Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

March 10, 2019

Bad Documents To Sell A Privately Held Business

By Jeremy Albelda

documentation

Last month, we discussed the right timing to sell a business within the context of macro-economic cycles and the lifestyle preferences of the business owner, we want to focus this month on the right timing within a calendar year.

“’Quite often, we see the New Year’s resolution put into motion by business owners, “says Achim Neumann, President, A Neumann & Associates LLC, a New Jersey based Mergers & Acquisitions advisory and Business Brokerage firm, “with many such sellers approaching our firm in the first quarter of the year.”

Given that it takes a year to sell a business (even though more recently significant shorter periods were seen), the timing within a calendar year is somewhat irrelevant. Nevertheless, many owners have decided to retire once they hit a certain age, and thus, there is the phone call at the beginning of the year.

The major challenge with this timing is the lack of proper documents combined with the inherent nature of a long-term successful business owner.

Typically, at the beginning of the year, a business owner’s tax documents have not been prepared. Thus, the first step in preparing the business for a sale, namely, executing the business valuation, will be executed on the premise of the Profit & Loss for the previous year in addition to the prior two years of tax returns. Without question, the preferable solution would be to have three years of tax returns.

Here is where the problem arises: the business valuation is based on the definition of the true cash flow of the business, by adding back one-time, unusual expenses, owner’s discretionary expenses, and non-cash expenses. Whereas the tax returns are mostly consistent within this context, the P&L, relative to the tax return, is often not ‘comparable’ (setting aside altogether the issues of accrual vs. cash reporting)

In other words, once the business valuation is completed and the P&L is later ‘transferred’ to the tax CPA and the ‘numbers have been re-worked’  – in the owner’s desire to minimize tax payments – the stated profit is often considerably lower, and thus, they are not supporting the previous valuation anymore.

Outcome? An over-valued, non-sellable business – and a very disappointed owner!

Solution? Until a tax return is completed at the beginning of a year, a seller should always provide two years of Profit & Loss. For example, if the valuation would be executed in the first quarter of 2019, with the tax return 2018 not completed yet, the seller needs to provide the 2018 and the 2017 P&L, in addition to 2017 and 2016 tax return. This will allow the valuation firm to compare the 2017 P&L vs. the 2017 tax return and to determine, somewhat, how the numbers will change from P&L to tax return.

A second part of the solution is to contain ‘seller greediness’.

Naturally, nobody likes to pay taxes, however, ‘driving down the profit’ to a minimum level from a P&L to the tax return, will devalue the business, in essence, making it less attractive to an investor. Quite often, it is considerably more profitable to pay the additional $0.30 to $0.40 of taxes on the additional dollar of income than to forgo three dollars in the business sale process for that extra dollar of profit.

In sum, when valuating a business in preparation for a sale in the early part of a calendar year, a little bit more company documentation is required to establish a truly valid valuation – not doing so will only lead to an unsellable business, long waiting times and a very disappointed business owner!

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About A Neumann & Associates, LLC

Neumann & Associates, LLC is a professional mergers & acquisitions and business broker firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge base in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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Client Testimonials

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

Double Diamond

“Used A Neumann & Associates to sale my business. could not imagine having done it with out the patience and experience Gary provided. Thanks Gary,”

Dennis Frazier

“Working with Marc and his company was a pleasure. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

Douglas DiCeglio

“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
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Contact A Neumann & Associates, LLC

If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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