Selling Your Business Within Two Years? Read This.

If you are contemplating selling your business within the next two years, then it pays to start thinking differently about your tax strategy. Now, before the end of the year.

It is actually very simple in theory. You pay a percentage of your earnings in taxes. However when you sell your company you get a multiple of earnings as the selling price. Often a three or four times multiple of earnings. So although normally you want to minimize taxes, in the year or two before you sell you don’t actually want to do that. Or at least as much.

Here is an example. Typically you are trying to write down as much as you can, even if your accountant is telling you that you really should capitalize it and expense it as depreciation. Well, depreciation doesn’t count (it gets added back into earnings). So in the year or two before you sell, you want to capitalize as much as you can. Tools, software, etc. Capitalize and depreciate that stuff to boost your earnings.

Inventory is another area. There are two methods to value inventory, FIFO (First In First Out) and LIFO (Last In, First Out). In this business we like to say that some owners use a third method: WIFL (What I Feel Like). If you are going to use the popular WIFL method, keep in mind again that it is well worth paying a few dollars more in taxes, as a % of your earnings, in order to gain a multiple of those earnings when you sell.

I don’t like to get into the situation (which happens fairly often), when the business owner wishes he or she had done some things differently in the years prior. It is a shame because I know they could have sold the business for more if only they took a few simple steps. I'm not talking about cheating. I'm talking about not cheating.

A good business broker will work with you for a year or two before you sell. They will review your year-end statements and identify areas where maybe you can increase the value of your business without much effort. Or identify problem areas (e.g. too much inventory, high AR) that you can work on so it isn’t a last-minute crisis. I have clients right now that I’ve been working with for over two years. I’m patient.