Business Valuation Blog | Understanding Buying / Selling a Company

We all know about new year’s resolutions from a personal perspective, along with the challenges these can bring in accomplishing them both in the short and long term. One of the hardest things for many of us, in both our day-to-day lives, and as business professionals, is examining the things we don’t do very well, and changing our habits permanently, to create a more successful outcome.

As a small business owner, you may feel even more invested in making these course corrections for your company each year as you assess past achievements and look to improve areas where results were less than optimal. This behavior is part of the core foundation of a long-term growth strategy that keeps your business operating as efficiently and effectively as possible. As the larger industry and marketplace, you work in changes over time, you need to keep up and adjust for these external issues. Also, review your internal structure and processes and determine whether there is room for improvement in any areas that drive revenue and control overhead and variable expenses.

Consider who on your team has outperformed expectations and how they might help take your business to the next level by promoting them or expanding their responsibilities. Keep an eye on employees who may be going in the opposite direction and determine if you can bring them back into the right mindset or potentially need to find alternatives for their role in the company.

Even if you had a very successful year in 2022, it is prudent to refresh your outlook on how the operation functions, while continuing to improve and create further growth opportunities. The concept of “if it ain’t broke, don’t fix it” doesn’t apply in situations where change occurs, both within and outside of your control, in the business marketplace, and right at your doorstep.

Seek to obtain advice from key advisors and employees who you trust and work with on a year-to-year basis. Objective opinions outside of your own experience are always useful to potentially view things from different perspectives before you fully commit to a course of action.

Give yourself the opportunity to look back at 2023, a year from now, and tell yourself you did everything you could to continue to create the best version of your company. Every objective may or may not be accomplished, however, putting in the effort to carefully consider all the options to remain successful, and continue to grow, will be rewarding.

Each company within every industry has certain key factors that determine and drive the success of the operation. It is therefore important to take a deep dive into yours and understand exactly what those variables are so you can continue to maximize the positive impact these have on revenues, costs of goods sold and operating expenses.

What parts of your business are making the biggest difference to your bottom line?

Consider the following:

• Marketing variables such as website optimization, social media messaging, or a strong sales team.
• Unique product offerings that may create higher margins than your competitors and allow you to provide customers with better pricing.
• Client communications that are consistent and effective.
• Commitment to timely delivery of your products and services.
• A strong market reputation based on decades of experience, expertise, and proven results.

It might be a combination of these variables or something even more distinctive that creates the value added that separates your business from all others in your industry and specific market niche.

Once you, as the business owner or executive, have a good understanding of what these factors are, you can discuss them in detail with service providers and consultants such as your accountants, financial institutions, and investment advisors. You can also share them with outside consultants such as business appraisal professionals and brokers who will work with you closely to develop the documentation necessary to exhibit the level of financial value your company truly supports.

Some key variables may not be readily apparent on balance sheets and financial statements so it is vital to create a way to break down the numbers further and make adjustments that can be supported in a more detailed analysis. By carefully explaining all these factors to those who will, in turn, independently and reasonably verify them, you will afford yourself the best chance to translate them in a more tangible way that will be obvious to those who will take an interest in your business down the road.

For those tireless small business owners whose hard work and good fortune have enabled them to build a profitable, growing company, it might be time to consider how best to “share the wealth” and develop beneficial plans for your employees while accessing profits to accelerate your retirement planning. Here are a couple of thoughts to get you moving in the right direction:

401K Plan

Many of us have previously worked in a larger organization where 401K plans were available as part of a benefits package. Setting aside a percentage of your paycheck on a pre-tax basis that diverts to an investment retirement account is a sound future plan for many employees. Certain corporations will match the employee contribution up to a certain amount, typically 3-6%, providing additional advantages to the plan.

Why not set this up in your small business? This will benefit both the business owner and current employees while improving the attractiveness of your company to potential new hires.

Employee Profit-Sharing Plan

A profit-sharing plan can create a significant benefit for both the business owner and their current staff and provide additional assistance in retirement planning. These plans act like deferred annual bonuses for the employees while enabling the business owner to deduct profits on a pre-tax basis as a bottom-line expense to the business.

