drive value later, and govern their company to create that value years before the time to sell arrives.
The purpose of my next few posts will be to list some things a small business owner can do over time to enhance the value of his company when it is time to sell:
- Run a Profitable Company. You would think this goes without saying, but it is one of the biggest mistakes small business owners make. Your tax adviser may well tell you that your goal is to do just the opposite: to maximize deductions in order to have little or no end-of-year taxable income. And while this may be sound short-term cash flow advice, it will not help you sell for value when the time comes. Small business valuations are often driven by a net present value of the profits, and while the valuator will often recast your financial statements to show more income than you reported to the IRS, the less “recasting” and explaining the valuator has to do the more confident a potential purchaser will be in the valuation. In addition, should the purchase price include third-party debt, the lender is unlikely to put up with significantly recast financials. Showing a profit every year will make your company more valuable and easier to finance and sell.
Next: Grow Annual Gross Revenues