You’re not alone

Barbara Taylor’s New York Times blog, Transaction, caught my eye the other day. Her career path has some similarities to mine: After selling a successful business, she is now involved in the business of buying and selling businesses.

Transaction is another forum for business owners to discuss issues concerning their businesses, including the prospects of buying or selling a privately owned business. And if initial reactions are any indicator, there are quite a few interested business owners.

It’s always interesting to see the perspective of fellow private business owners. One message in Taylor’s post especially rang true (and it should sound familiar to readers of my blog and my book):

“Even if you’re not planning to sell your business any time soon, I hope to get you thinking about how you can run your business with an eye toward what you can do to achieve maximum value if and when you do decide to sell,” Taylor says.

That, of course, is the purpose of my book, How to Sell Your Privately Owned Company, but it doesn’t hurt to have that message reaffirmed by a third party, especially one with the readership of the New York Times.

In the comments that followed, econobiker asked the following:

“Yeah, and how do small business owners work the system for profit beyond the operation/running of the business?

“Such as that ‘company owned car’ or somehow having vacations at the same time/place as an industry event or employing relatives on the payroll as consultants or personally owning real estate which the company then rents from the owner, etc, etc, etc…

“We want to know the unpublished side deals available!!!”

I offered this answer, which also was posted:

Most ownership perks are legitimate expenses used as tax minimization strategies.

Such matters are rather irrelevant when a business is offered for sale. A business owner’s benefits (salary, commissions, perks, incentives, personal loans and discretionary expenses) are identified – and published in footnotes – when “recasting” a Seller’s financial statements.

Proper recasting places a monetary value on such items. This amount is then added back into the bottom line earnings, thereby enhancing the company’s profitability and its value.

Here’s why it’s important: On a Seller’s financial statements – which are carefully scrutinized by Buyers – it is in the Seller’s best interest to show that the business is generating the highest possible level of profitability. Why? Because – as Barbara mentions – many businesses are priced using a multiple of EBITDA – Earnings (Profits) Before Interest, Taxes, Depreciation and Amortization.

Thus, higher Earnings will dictate a higher asking price for a company.

Most business Buyers understand the recasting process and how it’s used. It allows them to assess the business, its cash flow, its future earning capacity, and whether they’re able to make a reasonable rate of return if they buy the company.

Therefore, in business transaction, “unpublished side deals,” and “working the system for profit beyond the operation/running of the business” become moot issues.

 

Eric R. Voth is a serial entrepreneur, a private investor, consultant, and writer. He is author of How to Sell Your Privately Owned Company, a Basic Guide for Independent Business Owners, Baby Boomer’s Edition. Eric and his colleagues help a business Seller prepare and groom his or her company prior to offering it for sale or merger – then guide the owner through the actual process. He became involved in this field as a result of merging his own company in 1993.

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One Response

  1. Eric –

    Thank you for your comment on the boards at Transaction, and for highlighting my introductory post here at your blog. As you mention, there are plenty of business owners out there who are curious about the process of selling – and buying – a private company.

    Your blog is excellent! There seem to be very few GOOD online resources devoted to the topic of small business transactions. You are providing a wonderful resource to small business owners and those of us who advise them. I’ll be checking back frequently!

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