Guest Post By Jason Savedoff, RVA Advisors

When you're selling any business, putting a value on your hard work is a challenge. 

Dear Jason,

My husband and I own a successful restaurant in the city.  But as you know, this business really takes a toll on an operator, both mentally and physically.  So, after almost 15 good years we think it's time to call it quits and sell the business.

Like many owners, we've taken certain liberties with the money, especially the cash, that has come into the business over the years.  While this has been a positive thing for us during our ownership, our CPA has told us that since our tax returns show little to no profit most years that our business is basically worth only what we can sell our equipment for.  In looking at what used restaurant equipment sells for online, that would only be about $5,000!

So, my question is weather it's even worth it to list our business with a broker or if it's better to just liquidate and close the doors?

Thanks,
Amy S., Richmond

Dear Amy,

As you're already aware, your predicament is as common as common can be... I've seen business brokerage trade publications that poll their subscribers (business brokers) report that more than 90% off all small businesses use a "tax strategy" to decrease the amount of profit they show on their tax returns.  While this strategy can be very helpful with your tax exposure while you're an operator, any prospective buyer of your business will want to see your tax returns during the due diligence process and will rely on them as the most official proof of the profit (and loss) your business has taken.  Thus, if you show significant losses on those returns you certainly will expose yourself to some uncomfortable questions during your buyer's investigative process.

BUT, returns that show losses are not the ship-sinking torpedoes many CPA's believe them to be, particularly in the case of restaurants and retail businesses.  As part of RVA Advisor's services to sellers we work with accountants to provide proof of business success other than tax returns.  This may include point-of-sale records, a reorganization of Quickbooks classifications to separate discretionary expenditures from vital business needs and the production of a marketing package that tells the true story of a business's success.

That said, Amy, it's much easier to sell a business that shows robust profit on its tax returns, which is why we recommend that business owners meet with a competent business intermediary (broker) who is also an accredited consultant, several years before a planned sale.  This gives us time to smooth out any speed bumps that could impede a future sale, and, just as important, gives us time to increase the value of your business, which will result in a higher market value when it comes time to sell.

-JS