The Accounting Paradox: Secure Your Business Legacy by Preparing Your Exit Now

Business owners are often some of the hardest-working individuals. To each of us, every dollar matters, and understandably so. Tax is one aspect that no business owner wants to pay more of than necessary. However, when it comes to exiting your business, there's a paradox in accounting that you should be aware of.

Deciphering Actual Earnings - Normalization

Financial transparency is crucial when selling your business. Your records might reflect a net profit of $200,000, but this doesn’t consider additional earnings like personal salary, depreciation, amortization, and other owner benefits. This process of showcasing the true owner benefit is called normalization. And done properly, normalization, as well as clear financial records, could review the owner benefit being hundreds of thousands of dollar above the net profit.

The problem arises when the added numbers are murky and not easy to understand. Buyers, often armed with a savvy advisory team, will look for clarity in your records to gauge the business's true economic earning capacity. A clear and detailed record, especially during the years leading up to the sale, is essential.

Understanding Your Business Value

If you haven’t evaluated your business in the past two years, do so immediately. Recognizing its value not only offers incredible insights but, if the number is unsatisfactory, it provides a new perspective on achieving the deserving figure. Do not rely on what you hear on the streets or even advisors who don't get involved in valuing businesses on a regular basis.

Realigning Accountant Goals

Accountants aim to minimize your taxes, but as you near the potential sale of your business, the conversation should shift. Instead of solely minimizing tax liability, the emphasis should be on clarity and detailing adjustments over multiple years that showcase true earning potential.

The Risk of Unpreparedness

Data shows that a staggering 70-90% of businesses that go to market unprepared end up not selling. This unpreparedness could mean your business's legacy dying with your departure. Taking early action and understanding your business value can change this fate.

The Worth of Detailed Financials

At a recent mergers and acquisition conference (MASource.org October 2023), private equity groups stated that detailed, audited financials (though pricier that normal accounting service) significantly influenced their acquisition decisions.

Seek Expertise

If your accountant lacks experience in business ownership transition, collaborate with specialists. Certified Valuation Analysts (NACVA.org) or experienced Business Intermediaries and M&A Advisors can provide the expertise you need.

Caution Against Internet Valuations

Online valuations might be tempting, but they often overlook crucial elements. Two seemingly identical businesses might have the same revenue and net profit but differ in value significantly. Don’t compromise on your business's worth.

More than Just Business

Your business's legacy impacts more than just you. It's about your family, employees, customers, and even the surrounding economic community. Your business deserves respect. Prepare for its future and safeguard its legacy by acting now.

In summary, the accounting paradox is real, and understanding it is essential for securing the best future for your business. Don't delay; act now to ensure your business's legacy thrives even in your absence.

We are always glad to chat. Visit Legacy Venture Group at LVGAdvisors.com) for more help.