Focusing on Tax Minimization
Many business owners operate their companies to minimize income taxes. However, this is not the best practice when it comes to maximizing business value. Minimizing taxes while preserving the true profitability of the company makes good business sense but minimizing taxes by artificially lowering profits can cost you a staggering amount during the sales process. In an effort to pay the minimum amount of taxes, many owners run “lifestyle businesses.” By that we mean the owner seeks to take as much money as possible out of the business in order to fund the family lifestyle and keep his or her tax burden to a minimum. Unfortunately, this money is usually spent on an increasingly expensive lifestyle and is rarely saved for the owner’s future needs. This is a form of consumption, rather than the creation of wealth, which would occur if the business were treated like an investment.
Driving revenue rather than margins
Profit margin is often ignored in the process of increasing revenue, which can decrease the value of a business. Gross profit margin is the percentage of revenue you retain after accounting for direct costs referred to as “cost of goods sold”. Companies that sacrifice their margins to keep gross revenues high, reduce their overall profitability and company value which weakens their position in the marketplace. One key strategy for increasing margins is to add recurring revenue to your business, such as:
- Service or maintenance agreements
- Consumable product or replacement part contracts
- Subscriptions for products, services, or information
- Memberships
Recurring revenue is guaranteed revenue, at least for some time, which does not require the same level of sales and owner effort as one-time revenue. This revenue often has much higher margins and is always highly coveted by buyers. Studies show that businesses with recurring revenue sell at much higher multiples than those that don’t.
Dependence on the business owner
Revenue is not always the most important value driver. In fact, one of the biggest concerns a buyer usually has about a business is its dependence on the current owner. Not only does this cause a business to be unattractive to a buyer, but it also creates great risk for the current owner. How would that business continue to function and prosper without the owner? Too many times, an owner has the business relationships, processes, procedures, and technical know-how all under his or her control. In some extreme cases, you could actually say that the owner is the business. This is the direct opposite of what appeals to a buyer.
You may have only one shot at getting what you need from your business sale. Don’t take any chances. Let us help you prepare properly for your exit.
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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.