Similar to the 401K plan, these funds act as a longer-term investment. For employees, there is usually a vesting period that accrues every year, creating an incentive to stay with their employer until the account is fully vested. 20% annual vesting is common, creating a five-year timeline before the funds are 100% accrued.

Combined Plans

Creating a multi-level investment plan for you and your employees can create even more advantages for those who participate. For example, combining a 401K with a profit-sharing plan may allow the business owner to realize a maximum level of pre-tax income benefits allowable under the tax laws. Once you have committed to developing these kinds of ideas internally, you should contact your financial advisors who will take you through the detailed steps involved in creating and enacting these plans, while explaining how best to structure them for your specific business. This can be a complicated process so make sure you fully understand all the pros and cons involved before formalizing.

Many small business owners often wonder what their company is actually worth when they review each year’s performance results, growth patterns, and future outlook. Why not take this process a step further and definitively determine the overall value of your business?

You may answer this by claiming there is no benefit to having a formal appraisal completed until you absolutely have to. If there is no requirement such as for bank/SBA financing, new investor buy-in, partner dissolution, sale of the business, or other ownership shifting events, then is it really necessary? Won’t it require a lot of extra time and effort I don’t have? Isn’t it expensive?

The answers might surprise you. Working annually with a certified business appraiser can become a seamless part of your regular tax accounting processes and provide additional backup to your financial statements in the event any internal or external third parties ever want to review them with you. Minority partners, shareholders, key employees, new investors, banks, tax authorities, and others may knock on your door one day and ask about the state of the business.

Having an annual appraisal to complement the rest of your data will go a long way to efficiently address these issues. If an insurance, compliance, or tax audit is required down the road, you will be several steps ahead toward resolving these as painlessly as possible.

From an expense perspective, the cost will vary depending on the size and complexity of your business, however, you should be able to find a reputable valuation firm that understands your business and has the experience to provide a reasonable fee level in line with your expectations. Committing to an annual review and update with your valuation professional may enable you to receive some type of discount on future appraisal work.

Ensure you engage with a certified, experienced appraiser who will provide a high level of service and integrity with their work product. There are a handful of inexperienced and disreputable companies in the marketplace offering cut-rate prices, so be sure to research your options before you make a decision based solely on cost.

In summary, the overall value of having an annual business appraisal completed in tandem with your normal accounting and tax filings far outweighs the incremental costs involved. Planning ahead is always a good practice to instill in your business, so you will always be prepared for whatever may happen in the future.

As a small business owner, there will be times when third-party consulting services become a necessity in order for you to complete certain goals and accomplish plans made earlier in the year which are now becoming a more immediate concern. Whether that’s refinancing your debt, obtaining new working capital, buying out or adding partners, updating stock value, or any similar internal planning, there is usually a requirement to seek independent advice and reports to eliminate potential bias.

Engaging with a qualified business appraiser should be at the top of this list of external advisors given that their reports will be relevant in virtually all of these potential scenarios. Like everything involved in day-to-day operations, you want these longer-term projects to go as smoothly as possible and have an optimal outcome. What are some of the ways to increase the chance of this happening?

Start the Process Early

As with most business decisions, the longer you put them off, the less care and planning will be involved during the process. These goals may take months to complete so the earlier you start to take initial steps, the more time you will have to effectively work it from start to finish.

Ask For Advice

When working with valuation professionals or any other type of consultant, take advantage of their experience and expertise by asking a lot of questions. These advisors have been involved with hundreds of similar projects and can offer thoughtful advice on how best to work through the transaction.

Utilize Internal Resources

Whether it’s your company accountant, controller, finance manager, or other senior employees who may provide insight and another pair of hands, consider bringing them into the fold as part of your team to manage this project. Don’t take everything on yourself unless you have no other choice.

Provide Full Disclosure and Be Completely Honest

Have the advisors sign an NDA (Non-Disclosure Agreement) so you are comfortable sharing internal reporting documentation. Work with the consultants to break down these statements into a more realistic picture of your cash flow and growth potential. Don’t be afraid to discuss the true picture of your company’s finances as opposed to what might be limited to accounting or tax reports.

