Many business owners are so focused on running their business and putting out daily fires, they often don’t consider the long term ramifications of a few small decisions. What might seem like a quick fix today, could end up destroying the value of your business!
As we review small businesses (under $10M sales) to sell, here are 3 of the most common ways that business owners have devalued their business.
1. Not reporting cash.
We had a bar owner that would take the cash out of the register every night. It was his “pocket” money. He didn’t see anything wrong with this. It was “his” money. Sadly, when that is not the way the IRS or buyers look it at. When all the revenues are not reported to the IRS, a buyer become suspicious of how the seller is doing their books and starts to question what else is not being reported. A buyer will often say to us, “If they are willing to lie to the IRS, I am sure they will lie to me.” Since many businesses are valued based on a multiple of profits (or sometime revenue), when both values are artificially low from cash being removed. This reduces the value of the business and can make the business unsellable at any price turning it into a liquidation of assets, sold for pennies on the dollar.
TIP: Report ALL income in the business on your P&L and tax returns. It is better to pay the 30 cents in taxes, than loose the $2.50 that the buyer would have given you!
2. Not having options on their leases
Recently a retail location contacted us and they had less than 1 year left on the lease. When buyers learned about this, they immediately hesitated and wanted to talk with the landlord to make sure the business was going to have a place to stay. It turned out the landlord did not renew the lease and the business liquidated. All because they did not have a “place for the business to live” and there was no option to protect the business owner.
TIP: To prevent your landlord from killing the value of your business, always get 2-3 options when you renew your lease. An option, means the tenant has the right to renew the lease for a number of set terms when the current lease expires. This gives the tenant more control and helps secure the value of your business.
3. Too many family members in the business
We worked with a towing company that had 5 family members in the business and 2 employees. In order for a buyer to take over the business they would have to replace the many employees. It Is hard enough to learn a business and when you add hiring and training employees on top of that, buyers walk away and look for other businesses to buy. To add to the problem, the family had been working together for so long, they had no written procedures and everyone just “knew what to do.” So a new owner had nothing to guide them in training the new employees once the family had left. It was a disaster waiting to happen. When a business is being sold and some or most of the intellectual property (including knowledge of how to run the business, relationships with vendors and clients) leaves, the business is drastically devalued and buyers are less interested in the business. Buyer will pay much less for this kind of business since there is more risk with the intellectual property is leaving soon as after the sale.
TIP: Slowly phase out family members YEARS before you want to sell. Transfer their knowledge to employees that will stay. Also create standard operating procedures for the new owner to take over easily. This will reduce the risk for the buyer and increase the value.
The best way to not have your business devalued is to begin to prepare to exit your business long before you ever plan to leave the business.
By Kimberly A. Deas, Murphy Business & Financial Services, Exit Stage Left Trusted Advisor