If you have decided to sell your business in two or three years, you likely need to change some of your strategies to suit this new vision. While your money-saving tactics have gotten you this far, a new approach is needed to ensure you maximize the sale of your business.
First, you have probably been running personal expenses through the business to reduce taxes as well as working with your CPA to minimize taxes as well. So, what needs to change? Instead of minimizing profitability to minimize taxes, you now need to focus on maximizing profits. The math will be very compelling when you consider that taxes are a percentage of your profits, but the sale value of your company is a multiple of your profits.
As an example, suppose your business had a $1 million dollar profit last year and your combined state and local tax rate is 40%. Also suppose the average EBITDA multiple for your industry and company size is 7.2 times EBITDA. You are now paying $400,000 in taxes but your company is worth $7.2 million. In this scenario, every dollar of profit increases taxes by 40 cents and your sale value increases $7.20. Now the logic behind changing your behavior becomes clear.
Consider these strategies if your time horizon is in two to three years.
- As you make capital investments for equipment, lease rather than pay cash. Interest is tax deductible, and you can take accelerated depreciation to reduce taxes. The interest cost is not included in EBITDA, and neither is the depreciation.
- Stop running personal expenses through your business as many privately owned businesses do. You need to boost profits and you don’t need an IRS audit at the time you are trying to sell.
- If you have inventory, look for stale inventory that can be sold at a discount. Keeping your inventory turns up is a plus when determining the applicable EBITDA multiple for your company.
- If you have one or two customers that dominate your sales revenue, focus on diversifying your customers to lower the concentration of your revenue to a few customers. Buyers see that concentration as risk which lowers your EBITDA multiple.
- Look for ways to automate your processes where you can. This could boost your gross margins and show your company as a well-run operation that is scalable. This also increases your value.
- Develop some deferred compensation plans for key managers so they will want to stay with the company. A good management team also increases your sales value.
Business brokers will tell you that they can add back personal expenses and excess owner compensation to create an adjusted EBITDA. Our experience, backed up by investment bankers, indicates that buyers will not give you full value for adjusted EBITDA, so it is best to have clean earnings. As our example shows, changing behaviors to maximize EBITDA will put additional dollars in your pocket on exit.
C Squared Solutions provides interim or fractional CFOs, COOs, and CEO advisors in nearly all industries. We analyze and advise on these issues frequently through sophisticated modeling and experienced management. Give us a call or visit our website for more information and details. We have been there and done that!
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