With the corporate tax deadline extension of September 15th behind us and many accountants taking a much-needed break, it may be an opportune time to schedule a strategy meeting with your CPA if selling is a consideration in the next 3-5 years. Over the past few months, our firm has experienced a substantial increase in new clients going to market. During our initial review of each company’s financials, it becomes very clear which owners have been preparing and will benefit the most now with the burden of historically high interest rates and the ongoing recession debate.
We have daily conversations with business owners on how to best maximize the value of their business. From an accounting perspective, when it comes to preparing a business to sell, below are the three most common areas owners should address:
Minimize Add Backs
Most buyers and lenders would agree that it is standard to see a certain level of positive adjustments to SDE or EBITDA calculations for owner’s personal expenses in the business. However, when these expenses start to add up and the documentation becomes more of a research project, then these add backs can start to hurt the ability for the business to sell at top dollar. For example, extensive travel/meals, major home improvements, and large salaries to non-working family members are hard to defend when it comes to a buyer scrutinizing the financials. Especially with so much uncertainty in the market today, large amounts of add backs (no matter how legitimate) end up casting a dark shadow on an otherwise good business. If the plan is to sell in the next 3-5 years, work with the accountant to drop these personal expenses to the bottom line as distributions. The taxes paid may be higher but the payout could well worth it at 2 to 5 times in additional business value at closing.
Our firm recently completed an OMV (Opinion of Market Value) for a company that was considering purchasing a few electronic vehicles (EV) to upgrade its truck fleet and take advantage of the new incentives. With the company’s EBITDA in recent years over $2M, this seemed to be a good way to invest in the infrastructure of the company toward the end of the year while decreasing taxable income. However, with the owner’s desire to sell in a few years, it became clear that this investment would substantially decrease EBITDA and could adversely affect the value of the business. Instead of making these large expenditures, the company opted to lease the vehicles instead, preserving the high EBITDA while still making the move into EV. Even though equipment values have risen over the past few years, most businesses sold are valued based on cash versus hard asset value so an owner will typically not get a good return on new equipment purchases.
Especially if the business is on an accrual basis, it can be tempting to move large invoices out to next year. Similar to large amounts of add-backs, this can cast doubt on the financials especially when working capital adjustments are necessary in the transaction. When our firm comes across these types of adjustments year after year, the seller is just “kicking the can down the road” which could result in a significant loss of business value. For example, when an offer is made on a business it often includes working capital which could be much higher due to the large fluctuations in accounts receivable over the past 12 months. In comparison, if the business effectively manages accounts receivables and payables the working capital requirements could be 50% less or more. With so much uncertainty in the current market already, the less that needs to be explained on the financial statements the better.
There are many other tax strategies and estate planning situations to consider when meeting with your accountant. We encourage owners looking to sell to have this conversation and start making the adjustments that will pay dividends at the closing table. The majority of our business comes from referrals, and we appreciate your continued trust in our firm.
Robert W. Amerine
President, CBI, M&AMI