Six Ways to Destroy the Value in a Business
- Cash Sales: Ensure that a large percentage of your revenue is in unrecorded cash sales. Food trucks, car washes, and restaurants are notorious for having a large amount of cash sales. By doing so you will reduce the corporation’s taxable income. You will also skew the operating margin, the EBITDA margin and the gross margin. This will ensure that a potential business buyer will decide your company is unprofitable and will offer less.
- The Boss is the Business: Ensure that your business cannot run without you. Keep all the power and all the work. Don’t hire anyone who will interact with your customers. Don’t hire anyone you can trust to carry out your directions. Ensure that you know everything and do everything. You can’t ever take a holiday because the business couldn’t exist without you!
- Owner discretionary expenses: Owner discretionary expenses reduce taxable income. The potential buyer usually “normalizes” owner discretionary expenses. However, as the number and amount of owner discretionary expenses increases, the financial information becomes less believable. Good places to hide owner discretionary expenses include travel costs, vehicles when not strictly required for business expenses and meals and entertainment expenses. There is also the catch-all bucket of owner discretionary expenses known as office supplies. Expensing your kid’s school supplies is not a valid business expense, but it does reduce your taxable income.
- Volatility: Ensure a large variability in revenue and expenses on a year-over-year basis. A large range in the variability in revenue or expenses ensures a buyer cannot have faith in your customers or in your business practices. Large variations in revenue when examined over time leads a buyer to assume customers are not loyal or don’t come back or can’t expect to receive good customer service. Large expenses in different accounts ensures the potential business buyer will conclude management does not focus on creating repeatable practices keeping expenses at a maximum.
- Change accountants often: Frequently changing your accountant, every year or every other year, ensures that a potential business buyer will reach the conclusion that the business owner is unable to keep a professional working relationship with their accountant. This conclusion will also let a potential business buyer know there is little assurance or continuity in the financial statements
- Use underqualified accountants: Ensure the person doing your financial statements and filing the corporate tax returns is under qualified and is a related party. The best would be your son’s girlfriend’s mother’s uncle who took a bookkeeping course back in 1992. This ensures that your potential business buyer has little faith in the financial information of your company.
Destroying business value is really easy to do. Creating business value is hard. Make wise choices that create a business in which a new owner can step into. The successful business has customers who can expect consistent quality in product and services, who come back repeatedly and give glowing referrals to their friends. A successful business is one where the business owner can take holidays without worrying because the employees know what to do and how to do it. A successful business attracts buyers who review the consistent financial information, consistently prepared by a qualified party, with a focus on positive returns on equity and assets.