The hard truth is that approximately 20 percent of businesses fail by their first year, and nearly half by the fifth. The critical elements that set the survivors apart are good cash flow and smart financial management. For most business owners, the complexities of managing the books and tax compliance pull time and focus from growing their companies.
Partnering early with a good CPA firm will prove invaluable, not only at this crucial time, but throughout the company’s life. A CPA can provide guidance on setting up the best legal structure, creating a business plan, determining start-up capital requirements and the cash-flow necessary to achieve revenue projections, break-even points, pricing strategies, and budgets to achieve and maintain margin goals. It takes these elements off the founder’s plate and allows them to concentrate on their core business while setting up their companies for success in the years to come.
Early Growth Stage: The First Three to Five Years
When you start a business, you should already have the end game in mind.
While that’s sound advice, the reality is that most business owners wait too long and get caught off guard by the myriad details and decisions associated with selling or passing a business on to employees or family members.
The key to receiving the maximum amount for your business when you sell it is getting started on the right foot by setting your business up correctly and shepherding it every step of the way. A CPA is the ideal partner to guide owners through the tough decisions and past the hurdles that occur during each stage of a company’s lifetime.
Choosing the best legal structure: You have options, and can structure your company as a sole proprietorship, LLC, partnership, or S Corp. Your accountant can provide clear insight into the nuances and tax consequences of each, including the ramifications when you sell your business.
Implementing the right accounting software: The sooner you set up accounting software, the better. It can help you streamline operations, track payments and cash flow, and manage finances in real time.
Pro tip: Start with a pricing strategy that reflects the real value of your products and services. In the early years, entrepreneurs often pursue customers by offering a better price than competitors. It feels justified because of lower overheads and the real need to build a customer base. But in most cases, that strategy backfires. Initially, clients are attracted to the lower prices, but as the company grows along with your overhead, prices must eventually be adjusted to where they should have been all along, and the clients that were lured by price leave.
Middle Stages: Stay on Track through Expansion and Stabilization
Your accountant should be your collaborator throughout the year, not just at the end of the year. Work with your CPA to provide you with periodic check-ups to confirm that you are maximizing operations and profits and minimizing risk, profit leaks, inefficiencies, and taxes.
Keep an eye on your sales and growth goals and determine if they are aligned with your timeframe to sell at maximum value. It’s important to decide how big you want to become and stick with the plan. Now is the time to set an end date that meets your unique needs.
Pro Tip: Even though this should have been part of your strategy all along, it’s rare not to have clients and services that are no longer a good fit. Analyze your client base, product inventory, and service offerings. That means parting ways with products and clients that don’t meet your pricing structure or business plan. The focus now is to replace them with those that do. At the same time, review policies, procedures, and people to make sure everything is aligned to match your vision and mission.
End Stages: Maturity and Countdown to Retirement
At least five years before you make the transition to retirement, prepare a formal plan that will ultimately enable you to maximize your company’s value, mitigate taxes, and prepare yourself, customers, employees, and your family for the change.
Three years prior to selling, look at your customers and determine which clients will most likely be maintained after the transaction. Start refining and streamlining your client base accordingly.
Your accountant will work with you to value your business, factoring in the type of business, inventory, equipment, reputation, location, and many other parameters. Other subjective factors that will influence the value include whether you are exiting immediately or staying on to help with the transition.
Options for payment structure: You will examine a variety of methods to transfer ownership, which will depend on the scope of the transaction and the type of business. For instance, you may sell the company outright or over a period of time via installments. You may intend to transition the company to a family member(s); however, it’s important to consider whether or not they are willing, capable, or ready.
Pro tip: Reduce the stress of transitioning your business with the help of a CPA. As a business advisor, your accountant can facilitate sensitive discussions and provide objective third-party guidance for the many transition scenarios available to you, including tax implications, so that you arrive at the solution that is best for you.
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Bob Blasiotti, CPA, is a Director at Fischer Cunnane Certified Public Accountants & Consultants. With more than four decades of experience, Blasiotti provides comprehensive business growth and profitability advisory services for small and mid-size businesses. Reach him at [email protected].
