By Chris J. Roe, CPA, PFS
Many private businesses and physician-owned practices face challenges when the owner decides it is time to make a transition. Whether an external sale or an internal succession, the process can be difficult and time-consuming. Many businesses fail to have a succession plan in place, whether it’s because they weren’t sure how to start creating one or just didn’t have a defined internal successor. This leads the business owner to seek an external sale.
As a third-party sale is sought, the business owner, more often than not, realizes his mental business value is far different than the actual value third-party buyers are willing to pay. Given the goal is to maximize the value received, how do owners best position their business for sale? Here are several recommendations to consider:
Get Your Accounting Records in Order
Make sure your bookkeeping and financial statements are up-to-date and professional. If you are planning to head to market with the business, you will want to get at least the last two year’s financial statements reviewed by an external CPA Firm. This will give some assurance to the buyer that your books are in order.
Have Your Business or Practice Appraised
Hire a third-party appraiser to perform an outside business valuation. This will give you a good benchmark of what a third-party buyer may offer you.
Increase Your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
Many buyers will value your business based on a trailing 12 months of earnings. You want your profit margins to be at or slightly above the industry average, so as you move forward, it is appropriate to review your earnings, profit margins, and expenses to ensure you are pricing your product or services appropriately, given the market, and have eliminated any unnecessary expenses.
Ensure Consist Earnings and Cash Flow
Buyers like to see strong cash flow and consistency of earnings. Wide fluctuations in cash flow and earnings tend to scare buyers and lower business values.
Develop Your Add-Backs List
As business owners, we tend to live our lives through our business. When you are negotiating a sale, there will be expenses you are incurring, such as company-provided automobile, discretionary travel, meals and entertainment, and professional fees, that will not be considered as part of the sale and will increase the sale price when added back. The new owners will not incur these expenses. You should evaluate your expenses and develop a list of these add-backs.
Be Prepared to Either Be a Minority Owner or Carry a Promissory Note
Depending on the buyer, you may be required to roll over some of your sale price into the equity of the new company. Also, depending on your business size and buyer, you may be required to carry a promissory note to help the buyer purchase your business. Either way, you need to understand you are no longer in control of the business you sell.
Helping with the Transition
Be prepared to continue to work in the business to help transition it or to help grow it. This will serve to ensure your carried ownership in the new business will be maximized upon a future transaction. Also, develop your ongoing salary expectations for your continued work in the business. Keep in mind that if your salary expectations are much greater than you are currently making, it will reduce the purchase price of your business.
Evaluating Your Staff & Staffing
Evaluate the strength of your staff and whether or not you are understaffed. Keep in mind that if a buyer has to add staff to operate the business, they will lower your purchase price. Make sure your staff is adequate to run the business in its current state.
Do Pre-Transaction Tax Planning
The value of your business is not what you get for it but what you keep after taxes. Take the time to sit down with the proper professionals to do tax planning that will increase the amount you get to keep from the sale. Bear in mind these things take time, and the more in advance you decide you want to sell, the better the planning opportunities will be.
Assemble Your Team
You will need a team of people to help you sell your business and to manage the family’s wealth post-sale. We normally serve as a team lead and help business owners assemble and coordinate amongst all team members. It will be difficult for you to be the coordinator, given the stress and emotions you will be going through when the sale process begins. You will need a team of attorneys, your CPA, an investment banker, and other professionals.
Begin to prepare yourself mentally for the emotional roller coaster you will go through when selling your business. Additionally, prepare yourself for the post-closing regret that so many business owners experience.
While succession in a private business, family-owned enterprise, or physician-owned practice can be problematic and time-consuming, a sale can be a wonderful thing. If you take the time to prepare for the exit, your sale will turn out to be a wonderful event in your life.
Rx Wealth Advisors is a physician-focused financial advisory firm. Their primary focus is to help medical doctors maximize their earnings, keep more money in their pocket, and cultivate wealth so they can live the life they’ve earned and deserve. Rx Wealth can be reached at 412-227-9007, via email at firstname.lastname@example.org, or on the web at rxwealthadvisors.com.