Most small business owners think the value of their business is set by the market. But our next guest says that a lot of it is actually set by the owners themselves, that is, by how the company runs without them, and by decisions made well before a buyer even comes to the table. Mike Switzer interviews Jeremy Finger, a certified financial planner and certified exit planning advisor with Riverbend Wealth Management, Myrtle Beach, SC.
TRANSCRIPT:
Switzer: Hello, and welcome to another edition of the South Carolina Business Review. This is Mike Switzer. Most small business owners think the value of their business is set by the market, you know, by the buyers and sellers out there looking at it. But our next guest says that a lot of it is actually set by the owners themselves, that is, by how the company runs without them and by decisions made well before a buyer even comes to the table. Jeremy Finger is a certified financial planner and certified exit planning advisor with Riverbend Wealth Management in Myrtle beach, where he joins us from now by phone. Jeremy, welcome back to the program.
Finger: Hey, Mike. Thank you for having me.
Switzer: All right, so let's talk now about the importance of the years before one sells their business and why that matters so much.
Finger: A lot of times the business owners are quick to sell. They don't really think about it, and then they rush to sell. That could be through death, divorce, disaster, disagreements, things like that. And if they do not have things in place, it's going to drastically devalue their business. So, okay, so what can you do prior to that to get the maximum value? Well, there's a few things you can do. Number one is you need to make sure that your financial advisor, your attorney, and your CPA all have conversations and coordinate things together so that you have all your ducks in a row. The second thing you do, make sure you have contracts with your key employees, vendors, suppliers, and your clients, and set up standard operating procedures. Now, I know that may sound obvious, but the better you're able to set up standard operating procedures with all assets of your business. It does two things. Number one, it makes your business easier to operate without you, and it reduces risk for the buyer when you step away. The difference between having things set up poorly and right can mean three times the value of your overall business.
Switzer: All right, so what are some other things that a business owner can do to raise the value of the business?
Finger: Okay, let's assume for a second that they have everything, all their ducks in a row and everything as far as their cpa, their attorneys, standard operating procedures, and clients. That's wonderful. They really want to make sure they have their entities in the right structures, and they nearly need to have a deep dive with their CPA and attorney. Depending on what type of organization that they do have, you might be qualified to have qualified small business stock. And when you sell that company, you may be able to avoid federal taxes on that. But I, will recommend all your listeners make sure you deal with your cpa, because a lot of businesses are not included in that wealth management firms, attorneys, CPAs, basically any service based organizations are not included in the ability to qualify for qualified small business stock. And another thing you want to make sure of, like when a business owner is exiting, is that a lot of times business owners, they put a lot of their own personal expenses in the business. I'm not saying your listeners do, I'm saying I've heard of other people doing that. Is that when you're selling the business, think really closely about how much are you going to get after tax and is that going to fund the life that you expect?
Switzer: And so what about, you know, you've got these glowing revenue numbers, you know, where sales kept growing, you know, over the years and things are looking good. Wouldn't that be pretty enticing to a buyer?
Finger: It may seem that it would be enticing, but a revenue is just a top line number. It's not with money that shows up in your bank account after all expenses are paid. So what a buyer is really going to look at is EBITDA earnings before interest, taxes, depreciation and amortization, or really truthfully after tax money that shows up in your account after everything is paid. And so that's really what they're buying. And they're buying that stream of income ongoing. And the better you're able to represent that that is going to be consistent, ongoing and potentially increasing the bigger your sale value.
Switzer: And I guess that has a lot to do with customer relationships and making sure that those are going to transfer over to the new owner, right?
Finger: Absolutely. That's why, you know, when you're dealing with standard operating procedures, you want to have contracts with your clients, contracts with your key employees, all these different things in place so that it's very transferable. Because if the business can run without you, it's also going to reduce the risk for the buyer. Now a lot of business owners, after they have everything set up, they may decide that they don't want to sell. So that's also, a wonderful thing to have if a business can run without you.
Switzer: Well, Jeremy, thank you so much for the information.
Finger: You are most certainly welcome, Mike. I appreciate you having me.
Switzer: Jeremy Finger is a certified financial planner and certified exit planning advisor with Riverbend Wealth Management in Myrtle Beach. Remember, you can hear this show again at our webpage, South CarolinaPublicradio.org and you can find us wherever you find podcasts with the South Carolina Business Review. This is Mike Switzer.
The views expressed on the South Carolina Business Review do not necessarily reflect those of South Carolina Public Radio. South Carolina Business Review transcripts are intended to accurately represent the original audio version of the program; however, some discrepancies or inaccuracies may exist. The audio format serves as the official record of South Carolina Business Review’s programming.
