Preface: A CPA provides more value to an entrepreneurial business owner than is often perceived. Here’s one more reason why an investment in expert accounting and tax services is cost effective – it increases or supports business value at time of appraisal.
Investing to Double Your Businesses Value – Part I
Credit: Donald J. Sauder, CPA
Prudent and principled savings and investments are frequently heralded as the straight path to successful retirement planning; yet for many business owners, the largest investment asset in a portfolio is business ownership. There usually is a time for every business owner to sell a minority or majority share of a business interest, and appropriate planning of that interest’ sale is the purpose of this blog. Predicting business success is like investing, a long-term approach is usually advised.
Let’s say you never thought about selling any share of your business before. Maybe you’ve only launched your business 4 years ago, and success is easy, or perhaps you’ve plans to never retire. Either way, what would prohibit you from planning how you could strategically double the value of your business. After all, your personal balance sheet would give you more credit access. Well, omitting the time to plan and thinking through the possibilities is a likely reason.
Although business value is subjective, there are some standard characteristics relevant to business value. To start, you need a base line. What is your business worth today? What are the value drivers and what are the risk drivers? Do you know what your ownership interest is worth?
Business Value– the foundation is good accounting. A properly prepared business appraisal will include documentation relevant to the key metrics of that value. Without good accounting records for the businesses financial history, a business appraiser will not be easily able to accurately value your business asset, especially not with a premium. Therefore, the first value driver of business value is good accounting. Now, some business owners think of their accountant as mainly an advisor for tax planning and advice. After all, entrepreneurs understand how to use QuickBooks or say Eagle Business Software. Why pay an accountant thousands of additional dollars to review your bookkeepers work? Well, here’s why. In the auto industry, used vehicles sell for a premium when they have dealer certified warranty or service. That business premium is typically worth more in a business transaction than a vehicle sale. Errors in tax filings and accounting software files discount value in due diligence. A CPA say is that certified warranty of your business financial records.
Let’s consider for instance a business due diligence team, e.g. the buyer’s accountant and attorney, say, checking and comparing the prior five years’ data from tax returns to accounting software files. If the financial balances agree, you’ve added a possible value premium, or certainly avoided a discount to transaction, through the trust and assurance in accurate historical financial performance.
Yet many entrepreneurial businesses lack that level expert of accounting and tax compliance. It’s not that entrepreneurs don’t appreciate accurate records, it’s often they don’t realize the value or take the time or make the investment in expert accounting, neither realize that it is the first step towards a premium in business value. Expert accounting includes accuracy and consistency. If your accountant doesn’t require you to count inventory and document values, or request confirmation of balance sheet accounts, your records may appear accurate, yet have a problematic flaw perceptible to a skilled due diligence team preparing an independent appraisal of value for a potential buyer.
Working with a credentialed business valuator and experienced accountant, you can prepare your accounting and tax records for that due diligence team years ahead of gearing up your business for the marketplace.
Step one in doubling your business value – investing in expert tax and accounting services for your business, every year.