If you’re reached a stage in your life where you’re contemplating retiring from the family business, you can increase the price you receive for your company through some simple steps in the last year or two before the sale. This month, we’ll give you some strategies to ultimately maximize your selling price.
Let’s look at how a purchase price is computed in order to understand the logic behind the suggestions. Purchase price is normally determined by one or a combination of the following methods:
1. Asset value – The book or market value of hard assets to be purchased.
2. Profit Multiplier – Your latest or average annual profits multiplied by a factor of 1.5 to 5 times.
3. Risk Free Return – What a buyer could receive on a risk-free investment (such as a CD) as compared to the rate of return in your business. A discounted cash flow method will determine the rate of return of your company versus the risk free rate to determine a sales value.
4. Intrinsic value – Do your supplier contracts, customer lists, or locations provide any quantifiable benefits to the potential purchaser?
What can you do to maximize your sales price in this less than favorable environment? Plenty!
1. Maximize profits and keep them in the company. If you’re drawing out a too healthy salary, reduce it to what you need and let the rest stay in the company. Yes, this may cost some extra taxes if you have a “C” corp., but since a buyer uses a multiple or your earnings, the extra sales price usually more than compensates for the taxes.
2. Get lean and mean – reduce discretionary expenses to keep your bottom line fat. Review executive perks that are being written off and consider deleting them for a year or two before the sale. Review all personnel costs.
3. Quantify environmental costs – If you know your site needs remediation or upgrades, get a firm quote on the costs. Unknown expenses are very scary to a buyer. But if you say that it will take $XXX to do the upgrade, the buyer will feel more comfortable. Be prepared for your price to be discounted by the project amount.
4. Keep assets in top physical condition and appearance – Just like selling your house, a coat of paint and some landscaping makes a difference. Keep truck and plant maintenance up to date. And, if aggressive depreciation schedules have left your company with understated book values, consider having an appraisal of your assets shortly before you want to sell.
5. Timely company information – Most buyers will want to see a monthly breakout of your sales units and gross profit by site and product. Now is the time to fine tune your accounting.
6. Hidden asset values – If you’ve been expensing small assets, make a list of everything you own which doesn’t show up on your balance sheet with purchase price and date.
7. Carefully monitor and maximize cash flow – Know exactly what is happening to your cash each month and why. Build up a healthy cash cushion in your business.
If you want professional expertise in building your cash balance, or advice on maximizing sales value specific to your company – call Meridian at 1-800-728-9005
