Business Valuation Blog | Understanding Buying / Selling a Company

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, 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.

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.

After years of creating, developing, and growing your small business there will ultimately come a time when you determine the next best course of action is to sell, whether that be in the open market or in a private transaction between employees, family members, or current investors. In all of these potential scenarios, there are a few things to include in the early stages which will give you the best opportunity for a successful outcome. Here are some of the more critical steps to consider:

Accounting Records and Client Files

Work with your bookkeeper, accountant, and/or controller to ensure all internal documentation is current and organized. These records will need to be accurate, easy to understand, and accessible to both you and potential buyers during all phases of the sale process.

Obtain an Independent Valuation

There are sure to be differing opinions on the overall value of your business. Subjectivity and personal feelings can’t be a factor in determining a reasonable and fair assessment. Look to engage with a certified and accredited appraiser who can work with you and your support team to develop a credible, defendable valuation of the company. The earlier you engage in this effort, the more control you will have in the process.

Hiring a Consultant or Business Broker

If the sale is on a private level with the buyers already identified, such as in the case of an employee purchase or family generational transfer, you will want to consider working with an independent business consultant who is familiar with these types of transactions. Try to avoid hiring someone you know personally or through other business dealings as it can create doubt as to their objectivity.

If you are going out into the open market in search of potential buyers, you should think about working with a business broker who can guide you through the process and take on much of the workflow involved in getting a sale completed. They will act as your exclusive representative and offer benefits in the way of identifying the right groups of purchasers and negotiating fairly on your behalf.

Make sure they have experience in your markets and industry and have a reasonable commission plan that isn’t too expensive. Don’t hesitate to research typical broker plans and interview a few different companies before you decide who to engage.

In summary, regardless of whether your business is being sold at a private or public level, the process can take several months to complete, therefore, the more you accomplish and set up in the first weeks will lead to a more efficient timeline and effective conclusion. All the years of hard work you’ve put in getting to this stage will reap its rewards with a sound game plan to successfully sell your small business.

One of the biggest challenges for many small business owners is effective marketing which ultimately drives sales volume. Whether you’re a local company that tends to rely on word-of-mouth referrals or a nationwide operation looking to grow, one of the most effective tools available to you is your online presence.

There was a time when folks used to look in the newspaper or phonebook to locate what they were looking for. Those days are long gone. Potential new clients who want to utilize your service or purchase the type of goods you provide, will almost always turn to an online search engine first and type in a phrase or handful of keywords to describe what they need to find. For this reason, every small business today needs an effective and attractive online presence, where new content is being actively posted and updated, to maximize the benefits of this powerful marketing tool.

Consider engaging with a company that combines a web-building content management system (“CMS”) with a customer relationship management (CRM) system. Doing so can be very beneficial for a small business because you can aggregate web design, development, data tracking, lead generation, eCommerce functionality, and even social media marketing efforts saving you time and money in the long run. Many have the ability to add customized code and APIs so you can make your brand stand out. The best ones offer robust reporting abilities giving you a real-time look at your online performance across platforms and allowing you to make adjustments quickly and easily.

Look internally to your employees to determine if any may have the skills required to assist in developing or upgrading your website using a CMS or can oversee and manage the data coming in from a CRM. Keeping these functions in-house will save you money and afford you more control in the long run. If you need to engage an external business be aware the cost of using outside services can be significant. Budgeting and planning will be vital throughout the process as well as gleaning a clear understanding of the overall cost vs. annual revenue growth projections.

There are many key decisions small business owners make every day. When it comes to creating the optimal platform to maximize sales, the development of an attractive, effective online digital presence combined with a good quality CRM can be one of the most important ones, offering long-term growth opportunities that fit your goals and allow you to make the best investment decisions impacting the future success of your business.

In the small business arena, where the vast majority of US companies compete, there always seem to be new challenges and obstacles confronting many owners and employers each year. This couldn’t be any more evident than what we’ve all experienced over the last 2+ years as COVID-19, supply chain crises, inflation, shifting energy market policies, the Russia/Ukraine War, investment market downturns, and unreliable messaging have all impacted small businesses in one way or another.

Through all these developments, it seems small businesses are the ones left to fend for themselves while large corporations leverage these issues for their own gains. It might be easy to listen to all the noise and share in the complaining, however, wouldn’t it be more advantageous to focus on your company’s specific challenges, while carving out new paths to stay profitable and find growth opportunities while others are being overly reactive?

While all these compounded issues have created very significant challenges for many small business owners, many have faced these types of hurdles in the past, whether from revenue and cash flow reduction, vendor price increases, delivery delays, or employee and client retention. The most successful small business owners are continuously looking for ways to refine and improve their business practices, even in the best of times. Being proactive on a day-to-day basis while continually posing relevant questions to yourself, your peers and employees will allow you to stay ahead of the curve and be prepared when these challenging issues arise.

Don’t be afraid to take risks and invest in areas where you see new opportunities for growth or greater operational efficiencies can be developed. Challenge the rest of your team to do the same and humbly realize the more support you have from loyal employees who can assist in these efforts, the better.

Consider being a unicorn, and dare to make decisions that appear unconventional today, but could turn out to be revolutionary tomorrow. The less alike you are to the rest of your competition in certain value-added areas could easily have a positive effect on how clients view your products and services compared with those in your market. Improved communications, deliverable timelines, and customer service are just a few examples to consider.

These changes will likely create more demands on you as a business owner, as well as your employees, however, the eventual payoff can be critical in overcoming the sum total of the challenges faced as a result of the external forces affecting your business.