By: Dr. John Sherrill – CBI Tulsa, Oklahoma Business Broker
In the best-case scenario, planning to establish your individual exit strategy should begin at least three years before putting your business on the market. This time frame is important because most businesses sell for a multiple of the previous three years’ average earnings (EBITDA or SDE).
The primary goal, then, is to maximize the average earnings over the period and seek to increase the multiple that can be attained. We also want to work to remove any barriers to entry and to increase marketability. Additionally, it is wise to meet with your CPA, investment professional, and/or tax attorney to begin planning to lower or delay the impact of resulting capital gains taxes.
A few words on maximizing earnings – This often requires the very opposite approach to what we do to minimize taxes. In preparing to sell, we want to show as much profit as possible! Therefore, we seek ways to increase revenues/income and lower costs/deductions. It is far better to pay an effective tax rate of 35% on our earnings than to lose the opportunity to gain 2-3 times those earnings in the sale price! By the way, beware of using rapid depreciation methods or Section 179 expensing to lower your tax bill, as the IRS potentially will require recapture of the unused portion at the time of sale.
Next time, we will look at some effective strategies to increase the multiple of earnings used in calculating the sale price. We will need to consider some common Value Drivers (maximizing the multiple) and Value Detractors (mitigating the risks).
Until we meet again,
Dr. John Sherrill