Price and value do not necessarily go hand in hand, but with vision and foresight, the savvy business owner can maximize the sale price of a business by first enhancing its value. Value enhancement requires careful planning and continual assessment of the operation, structure and nuance of a business. Preparation for a business sale is a process rather than a procedure. In other words, it requires time for value enhancers to prove their worth, therefore, it’s never too early to start sowing the seeds of value enhancement. Business owners can begin packaging their business for acquisition now, whether they plan to sell in one, five, 10 or even 20 years. And, even if you never expect to sell your business, the following advice is simply good business sense that will enhance your revenue and profitability, thereby allowing for a smooth transition to the next generation.

What’s your business worth? Business valuations are best understood when regarded as consisting of two components: (1) Subjective side (i.e., business reputation, industry projections, employee value, etc.), and, (2) Objective side (i.e., revenue, gross profit, net profit, etc.). The subjective and objective components are integrated into the final valuation when a risk factor or inverse capitalization rate (derived from the subjective component) is multiplied by EBITDA, EBIT or Seller’s Discretionary Cash Flow (SDCF) (derived from the objective component).

How are you financial records and tax statements?

Financial records and tax statements are a critical point of reference for the objective component of a business valuation. They can enhance or deflate the value of a business, depending on how business expenses and deductions are documented. Reality check … most business owners include personal perks and expenses in the “business expenses” category to maximize business deductions and minimize tax liability. This short-term gain can be a dramatic tax savings, however, when it comes time to sell, the net profit and business value can be significantly underestimated. But don’t be discouraged. There is a reprieve … in the form of adjustments. Read on …

Can you document your adjustments?

Business valuations involve the itemization and determination of personal or nonrecurring deductions that are included in business expenses (i.e., family medical insurance, interest, depreciation, vehicle expenses, travel, etc.). These are “added back” to the net profit, enhancing profitability and, when multiplied by the subjective multiplier, have a significant influence upon the value of a business. Obviously, bookkeeping and documentation is essential, since these will be reviewed during due diligence for the sale of your company.

How is your company structured?

Depending on the legal structure of your business (sole proprietorship, S-corporation, C-corporation), the IRS labels and taxes proceeds from the sale of a business differently. All things being equal, probably the greatest tax liability occurs upon the sale of a C-corporation. Sale proceeds are exposed to dual taxation, being taxed at the corporate level (up to 40 percent) and then taxed at the personal income level (up to 50 percent, depending upon tax bracket). On the other hand, sale proceeds for an S-corporation and sole proprietorship escape the corporate tax treatment, and are taxed at personal income level only. So, what if you anticipate selling your C-corporation in five years (and selling its stock is not a viable option), and you restructure it as an S-corporation to avoid anticipated taxes? You must establish the value of your C-corporation before restructuring. The IRS requires that a business be an S-corporation for a minimum of 10 years before sale proceeds will be treated as a arising from an S-corporation. Instead, the increase in value of the business pre versus post C-corporation will be taxed at corporate tax level, while the remainder of the S-corporation sale proceeds will be treated as S-corporation income.

Who is on your team?

Every good manager should have a mastermind, a sounding board, and a team of consultants for sound advice. As the company grows, so should the perspectives and insights of the owner. Expanding the boundaries of reality and ideas requires synergistic minds and varying perspectives. Don’t recruit members who are just like you, or will tell you what you want to hear. You will get the greatest benefit from a team that is complementary, enhancing, synergistic and honest. There are many networking business organizations whose members share advice, consulting and experience.

Are you in a position to grow?

Can your facilities, equipment and personnel manage an increase in volume? Don’t compromise your service or quality for the sake of growth. Develop your infrastructure to stay just ahead of growth, not the other way around. Flying by the seat of your pants won’t allow you to continue expansion. Do you have sufficient capital in reserve? Have you calculated your sustainable growth rate and determined at what point a third party or investor is required? Consider recapitalization as a way to reduce your financial risk while accessing financial capital to initiate and sustain growth.

Is the business too dependent on you?

Some owners work in, rather than on their business. If the company is overly dependent on you or your family for daily operations, think about developing a key management team that is positioned in a win-win infrastructure. Having experienced management in place during and after an acquisition will insure easier transition and offer value to the business. Think about how well your management team would perform after your exit. Especially during growth cycles, your best position is to be spear heading the expansion, not managing crises or the daily minutiae of operations.

Who are your customers? Who are your vendors?

Maintain a customer and vendor mix so if one accounts moves from the company, your revenue and supply will not be significantly affected. A business that is dependent on a smattering of large contracts or suppliers is in a high-risk position.

It’s never too early establish the goal and destination of your business. Remember, if your company’s not thriving it’s merely surviving.