Article


The Five Deadly Sins
Knowing what to avoid when selling your business
By Donald Feldman
Date Published: 8/1/2016

 

There are no Mulligans when selling your business. Avoiding these “sins” will give you a good shot at executing a successful transaction.

 

Not understanding the value of your business

Business valuation is not an exact science, but it remains an essential first step. A good business valuation will help you understand what your business looks like from the perspective of a buyer and most importantly what an outsider is likely to pay for your business. Of course, you must understand this value before you decide to leave the business—this is one of the basic steps of exit planning. But many owners still don’t do this.

A business valuation will help you understand the true economic cash flow that is generated by the business. The earnings of the business must be recast so as to reflect the arms-length value of the services that the business is buying. For example, it might not make much difference to the business owner whether she receives salary or distributions, and in fact these amounts are often adjusted by accountants to obtain optimal tax results. But it makes a big difference to a potential buyer how much he will have to pay to replace you, a key manager in the business. If you own the business’ real estate, your accountant might suggest adjusting the rent, again to obtain optimal tax results. But the recast earnings must reflect the actual rent that you would charge a third-party business owner who will become your tenant in order to gauge the true business earnings. Recast earnings must also reflect any excessive benefits as business profits rather than employee earnings—similar adjustments must be made for non-recurring expenses and revenues. 

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