3 Ways Business Owners Unknowingly Lower the Value of Their Business Come Sale Time
When preparing to sell your business, every decision counts—especially those that can unwittingly lower your business’s market value.
Understanding these pitfalls can help you optimise your business’s appeal and secure a better sale price.
Here are three common ways business owners might unintentionally diminish the value of their businesses, along with strategies to avoid these traps:
1. Mixing Personal Expenses with Business Accounts
Many business owners use their company accounts to pay personal expenses, planning to add these expenses back into the profits when selling the business.
However, banks and buyers can be stringent about recognising these add-backs unless there is clear documentation to back them up.
It’s vital to keep personal expenses separate and maintain meticulous financial records. If a buyer sees mixed expenses, they may question the reliability of the financial data, potentially lowering their offer.
2.Underreporting Income
While taking cash payments and not reporting them can provide short-term cash flow and tax benefits, it severely impacts the long-term value of your business.
For example, if you’re not reporting $1,000 per month, that’s $12,000 a year that isn’t reflected in your business’s financials.
You may have saved $3,000 in taxes, however…
Many businesses are valued at a multiple of their earnings, so if your business valuation multiple is 3x earnings, that $12,000 could potentially increase your business’s sale price by $36,000.
Accurately reporting all income not only avoids legal risks but also maximises your business valuation.
3. Inflexibility in Sale Terms
Especially in today’s market, being flexible and offering various terms of sale, such as vendor financing, can make your business more appealing to a broader range of buyers.
Vendor financing, where you, as the seller, help finance the purchase, and get pad back a portion of the sale price over time can be particularly attractive as it demonstrates confidence in the business’s profitability and smooths out financial barriers for the buyer.
Flexible terms can expedite the sale process and potentially fetch a higher price as it opens up the pool of potential buyers who might not have immediate access to total funds but are otherwise excellent candidates.
By addressing these three areas proactively, you’ll maximise the value of your business as well as enhance its attractiveness to potential buyers, ensuring a smoother and more profitable sale process.
If you’re planning on selling, send us a message to organise a conversation or call us on 1300 405 597 to find out if we can help.
Have a great week.
– Kurt