In a recent meeting of the San Diego Chapter of The Financial Executives Networking Group, renowned business broker, Steven Hanson, delineated the crucial points that every potential buyer must consider while purchasing businesses. He broke them down into three categories: those who are buying a job, strategic and foreign buyers, each boasting their distinct set of requisites.
A common thread through all three types is the buyer’s expectation for professionally curated tax returns and financial statements that are in sync. Steven introduced the concept of add backs, where some expenses can be reintegrated into the profit for valuation purposes. However, he warned of the red flags that excessive add backs can wave at buyers and banks.
Hanson also spoke about the significance of exit planning and how his organization guides clients to professionals experienced in the field. This helps maintain the accuracy of the evaluation process, keeping messy financial records at bay, which could otherwise become a deterrent.
The meeting also extended its focus towards sellers and their need to remain transparent. Hanson highlighted legal and regulatory compliances to be maintained by sellers, including tax returns, EDD standing, and payroll taxes. He broke down the difference between asset purchases and stock purchases for the attendees. Where asset purchases involve buying the assets of a business and incorporating them into a new company, stock purchases constitute buying shares of the business.
Another focal point of the meeting was HR compliance issues, especially, the correct classification of employees (W-2 and 1099) that can help circumvent potential legal issues. Hanson advised recasting financials to indicate W-2 employees for a comprehensive evaluation by potential buyers.
To prepare a business for sale, Hanson emphasized the necessity of transitioning from being the face of the business to creating a broader, more marketable brand identity. One of the proposed methods involved changing the name of the business from its association with the current owner and recruiting additional staff to reduce the reliance on the owner.
Maintaining precise financial records was underscored repeatedly, especially in terms of accounting for cash flow appropriately. Hanson strongly recommended professional help for managing financial statements and tax returns, discouraging a DIY approach in these crucial areas.
As a resource pool, Hanson advised business owners to seek guidance from business brokers. They can provide the requisite expertise in preparing a business for sale, which includes conducting valuations to derive its market value.
Summarily, the meeting asserted the criticality of strategic planning and financial readiness in prepping a business for sale. The insights provided during the meeting could serve as an invaluable guide to securing a successful sale and ensuring a smooth transition for both the seller and potential buyers.
About Steven Hanson
Mr. Steven Hanson is an owner of Transworld Business Advisors San Diego North.
He is a Certified Business Broker (CBB) and Business Broker Intermediary (CBI), concentrating on Main Street to Lower Middle Market for mergers and acquisitions. He has demonstrated proven leadership as a Divisional President in a Fortune 100 firm. He is a hands-on, results oriented business leader with a demonstrated track record including Directing the Sale of businesses, Exit Planning and fractional CEO.
Steven uses his background as a Fortune 100 Divisional President in the medical device field and as a founder of a small medical device company, to assist business owners in the preparation and sale of their business. His knowledge base also helps new entrepreneurs as they seek and review business to acquire.
With over ten years of business broker experience and forty plus years in the medical device field, Steven brings a strong background in exit planning, negotiation, due diligence, and business development to his clients.
Steven is a member of The California Association of Business Brokers (CABB) and the president-elect and Treasurer and the International Association of Business Brokers (IBBA).
