By Molly Booi, CPA, Senior Accountant, Tronconi Segarra & Associates LLP
Have you ever wondered what your business would be worth if you were to sell it? If you are considering a sale, or even if you think a potential sale as an exit plan seems far into the future, it is never too early to start planning for how you might maximize the value of your business.
Too often, owners wake up one day and decide they want to travel, spend more time with their family or both. Or, they unexpectedly have a willing buyer (or multiple buyers) knocking on their doors asking if they’d consider a sale. In both scenarios, owners are more likely to take a haircut on the value of their business since they were reactive rather than proactive.
Strategically preparing for a sale well in advance of “going to market” will not only help maximize the selling price, but it will also likely prevent headaches down the road during the buyer’s due diligence process. So, what are some items owners can start to think about that will help down the line? For one, business owners should get out of the weeds! Owners that aren’t actively involved in the day-to-day operations and only strategically “steer the ship” can likely support adding back their compensation to arrive at sellable Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”). This is because the buyer will likely not need to replace the legacy owner’s position post-sale, which can result in a significant increase in the purchase price. For example, if an owner can support adding back a full salary of $200,000, a 5-times multiple on sellable EBITDA will result in an additional $1,000,000 in purchase price! Moreover, the owner’s transition period post-sale will likely be much shorter, allowing the seller to move on to their next endeavor faster.
Another tip is to begin identifying and saving documentation for items that are considered discretionary in nature or non-recurring. The most common examples are non-operating (i.e., personal) expenses that are run through the business, or items that are considered to be unusual, one-time expenses, such as a large bad debt write-off or one-time legal fees to settle a lawsuit. Similar to the example above, these expenses can be added back to arrive at a “normalized” EBITDA that a buyer could expect if they were to acquire the business. Buyers will typically accept these add-back adjustments so long as they are credible and defendable. By tracking these items well in advance, it is much more likely that no potential add-backs will be missed. Every dollar counts when arriving at normalized EBITDA!
Finally, consider having an outside accounting firm perform preemptive diligence to help identify any common issues prior to “going to market.” This will allow the seller to fix any identified issues (or at least disclose them to a buyer upfront) in advance of providing a buyer complete access, which will, in turn, ensure credibility is maintained throughout the transaction as well as prevent any purchase price adjustments from a buyer after having provided an enticing initial offer. And remember – any expenses paid that relate to the sale (such as fees to perform preemptive diligence) can be added back to EBITDA!
These are just a few of many examples to think about when planning an exit. If you would like to discuss additional strategies or ways in which we may be able to help, you can reach out to one of our Transaction Advisory experts here at Tronconi Segarra & Associates, including Mark Ferm, CPA, Partner, or Molly Booi, CPA, Senior Associate. We can be reached at (716) 633-1373 or and . www.tsacpa.com