There are two rules you should know about in the brokerage of closely held companies:
1. The value of your business is determined by how much profit you show on your tax returns. How much you actually made is irrelevant.
2. Your business is worth less than you think it is, probably a lot less.
Therefore, if you are considering a sale you will want at least three years of tax returns with the maximum net profit. (It’s a calculated risk: more taxes and higher selling price or lower taxes and lower selling price.) If you are currently running your personal car, the gym memberships and all of your restaurant meals through the business’s books, you may want to reconsider.
Ideally you will be selling your company when it’s on the upswing – not the opposite. Buyers will look at a downward trend, assume it will continue, and lower the value of the business. Buyers will make the same assumption if revenues are growing, but they aren’t going to pay for the possible future returns.
The value of your business will be determined in part by the amount banks are willing to lend for the purchase. It will also vary with other conditions including:
- The business environment around you. Your hardware store may be showing record returns but a planned big box home store in your area will make the sale extremely difficult and depress the price.
- If your business is dependent on a few key customers the buyer may decide that the risk is too high. Customers may not feel any loyalty to the new leadership.
- If you, as owner, are perceived to be personally critical to the company’s success.
- Whether key employees will agree to stay on.
- Whether you will agree to stay on.
If your business owns patents, copyrights or other intellectual property you may want to get an independent expert valuation of those items.
Begin early, get your books in order. Spruce up the physical plant whether it’s a factory, an office or a store. We all tend to overlook the clutter and disrepair which builds up in our own environment. Deal with it before there are brokers or buyers on the scene.
You will want to keep the fact that the business is for sale quiet until as close to the closing as possible to ensure that your creditors, employees and other stakeholders don’t get nervous and jump ship (possibly reducing the value of the business). You should get an appraisal from a broker who sells businesses – not real estate, or insurance, or accounting services.