In summary, as a business owner, you are the expert when it comes to describing the history and future plans of the business. Getting the most out of your internal team as well as the independent advisors you engage will give you the best chance of an optimal outcome for these longer-term goals.

Business appraisers typically gather a lot of historical financial data when working with their clients on valuation assignments. They review income statements and balance sheets while looking at the market and industry data that all help shape their conclusions. Going back five or more years is not uncommon, while at the same time discussing reasonable future expectations within the confines of the current company profile.

On occasion, however, an appraiser may engage with a new “startup” or a company that’s been in development for years with little to no income that projects a formidable 5-year forecast of significantly higher revenues. How should that appraiser approach the valuation effort without ignoring historic performance or the external data they usually rely on when looking at more traditional businesses?

The answer is largely dependent on the credibility of the forecasted revenues and their client’s underlying reasoning behind these estimated projections. Here are a few questions to ask both the client and yourself as you work through the analysis:

Is the business unique in any way to its competitors or to comparable businesses in the market?

If yes, then it makes sense to focus on those areas to support the projections that might otherwise appear unreasonable on the surface. If the answer is no, then use the available market to create some checks and balances with the forecasted figures.

Has there been any tangible infrastructure developed within the company that sets the stage for realistic expectations of the longer-term forecasted growth?

It is common with a 5-year forecasted projection to aggressively estimate much higher revenues in the latter half of this period. What has been accomplished today that might further enable the appraiser to agree the longer-term outlook is not overreaching?

What degree of hypothetical or extraordinary assumptions is being made to support the aggressive growth?

Is the client making one too many assumptions about the internal structure of the company or making future market predictions that just don’t add up to a reasonable expectation?

Overall, there will be additional challenges with these valuation projects where reliance on heavily forecasted projections far outweigh historic data. As an appraiser, don’t be afraid to question the client if you are not comfortable with the overall picture they are presenting. Have them provide a clear, sensible outline that supports the aggressive forecasts, and ensure you make statements in your report which show the level of reliance you put on the assumptions and conditions. After all, it is your work that will potentially be relied upon by other parties who may be investing in the future of your client’s company.

As a small business owner, I receive dozens of email “come-ons” every month advising me of wonderful new marketing, accounting, hiring practice methodologies, or related services that are supposed to increase my company’s effectiveness and efficiencies, leading to a healthier bottom line.

Personally, I have never followed up with any of these places, however, that doesn’t mean some may provide a useful service for my company. I just happen to be an old-school manager who has people I trust handling these kinds of things for me internally.

As a business owner, you should do what works best for you and your business. Have you been mired in the same processes for years without thinking of new ways to improve your business model? Are you a new start-up, ready to utilize the latest technologies, products, and services available to enter the market running at top speed?

In either case and for most business owners who are somewhere in between these two scenarios, you should keep an open mind about process improvements while continuing to rely on your own experience and expertise, as well as those of your coworkers. If you don’t have certain areas well covered at the moment, such as social media marketing, website development, or accounting software, it may be a good idea to research and engage reliable third-party companies who provide these services or look to hire those with the skill sets required to handle these key sectors of your business.

Consider if your goal is a long-term permanent improvement to your company’s capabilities or a shorter-term fix that can be solved with the help of an outside consultant. Depending on the industry you operate in, products such as accounting, valuation, and inventory management software, might be useful to consider acquiring. Other areas that are critical include marketing, website design, and search engine optimization.

Capitalizing on your past success and old-school work ethic, while staying current with the latest developments and capabilities in the business marketplace, will provide the best opportunity to be successful as you move forward with your small business. Take the time to review the strengths and weaknesses of the key components of your company’s current profile, and look to create a plan that will put you in the best position to succeed today and in the future.

Retirement can mean many different things to people who come from a multitude of family and career backgrounds. If yours involves owning a small business, there are some consistent mindsets and potential options ahead that are in tune with other proprietors nearing this phase of life. Here are a few to think about:

Keep it in the Family

If you’ve been fortunate enough to have one or more family members working with you over the years, there is the opportunity to sell the business while keeping it close to home. Consider who has the best makeup to take over the company, whether it be a sibling, child, or another relative who has been with you and knows the business inside and out.

