June 22, 2023 •HoganTaylor
Selling a private business can be a stressful endeavor, especially for entrepreneurs who have invested significant time and effort into building their companies or for second-generation owners looking to sell their parents' legacies. Determining the appropriate asking price and understanding the complexities of deal terms and tax matters can be overwhelming. Fortunately, enlisting the services of a business valuation professional can provide peace of mind by leveraging their financial expertise and real-world experience to maximize the selling price and minimize uncertainty.
Before a business is put on the market, a valuation professional can assist in addressing critical items to make the company more attractive to potential buyers. This includes examining financial statements to compile schedules of unusual or nonrecurring adjustments, identifying nonoperating assets, and helping businesses sell less desirable assets or product lines. Additionally, they can assess internal controls, which play a crucial role in influencing a buyer's perception of risk and may impact the selling price. Strengthening controls through measures like segregating job duties, fraud-prevention training, mandatory vacation policies, and whistleblower procedures can help minimize fraud risks and impress potential buyers.
Another important consideration is the risk associated with the departure of key individuals involved in the business. Valuation professionals can help develop strategies to mitigate these risks, such as training subordinates and decentralizing the organizational chart. By ensuring that the business can thrive without the day-to-day involvement of key owners, it becomes more attractive to buyers.
Buyers often base their offers on a company's historical performance. Valuators can assist in optimizing the selling price by demonstrating positive growth trends, showcasing promising product mixes, maintaining assets, training staff, and ensuring sufficient operating capacity to achieve forecasted results. To facilitate a buyer's due diligence, valuators can compile a comprehensive selling packet that includes financial statements, tax returns, business plans, and other relevant documents. It's important, however, to limit the dissemination of proprietary information to qualified prospective buyers and consult with an attorney regarding necessary confidentiality agreements.
In addition to preparing the business for sale, valuation professionals play a crucial role in analyzing market conditions. They can help evaluate the marketplace, set a reasonable asking price, and identify potential buyers. While some business owners may be tempted to rely on industry rules of thumb or comparable transactions to determine value, these resources can be misleading and outdated. Valuators go beyond simplistic formulas by evaluating how the company differs from comparable transactions and estimating future earnings and relative market risk. This comprehensive approach allows for more accurate estimates of value.
Valuators also help sellers understand current market trends and deal terms based on prevailing tax laws. Creative deal terms, such as noncompete contracts, earnouts tied to future performance, or consulting agreements, can bridge the gap between a seller's asking price and a buyer's offer price, potentially resulting in a higher sale price.
Ultimately, setting realistic expectations is crucial when selling a business, and a business valuation professional can be an invaluable ally in this process. Their expertise and guidance can provide the necessary peace of mind and ensure that the sale proceeds smoothly.
How HoganTaylor Can Help
If you have any questions about this content, or if you would like more information about HoganTaylor’s Forensic, Valuation & Litigation Support practice, please contact Clay Glasgow, CPA, ABV, CFF, CFE , Advisory Partner.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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