Scenario 1
Meet Rickey “The Speed Man” Jr. and his flourishing auto parts store. Started by Rickey Sr. 40 years ago the business has established itself as the place to go for custom 50’s and 60’s hot rod auto parts. However since Rickey’s dad left the business 8 years ago the workload on junior has been more than he desires at this stage in his life. Rickey Jr., now 60 years of age, has made the difficult decision to sell the successful business and move to the southwest where he can enjoy the outdoors. Rickey starts to do his homework and starts to see the daunting task ahead of getting his business ready for the sales market. What are the first things the “Speed Man” should consider?
HTH Insights
- He must have solid financial records in place and the financial statements need to agree with the business’ previous 3 years of tax returns. These financials need to be accurate and up to date. The balance sheet items must tie-out to a statement or a reliable piece of supporting documentation.
- All of the assets and inventory must be valued correctly.
- He needs to identify any current expenses that would not be considered necessary for another owner. Examples are vehicles; payroll for family members; any home office expenses; employer pension plan that funds mostly to the owner; owner salaries that exceed what a business manager would need to be paid; These types of expenses, like those listed above, are considered “add-backs” that will increase EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). EBITDA is a measure of a company’s profitability that focuses on its core operations by excluding costs related to financing and non-cash expenses, therefore increasing the selling price.
- Determine if there are local competitors who would be interested in purchasing.
- Consult with CPA and consider hiring a business broker to handle the transaction.
- Consider his goals for his exit such as the timing; any staff implications; tax implications, the overall business valuation, etc.
- Rickey should have a plan in place as far as retirement goes so he can live the life he wants to when he moves down South by evaluating what his post sale income will look like.
- Consider which type of business sale model would work best. Examples are: Asset Sale; Stock Sale; etc.
- Another important consideration would be whether or not Rickey wants to remain associated with the business, or just completely cut ties.
In the next scenario we will see just how ready Rickey “Speed Man” Jr. is to begin the sale of his business.