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.