Sell Your Business for Maximum Profit
Understanding the True Earning Power of Your Business
So, you have finally decided it is time to move on, find the right buyer to grow and expand your legacy while you start a new chapter in your life. Good on you, as you have earned it!
Now, how do you sell your business for maximum profit?
As a Business Broker and Mergers and Acquisitions (M&A) advisory firm, we begin the process by conducting a thorough analysis of your company and its potential value to the right buyer.
To properly value your company, present its true earning potential and sell your business for maximum profit to a prospective buyer, an advisor must thoroughly analyze the business and its income and expenses.
You may have heard someone mention add-backs or recasting financial statements before.
Add Backs and Business’ Valuation
Most businesses are transferred to new owners based on their earnings potential and not on the value of the business’ assets.
Business owners collaborate with their accountants to be careful not to over-report their earnings for tax purposes but in the process, it typically minimizes the true earning power of their business.
Therefore, we as advisors must recast the Income Statement to show as much income (adjusted net income) as possible to sell your business for maximum profit.
When recasting, we normalize the Income Statement line by line in seven steps:
We collect 3-5 years of Income Statements
We adjust to reflect the true earning power of the business
We adjust to exclude any non-recurring items
We adjust to include expenses not already included
We adjust to reflect any imminent changes
We adjust to remove any non-operating income or expenses
We adjust for income taxes
For example, it is common for a relative to be on the business’ payroll yet not be working in the company or vice-versa.
Adjustments to the tax return are necessary for these circumstances. Instances where an owner’s child is receiving a monthly paycheck throughout the year from the business while she is across the country away at college.
This increases the discretionary earnings (cash flow) of the business and must be “added back.” In contrast, I often see a partner in the business that works 40+ hours per week yet does not receive any income from the business.
In this case, since this person will need to be replaced upon the sale of the business, a fair market wage will need to be calculated to reduce the discretionary earnings (cash flow) of the business.
Competent advisors will properly determine Sellers Discretionary Earnings to reflect the true earning power of the business and help you sell your business for maximum profit.