Not Always King
Businesses in the Gulf Coast states that cannot document their earned income are at a disadvantage in filing claims for losses arising from the oil spill. But for all business owners, there are other costs of running a cash business that may not be obvious until it comes time to think about the exit strategy. The value of a business is typically derived as a multiple of earnings, so any cash or phantom income reduces the perceived value of the business to the buyer. Indeed, the lack of good financial records is consistently identified as one of the top three reasons why businesses are not saleable or sell for far less than the owners believe the businesses to be worth.
I recently heard Andrew Bryan Burnett, managing director of the Cathedral Consulting Group, deliver a presentation “Running Your Business With the Exit Strategy in Mind”. He holds an MBA from Wharton and hosts his own radio show, “My Father’s Business”. Based on his experience in advising business owners, he identified six obstacles to maximizing value on the sale of the business:
- Tax structure
- Poor financial statements or lack of records
- Complicated structures involving too many people
- Minority interest without a buy-sell agreement
- Inability to identify potential buyers
- Asset structure that impairs the sale of the business
The value of the business is the future cash flow to the buyer which value must be identifiable and transferable. A major source of contention on disaster relief post-Katrina was the lack of transferable property deeds in New Orleans as some properties passed from one generation to the next in the family without an update of public records. A disaster is the worst time to put your records in order. Do it now – it will reduce your stress levels later.