3 Things Every CPA Should Know When a Client Sells Their Business

September 29, 2016Exit Strategies, Family Business, Selling a Business

As the financial pulse of an organization, business owners frequently turn to their CPAs for advice when planning to sell their business. Truthfully, it’s possible the CPA has listened to that same business owner threaten to sell year after year. Entrepreneurs continually flirt with the idea of packing up and moving on. It’s part of the business roller coaster.

When a business owner finally turns the corner, committed to selling, their CPA is one of the first persons they venture to for support and advice.

Despite being the best resource for forecasting, cash flow and having the most up-to-date picture of the financial health of the business, CPAs often find themselves in unknown territory when broaching the logistics of an exit. Many CPAs have never gone through the sale of a business with a client before.

While there are many parallels to other transactions, ultimately the sale of a business can be one of the most complex transactions in the business world. To help, here are the three things all CPAs should know before advising their client on selling their business.


1) Understanding the Process

Since business owners typically only go through selling a business once in their lifetime, they don’t understand the process or required timeframes. As their first point of contact for selling, it’s important to give them a clear picture of what the process looks like.

First, they can’t sell a business solely because they are ready. Three conditions must be met in order for the sale to occur:

  1. The business owner is ready to sell,
  2. The market conditions support the sale,
  3. The business itself is ready to be sold

Too often, entrepreneurs flip the switch from loving it to wanting to sell it without an exit plan in place. Preparing a business to sell takes time. Helping educate them on the process from the start creates a much smoother transaction.

Depending on the current health and readiness of the business, the minimum desired timeframe is typically nine months to a year. We advise clients to start planning for an exit three or more years in advance, starting sooner if they are planning to leave the business to their family.


2) Valuation

As a skilled CPA, you could easily plug the business’s revenues into a formula and account for assets and liabilities to determine a value. Certified valuation experts also crunch numbers, creating a valuation for a theoretical buyer.

Unfortunately, while mathematically viable, business owners can’t sell to a theoretical buyer. These formulas can generate values are far more than what’s realistic in the market. There can be a significant difference between valuation and sales price.

Real-life buyers set the price they are willing to spend based on an in-depth analysis of the business. The limited scope from the aforementioned valuations doesn’t factor that in, creating a monumental gap between the owner’s expectation and realistic asking price.

This unattainable valuation sets the business owner up for a brutal wake-up call when the first buyer makes an offer.

There’s not a cut and dry formula for determining sale price. When working with businesses to determine market rate, our team at Exit Consulting Group factors in all the variables. While unique for each business, we look at topics such as:

  • Owner’s value in the business,
  • Customer concentration,
  • Business structure,
  • Leases
  • Age of assets,
  • Leadership team,
  • Market trends,
  • Overall health of the business,
  • Skills needed to successfully run it

Businesses without guaranteed lease options tread into riskier territory. A client representing over 50% of revenue sends up a red flag. Lack of qualified team members to run the business after the owner exits creates huge burdens for future owners.

These are the facts that matter to a buyer because they determine the potential for future success. Financials, while important, only represent a portion of the full equation. If 50% of your revenue walks out with the old owner, the business goes under.

When asked to run a valuation, encourage the business owner to work with an exit consultant to determine a value they are likely to bring at market. This lays the foundation for a much more successful business exit.


3) Strategic Tax Planning

As a CPA, you excel at the execution aspect of the business financials. From managing the day-to-day to evaluating cash flow to producing reports, there’s no one more in tune with that side of the business.

This is your area of excellence.

Transactional work associated with the sale of a business differs drastically from the traditional scope of most CPA services. Depending on the size of the business and complexity of the deal, you could argue it’s a whole different ballpark. That’s why so many professionals specialize in tax strategy and transactional work.

In order to limit the sickening amount of taxes due at the sale, a tax strategist must devise an approach that maximizes after tax profits. This means evaluating every possible option for setting up the transaction and accounting for variables such as stock options and retirement plans.

Not getting creative or putting together out-of-the-box solutions could unnecessarily give Uncle Sam a larger potion of the pie, costing the business owner thousands of dollars.

More often than not, CPAs for mid-sized businesses refer clients to someone specializing in tax strategy or transactional work to properly execute the sale.


Where to Turn for Exit Support

Ultimately, the sale of a business requires exit specialists. Because the nature of the sale deviates substantially from the day-to-day, business owners are encouraged to work with an entire exit team.

At Exit Consulting Group, we work with mid to large sized businesses to navigate the planning, preparation and execution of exiting their business. If one of your clients is considering selling their business or looking for exit strategies, contact us today. We can help ensure that you help position the business for success.