You’ve heard me say this countless times: Get the advisors who are best qualified to help you, and do it early on. There are a ton of excuses you can give as to why you don’t want to bring on this outside help — pride, money, loyalty to a current (albeit less qualified) advisor, you don’t think you need one, etc. — but the number one thing business owners say is once a deal has closed is “I wish I had have known X.” I should know; I’ve said it myself.
The point of today’s post is to remind you that there are depths to the sales process that even the best and most experienced entrepreneur has no idea about. While we won’t get into the nitty-gritty details about it (I have an entire podcast about it here), it will at least give you an idea of how much you don’t know and why you should fix that right away.
We all have an accountant, unless by some strange miracle we are experts at tax law ourselves. … and if you are, I have to ask: Why are you still doing it yourself? Wouldn’t your time be better spent elsewhere? At any rate, chances are you have a really great accountant who is more than capable of balancing your books and pointing you in the right direction in regards to your business’ day-to-day operations.
However, do you have a transaction or M&A accountant lined up when it comes time to sell your company? If you’re thinking your traditional accountant can service this role, you’re dead wrong. Again, while your CPA is an expert in your business, they are not likely to be an expert in transaction or tax law. It’s also not very fair to expect them to be, particularly after all the changes that rolled out at the end of 2017.
What should you look for in a transaction or M^A CPA? You need someone who understands when a capital gain is better for you than getting double taxed off certain transactions, one who knows what a 1031 Exchange is and how to pull it off flawlessly, and one who understands a 338H10. Sounds like chemistry class, I know, but these are real things that will cost you (or save you) real dollars if you get it done right.
Transactions are truly customized in business, and this applies no less to the taxation side of your company’s sale. If you can identify areas where you’re better served by certain branches of tax law than others, your qualified transaction CPA will be able to point you in that direction — often well in advance so you can further increase your cushion.
We’ve talked before about financial engineering, so it should come as no surprise that we’re really trying to reinforce that today. If you can stop yourself from leaving money on the table simply by hiring the right person who can really tackle the tax side of a transaction, you’d be foolish not to do so. You’ve done enough work just by building your business, let someone else use their expertise to help you sell it and get the money you want and need from a valuation.
Secondarily, and building off a bit from last week’s podcast, is looking at ways to influence your numbers by de-risking your business and giving yourself a real look at what an outsider would need to spend to keep it running the way it is now. This means looking at add-backs and how they influence your valuation, multiple and EBITDA.
This is something you can do yourself, or with your in-house accountant. Simply tally up all the expenses you run through your business and see what it would cost a new buyer to do them properly (and for the ones you use as your own perks, what it would cost you to continue to do them). These slight differences in numbers can mean a ton when you factor in your multiple.
For example, your cost of travel, meals and entertainment, internet and cell phones, cars and their maintenance, gym memberships, etc. all need to be accounted for. If you take out a few of these expenses, you put money back into the business. Looking at the $17,000 a year you spend on travel for business, times a multiple of 5, you have another $85,000 sitting there that you were about to leave on the table.
Look at the staff you have and their compensation. Are the right people in the right roles? If not, how much would it cost you (or the next buyer) to move them around? You need to factor this into your valuation as well. This applies to you, as the owner-operator, as well. What would it cost to replace you? $125,000 a year? Well, if you have a multiple of 5, you are looking at $600,000. The buyer will need to spend that and more to hire and train someone to replace you, so why not save yourself some money and hassle and do that yourself? Same with if you have family or other employees in roles that aren’t really performing and would likely be cut by a new buyer. You can add that value back in once they stop drawing pay checks.
None of these changes have to be made tomorrow, but you need to start at least thinking about them now. Your bank account will thank you.