|
|
 |
|
March 2004 Getting top dollar for your business Maximizing the market value of your company is a process that should start years before you start entertaining offers Most privately owned companies represent two types of value for their owners: the income that the company generates, and the price the company brings when it sells. If your focus is on the latter – i.e., selling the company is a strategic part of your business plan – maximizing your company’s value now should be foremost in your thinking. But even if you have no plans to sell, you never know when circumstances may cause you to change plans in a hurry. Either way, every important decision you make about your business – capital purchases, expansion into new markets, development of new products or services, structuring of management, etc. – should reflect how that decision may affect the company’s value and marketability. Maximizing the selling price of your company is a process that requires advance planning, and it’s never too early to begin. Regardless of where you are in your preparation, the following considerations may help you get the best price when the time to sell arrives. (For the sake of this discussion, let’s assume that you are your company’s sole owner and ultimate decision maker and, thus, you are not burdened by shareholder agreements, employee stock options or other restraints.) Are you willing to stay? Your knowledge and experience may be extremely valuable to a new owner, and the price your company brings may be tied to your willingness to stay on for a time. If you think that would apply in your case, you have some tough questions to consider and answer:
If the answer to any of these questions is a firm “no,” then maximizing your business value probably requires that you reduce your importance to the health of your company. That may mean bringing in better managers, decentralizing the company’s decision making, and creating structures and procedures that would allow the company to operate profitably in your absence. Clean up your financial statements. Closely held companies operate in fundamentally different ways from public companies. In contrast to large corporations, which generally want to show healthy earnings, you are probably more intent on minimizing your taxable income. Thus, you may be perfectly willing to run through your company any number of personal expenses or items of dubious business value. Whether or not those expenses are truly business related is not the issue. The key is that discretionary or non-operating expenses decrease earnings and, consequently, value. Eliminating such expenses from your income statement several years in advance of a contemplated sale will allow a prospective buyer to evaluate your company’s true earnings capacity. Ideally, the balance sheet should contain only operating assets and liabilities. Remove any non-operating assets, pay off shareholder loans and advances, and clean up loans to and from related parties. If you can’t stand the thought of giving up those tax deductions, at least be able to easily determine the total amount of those discretionary costs and where they are located on the income statement. Tighten internal controls. Strong internal accounting controls are more the exception than the rule in many closely held companies, since owners and employees often wear many hats and have broader responsibilities than in larger companies. Nonetheless, a prospective buyer will want to know that the company’s financials accurately represent the transactions that generated the numbers. In addition to engaging your CPA firm to conduct an audit or review of your financial statements, expand their scope to include a thorough analysis of your internal controls. Ask for specific recommendations on how you can improve your controls, and then implement them. Decentralize. Strong, effective management apart from the owner is often the most critical factor in a business’s success and is a major enhancement to its market value. Optimizing your company’s management requires that you (a) have the right people and (b) plug them into an effective structure. Develop an organizational chart and formally define each person’s job responsibilities and lines of communication and supervision. Evaluate shareholder involvement. A major consideration in valuing small companies is shareholder compensation and involvement in daily operations. Common issues in this area include the practice of paying salaries (instead of dividends) to shareholders who have no real function, and having non-involved spouses and children on the payroll. If compensation paid to shareholders and relatives exceeds the amount that a new owner would pay to competent third-party managers, that’s a situation that needs to be resolved. Know your competition. You should be able to describe to a potential buyer what sets your company apart from your competitors and how those characteristics will transfer to the buyer. If you can measure your company’s market share, know where you have ranked among your competitors in recent years. Has new competition entered your market, and what has been the response by established players? How concentrated is your local market; do a few companies control most of the market or are there many small players? How will local competition react to the sale of your company? Identify company strengths and weaknesses. Every company has some weak spots, including yours. To the extent that you can identify and shore up your weak areas, you will increase your company’s value. Buyers are suspicious about what they are told about a company by its owner, expecting them to “puff” the good and hide the bad. An honest and straightforward look at your company can help inspire a buyer’s trust and confidence and perhaps result in a more desirable offer. Conclusion All of the issues discussed above, and many more that aren’t, are addressed as part of a formal business valuation. You are clearly the expert at running your company, and a valuation professional is an expert at analyzing your industry, your business assets, profitability, and performance relative to your competitors. In addition to producing a supportable estimate of value, a sound valuation report will go a long way toward satisfying your disclosure requirements, providing a buyer with his desired comfort level, and bringing top dollar – perhaps an even greater price than you anticipated – for your company. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |
