PREPARE THE BUSINESS FOR SALE
Start with this: Because of generous write-off provisions in the 2017 Tax Cuts and Jobs Act (TCJA), the accounting records of SMEs will invariably show a higher level of taxable income than the tax returns. That results for variety of reasons. One is accelerated depreciation allowed on tax returns; another is the 20% “qualified business income” deduction provided for in Sec. 199A of the TCJA for nearly all SMEs.
This is why we strongly recommend that SMEs keep accounting records that are consistent with economic reality. Let the tax chips fall where they may on the tax returns. . .but keep the TCJA out of generally accepted accounting principles. Among other things, keeping accounting records in accordance with GAAP will result in notably higher value for the business than if a valuation were prepared using TCJA numbers.
That said, preparing a thirty-year-old business for sale has two things in common with preparing a thirty-year-old house for sale: Done right, it takes time, and it costs money. The older the business, the more time it usually takes to get the company ready to sell. For a business with, say, twenty or more employees, we recommend allowing at least two years to get the company ready.
Yes, that is quite a while. Yes, it is not inexpensive. But the time will result in an easier deal to close and a higher price for the seller(s). In particular, there are compliance issues in HR that usually merit significant attention. In addition, a company that expects to be sold will often get, not an audit of its financial records by an independent CPA firm, but what is called a ‘review’. (A third level of ‘attest’ service provided by CPA firms is a ‘compilation’; it’s not exactly GIGO [Garbage In, Garbage Out], but it doesn’t miss it by much.)
We recommend that, at least two years before a company expects to sell, it have its books and records reviewed of by an independent CPA firm. That might be the firm that has prepared its tax returns for many years. More often, though, in our experience, the CPA firms that offer tax services to small-business clients seldom offer attest services (audits and reviews). That means that the owner(s) of a business that will be selling in a few years have to find another CPA firm. That’s not a bad thing, but owners should not be surprised if those who have prepared their taxes for many years are not exactly turning handsprings over another CPA firm coming into the picture.