Determining the when and how to conduct the business pre-sale valuation is critical to proactively creating an exit strategy. Even after spending a lifetime building a business, some business owners don’t have a business that can be sold—due to lack of planning. And this is often discovered after it’s too late.
Hiring a business valuation professional can negate this unfortunate situation. The process of valuing a business can be beneficial for multiple situations, including the preparation of a company sale.
A recent QuickRead article by Lone Peak Valuation Group principals Rick Hoffman and Jeff Pickett stated that, “valuation analyst can help the company prepare for a sale by analyzing the financial statements for normalization adjustments. Because a buyer will typically review the historical financial statements for the three to five years preceding the transaction, it is important that this exercise be performed at least three years in advance of the business owner’s desire to sell. The purpose of this exercise is not only to identify adjustments, but for the company to make the adjustments going forward in anticipation of a future transaction. In other words, to the extent possible, change the accounting so that the profit and loss statement and balance sheet need as few ‘normalization adjustments’ as possible.”
The same skills used in a business valuation should address any revenue and expense adjustments in order to accurately reflect the ongoing business operations. These are the most common adjustments encountered:
- Owner’s Salary. Valuations often reveal that owners pay themselves too much or too little.
- Rent Expense. A valuation professional can guide a business to the extent at which it can adjust rent to a market rate that is appropriate, which is not always the actual rent paid
- Personal Expenses. Valuation analyst can identify which business expenses can be removed to increase the company’s value by increasing cash flow.
“Finally, although less common, the analyst should consider potential adjustments to revenue,” Hoffman and Picket wrote. “The most common revenue adjustments are found in the form of revenue streams unrelated to the business that the owner would not sell. However, if such a revenue stream is to be removed, all associated expenses must also be removed. Although many of these adjustments to the income statement can increase or decrease cash flow, they all strengthen the quality of the company’s financial statements, thereby reducing risk and increasing value.”
We’ll explore the next steps of a business valuation in an upcoming post. In the meantime, if you’re a business owner and are ready to proactively build an exit strategy with maximum business value, give us a call today.