Rick Kozlowski

Rick Kozlowski

 


 

(802) 864-5756

rkoz@lisman.com

vermontestateplan.com


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Maximizing the Value of Your Business

When an owner is preparing to transition the business in the form of a sale (to a third party or an ESOP), the goal will be to maximize its value.  Believe it or not, there are a number of steps you can take to increase value which will have little or no effect on its current operations.

Improving Cash Flow and Assets

In order to understand what steps can be taken to maximize value, it is first important to understand the factors influencing value.  Although there are many such factors, the two most important are assets and cash flow.  The value of a company’s assets affects it liquidation value as well as its ability to operate profitably in the future.  The historical cash flow of the business is a good indicator of its profitability -- many businesses are bought and sold on the basis of the ability to generate positive cash flow. [A quick measure of a business’ value is to “factor” the cash flow by some multiple which is dependent on the type of business involved.  For example, a business with an annual cash flow of $200,000 might be worth $1 million if the factor that is common to that type of business is 5.]

What does this mean for the business owner?  Obviously, if the owner can improve the value of the company’s assets or increase its cash flow, then the value of the company will increase.  For most businesses, increasing the assets is not practical -- if operating efficiently, the company will already have sufficient assets to operate properly, and will not need (or desire) to tie up additional capital in acquiring more assets.  Increasing cash flow is another matter.  The owner should carefully review the cash flow data for prior years, and begin the process of weeding our unnecessary expense and those expenses which are discretionary expenses of the owner.  Examples:  if the owner is receiving an excessive salary, that salary could be reduced to a reasonable level of compensation (C corporations make this difficult).  Other perks (cars, club dues, entertainment, etc.) should be reviewed to determine if they can be eliminated (not relinquished, just moved to the owner’s side of the ledger to improve the cash flow of the business.  Likewise, if related parties (spouse, children) are on the payroll, their compensation should be reviewed to see if it is reasonable.  Other items, such as lease arrangements between the owner and the business, should be scrutinized.  

These adjustments take time -- it is important to get started early, ideally several years before the transition is to take place.

Positioning the Business for Sale

Potential buyers of your business will be using the same factors discussed above to arrive at a value (purchase price).  A buyer will want to see the corporate records in order to determine what the business is worth.  Therefore, it is critical to have your ducks in a row -- a compilation of the past and current operations of the business that can be delivered to a potential buyer without undue delay (do not forget to obtain a well-written confidentiality agreement before turning over information!).

Typically, a potential buyer will ask for the following:

  1. Profit and Loss Statements -- both current, and for the prior 3-5 years
  2. Balance Sheets -- both current, and the last 3-5 year-ends
  3. Tax Returns -- 3 prior years
  4. List of Assets
  5. Copies of Major (Material) Contracts
  6. Employee List (names, titles, duties, compensation)
  7. Customer List (again, be sure to obtain a confidentiality agreement)

Presenting this information quickly and thoroughly can only impress a potential buyer with the management of your business, and will allow you to capture potential buyers that might otherwise slip away if this information is delayed.

Get an Appraisal

When you ask an owner of a closely-held business what his or her business is worth, the answer in invariably “Well, it depends.”  This common answer is actually responsive to number of different questions.  What is the business worth to the owner?  What is it worth to a third party? How is the business valued for estate and gift tax purposes?  In my experience, most business owners are jaundiced (or emotional) in their view of value, and underestimate what a buyer would pay for (or what the IRS would say about the taxable value of) their business.

Having an objective estimate of your business’ value can be extremely helpful in planning for retirement, a potential sale, the payment of estate taxes, etc.  Getting an appraisal of the business, if performed by a professional, can provide a value for planning purposes.  Appraisal run the gamut -- from detailed written reports (costing $1,000’s), to less expensive, less detailed estimates.  The type of appraisal that is best for you will depend on what you are attempting to accomplish.

I can help. If you would like to discuss your business and your goals, please contact me. rkoz@lisman.com

 

 

 




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