Train Existing or New Employees For Replacement

One or more existing employees may have an interest in acquiring the business. If so, it may make sense to consider one or more of them under a buyout option. You may need to finance the acquisition in this case, either through a fixed loan or a percentage of the monthly revenue. If no one is senior enough to take over, consider looking outside for seasoned talent who can quickly learn the ropes and assume the leadership role.

Hire a Business Consultant for an Open Market Sale

There are experienced consultants who know your industry and could take a lot of the pressure off you while marketing your business to competitors and those looking to enter the market. This process may take several months, however, you can put the terms in place you’re comfortable with and negotiate a fair price with the support of reliable third parties.

Part-Time Transitioning

In any of these possible scenarios, it might make sense to consider a phase-out plan over a couple of years or so, in which you remain actively involved in the day-to-day operations on a part-time basis to ensure a smooth ownership transition, especially if you’re involved in the financing of the sale. It’s difficult for many small business owners to say goodbye to their company and the people they have worked with, so this might be a nice way to manage the process.

From a personal perspective, we all have stages in our life where we strive to become the best version of ourselves, by improving our overall lifestyle in areas such as health, career, and relationships. Small business owners should take a similar look at their company and ask the same questions. Is my operation the best version of itself or are there ways to significantly improve it in the coming years?

You know your business better than anyone, and like your own life, you can dig deep to break down the areas that can be updated, enhanced, and made more efficient with some introspection, that can be converted into new processes that ultimately increase revenue and net profits.

Some examples to consider:

Overhead Costs

Whether it’s a fixed or variable expense, what areas of your monthly overhead costs can be better controlled without sacrificing quality and efficiencies? Possibly cutting back on expensive trade shows or business meetings where travel costs are high, especially in today’s market. Review everything, from current subscriptions to the employee health care plan for ways in which you might be able to save money while keeping their benefits at the same levels.

Capital Resources

Are their less costly financing options available in the market to restructure your current debt? Would a fresh infusion of working capital allow you to invest in new growth opportunities?

Updating Your Fixed Assets & Maintenance Programs

Is your plant & equipment still functioning at the same levels as when they were originally acquired? Are you spending too much on maintenance as a result of poor operating efficiencies?

Employee Performance Levels

Are you getting the same commitment and output from your staff since the days when they were first hired? Is there room to consider adding personnel in areas that would have a direct payoff to increased revenue or cost savings? Would additional incentives lead to more productivity and increased revenue?

Market Expansion

Are there unexplored markets that complement your key business focus that could lead to additional clients and services? Are you happy with the current market share for the sectors you are entrenched in every day?

These are just a few of the areas to consider when looking to create a new and improved version of your business. Take a deep dive with the knowledge and experience you’ve developed over the years to make improvements and continue to have success.

Small business owners who have spent the time going through the initial stages of becoming established and developing a steady revenue stream under their existing plan may decide it’s time to consider what it will take to expand and grow the company to the next level.

Depending on the type of business you operate, your competition, and available resources, your growth options will vary. Here are a few to consider that might assist in your expansion efforts.

Marketing Effectiveness

Marketing is the biggest day-to-day challenge for many small business owners. In today’s digital world, a lot of focus has been on upgrading the effectiveness of your SEO (Search Engine Optimization), website appeal, and social media activity.

For others, old-school word of mouth and physical networking such as industry conference presence is something to consider investing more resources into.

Expanded Client Services

For those companies who rely on a handful of clients to drive their business, look to provide additional services such as consulting or new product development. What complementary services are you capable of providing that will open up new revenue sources?

Sales Force

Consider bringing in new talent with experience and new client relationships that can immediately impact growth. It may be more costly in the short term but can soon reap the rewards of permanently expanded market share.

Existing Staff Effectiveness

For those employees who have been with you since day one, consider how they might take on updated, expanded roles that can lead to efficiencies in all areas of your business. You may be pleasantly surprised how much your existing staff is capable of doing, especially when you add plans for incentivizing the extra work effort.

Growing your business to the next level can be a new and exciting objective that can reinvigorate you and your team’s investment in the company. Take a hard look at how you achieved all that you’ve done up to now, and what areas of the company can improve and expand, to provide the best chance of getting you there.