The most successful growth and succession plans are those that ask tough questions during the planning process as opposed to during the ownership transfer. Therefore, we suggest that you talk with a firm that specializes in succession planning, such as Stratus, about getting an independent audit and/or a valuation of your business at the beginning of your succession planning process. Remember that a valuation will be required to finalize the ownership transfer, so we believe it is best to set your baseline well before a deal is concluded.
1. An Audit Provides Objectivity: We suggest those business owners who know they overlook bookkeeping and financial statement preparation get an audit before a valuation. If you are going to get an audit, it is typically best to not have your accountant do the work. The goal of the audit is for someone who does not know your business to go through your financials, look at compensation and benefits and ask questions about how your operations are financed. An independent professional is going to provide a good barometer for how well your business is prepared for the scrutiny that a buyer will bring to the due diligence process.
2. A Valuation Lets You Know Where You Stand: Once you have your financial reporting in good condition, the next step is to get an independent valuation. It is best to look for a professional with a valuation credential such as a Certified Valuation Analyst (CVA) granted by the NACVA or the Accredited in Business Valuation (ABV) granted by the AICPA. A valuation is different from an audit and provides many owners with their first look at what a third party thinks their business is worth. The valuation will touch each area of your business, from bookkeeping to taxes to operations to the physical condition of your real estate. Keep in mind that your business is worth the productivity of its assets and the net cash flow it produces; it is not a function of how long you have been in business.
3. What You Know Helps Drive Your Growth Plan: We like to stress that the initial valuation of a business is not as important as the amount of time the owner has planned for growing the business. While many business owners are disappointed with their initial valuation, the valuation is the first step in the planning process and will help to expose weaknesses in the owner's business. These weaknesses should form the basis for your growth planning because the return on investment for most weaknesses is greater over a 3 to 5-year period than focusing on what you already do well. A succession planning advisor like Stratus will not only be able to tell you what your business is worth and how it can be improved, but can also coordinate with the other advisors (e.g., CPA, auditor, attorney, etc.) that will be important to your growth planning and ownership transition.
In our experience, an owner should begin the growth and succession planning process at least 3 years before their intended transition date. The reason we like the 3-year window is that the first pieces of information a buyer is going to ask for are the past 3 years of tax returns, and profit and loss statements. If you assemble the right team, you will be able to hand a buyer 3 years of solid financials that will help you maximize the value you receive while minimizing the questions that can derail the negotiations.