All things being equal, higher revenue and a better bottom line increase the value of a business and its appeal to potential buyers. How we get there will be the focus of our next few posts. But first, I’d like to take a short detour. I recently read Good to Great, written by Jim Collins. What follows is a summary of his concepts for taking your business and business worth from good to great.
In the last post, we talked about financing the purchase of a business through a bank loan (unlikely), through a Canada Small Business Loan (CSBL), a hybrid structure using a CSBL, and a seller note (preferred choice). Today we’ll explore other approaches.
There is a general misconception about the availability of financing for the purchase/sale of a small business, especially where the purchase price includes significant goodwill: banks do not want to finance these transactions.
While the tests for determining whether a sale of shares does or does not qualify for the exemption are technical, a rule of thumb is that the corporation must be operating an active, rather than passive, business and the assets owned by the corporation at the time of sale must generally be assets used in the active business.
You wouldn’t head out on a family road trip without checking your car and local weather forecast would you? There are many actions available to reduce the risks when embarking on the buying or selling of a business. Adequate protection through insurance is high on our checklist.
Although our one-cent coin has been retired, those of us in business can still bank on the premise “a penny saved is a penny earned”. And we don’t want to pay out one penny more than we have to in taxes.
As you read in part one of selling a business: what is your business worth, a seller’s price expectation needs to be in line with market reality. Most financial statements of small businesses are prepared to minimize the tax burden for the company and its owners. To reflect the company’s true earnings, we need to recast/normalize the balance sheet and income (profit and loss) statement.
If beauty is in the eye of the beholder, then the worth of a business lies in the eye of the market. For the market is really what decides the price an owner will get for their business when they go to sell – the scenario most have in mind when they ask what their business is worth.
The Process of Selling a Business