owner’s compensation tends to be the area of biggest adjustment in an income statement
As you read in part one of selling a business: what is your business worth, a seller’s price expectation needs to be in line with market reality. Most financial statements of small businesses are prepared to minimize the tax burden for the company and its owners. To reflect the company’s true earnings, we need to recast/normalize the balance sheet and income (profit and loss) statement.
Recasting income statements
In a small- to medium-sized business, owner’s compensation is often based on what the business can afford. It tends to be the area of biggest adjustment in an income statement, where we “add back” expenses considered discretionary, extraordinary, non-recurring or non-cash. We also add back interest as the new owner may have a different capital structure.
Owner’s compensation can include pension plans, profit sharing, health and life insurance, auto travel, entertainment, meals, memberships, dues, fees, subscriptions, salary, wages, bonus and payroll taxes, family and relatives on payroll.
In recasting, you need to ask: Will the new owner incur this expense to obtain these earnings?
This process can take some time and requires the business broker/appraiser to have the right questions. Continue reading
The worth of a business lies in the eyes of the market
If beauty is in the eye of the beholder, then the worth of a business lies in the eye of the market. For the market is really what decides the price an owner will get for their business when they go to sell – the scenario most have in mind when they ask what their business is worth.
Determining that value, the most probably selling price (MPSP), is an art that’s goes beyond valuation. Brokers at our company have expertise in both.
We start by formally appraising the value of the business to determine Fair Market Value (FMV), using methodology of the International Business Brokers Association (IBBA), the Institute of Business Appraisers (IBA) and the National Equipment and Business Brokers Institute (NEBB). Sunbelt has staff certified by each; I am a Life Member of IBA and teach business valuation for IBBA and NEBB.
From the FMV, we determine the MPSP. This calculation represents a reasonable price, factoring the true (recast) earnings past and future, what the market is willing to pay, and motivation. The seller can then negotiate on an informed basis.
Bad record-keeping is the top roadblock to selling a business
Does your accountant dread your visit? Bad record keeping is, in fact, the biggest roadblock to selling a business.
Buyers want a business with a proven track record of consistent financial performance with solid/growing revenue and earnings. Yet, most of us are rather flabby when it comes to fiscal fitness. Spending some time with a trainer/coach can boost your strength and health. Let’s start with some top financial drivers of business value. Focusing on these will make it easier for you to sell your business and get you more money–then as well as now. Assess your own business, determine which factors affect your business the most and prioritize what you want to work on.
Keeping (in the) good books
A proper set of books prepared with proper accounting software is a necessity. Your documents need to be current and correct, demonstrating timely remittances and filings.
Compliance is essential: issues with the Canadian Revenue Agency (CRA) or others can freeze your accounts and destroy your business. Continuity is also important. Are you dependent on a single employee who could leave?
Outsourced bookkeeping provides efficiencies that small businesses can benefit from. Businesses pay for work that’s done, not standby hours. Clean and compliant books will contribute to a good relationship with your accountant and save you dollars there, too.
A good bookkeeper will also help you understand your numbers. They can do forecasting, financial analysis, identify cash flow risks, and provide much more than effective use of a software program.
It’s important that owners keep records and communicate changes to the business. They’ll often dispose of assets or sign a new lease and forget to advise the person doing their books. Continue reading
Business owners want to know: should they sell now or later
The recession has thrown many business owners off track, leaving them unsure and unequipped, akin to driving in an unfamiliar area without a GPS or map or navigating the wilderness without a compass.
For many who’ve lost 25% to 50% of their savings in the market, the paved road to retirement is now full of potholes. Do they keep on course, or take a detour?
Business owners want to know: should they wait a few years before selling their business or should they go ahead and sell it now? If you own a business, maybe it’s a question you’ve been asking as well.
If you can afford to retire with the proceeds of the sale now, do it now:
- There is a good market for quality businesses. Businesses that are currently performing well are selling at the same multiples as before the recession. Those that are under performing are selling at lower multiples than they would have prior to the recession.
- There are many more buyers chasing fewer businesses. It’s true that buyers have also lost part of their savings in the markets, leaving them with less cash for a down payment. However, with downsizing, rightsizing, plant closures and layoffs, there are more individuals actively seeking out other means to support themselves and their families.
- You may have to finance a bit more of the transaction than a couple of years ago but if the business is performing well, you will get top dollar. Vendor financing can add as much as 30% to the price of your business and you get the interest on the financing on top of that. Most small business sales in Canada are financed 50% by the seller, with a note that runs three to five years . They can also be financed in part through the Canada Small Business Financing (CSBF) program or a loan from the Business Development Bank of Canada (BDC), with the seller providing a note for 20% of the transaction.
Waiting a few years is risky and may result in a much lower price
Maybe you’ve landed in one of those potholes. You don’t have enough to retire on and selling your business will still leave you short. You’re stuck managing your business a few more years to make up the losses. It’s your only choice. You need to understand the consequences of that decision, though. Continue reading