A common comment we hear from business owners who contact Sunbelt Texas about selling a business is “I didn’t know a year (or 2 or 3) ago I would be selling my business so soon.”
Before you file your taxes, keep in mind that a buyer and the buyer’s lenders will look very closely at the financials of a business for 3 full years. That means that if you sell your business in 2020 or sooner, the Tax Return you’re about to file could have a significant impact on the value of your business.
Do your business tax returns clearly and accurately reflect the earnings of the business?
Tax Planning for a Future Sale
Here are 4 areas that we often see need significant improvements to obtain the highest value in the sale of a business. Talk to your CPA about how you can move ahead to increase the value of your business.
- Do you have an accurate inventory count and value booked into your financials?
- Is all of your inventory in “good and saleable” condition?
- Do you actually know what your inventory value is?
- Have you written off the old and obsolete inventory?
- Are all your receivables good and collectible?
- Have you written off the A/R you know your odds of collecting are remote?
- Do you have customer deposits intermingled with the accounts receivables?
- Do your receivables reflect what is actually owed to you by the customer? (We see companies that when they get a customer deposit for a job, they book the whole job as a sale and book the deposit as a partial payment even though they haven’t actually earned the sale yet)
- Are your employees classified correctly 1099 vs W-2? Are your 1099 contractors really employees who should be classified as W-2 employees. (This is a very big issue and the government has an active program to crackdown on this….and the penalties can be severe).
- If your 1099’s are really 1099’s, do they have an entity (i.e., LLC, S Corp, etc) you pay?
- Do you have a properly written and valid independent contractor agreement with them?
- Are your W-2 employees correctly categorized as hourly vs salaried and paid accordingly? You don’t want to lose a claim where, after years the employee claims you owe them thousands of hours of back overtime pay.
Owner Benefits and Compensation –
This is VERY important and can dramatically affect the value of your business:
- Are the compensation and benefits received by the owners easily identified and properly booked on the financial statements and tax returns?
- Do you have significant expenses that are not directly related to the business, expensed through the business that are buried in the company expenses?
- Expenses run thru company credit cards?
- Personal vehicles?
Tax Planning Action Item:
If your objective is to sell your business one day then you should get your financials in condition for easy due diligence and maximum value. “Burying” personal expenses in the business financials will reduce the business earnings and reduce the value to a buyer.
Our advice is for business owners to take any compensations as salary, bonuses and draws. Running non-business expenses through the business financials creates problems for proving the earnings in due diligence and raises the risks associated with potential tax liabilities
The most important element of business value is clarity of the business earnings and reduction of the risks associated with all aspects of the business. A buyer will only pay for the earnings that can be proven and the risks a buyer sees drives the multiple buyers will pay for a business.
A business with the lowest perceived risks will command the highest price multiples when being sold.