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Before Selling Your Online Business, Get Your House in Order!

Posted by Carson Bomar in Articles

One thing we see a lot when we meet with potential sellers of online businesses is a disconnect between the attractiveness or appearance of the business in the marketplace versus the actual value of the business.

There are a lot of considerations we place in Packaging and Marketing a company. When it comes to Buyers and Banks, we know exactly what they are looking for and expecting in a target. It is our job to make sure they see the things that they want to see, as well as those that are necessary, to orchestrate the desire to finance and close the deal.  Many brokers fail in selling Internet Businesses because they simply don’t understand the nuances of an Internet Business, so they miss out on the opportunity to provide the exact information the professional buyer needs. We ensure that the important information on the target is in front of the buyer upfront so that he/she can see the true value of the business.

Personally having owned dozens of businesses, I truly understand the desire to pay absolutely as little as possible in taxes. It is very common to bury the profits in the many available line items of the financial statement. It is then assumed that you can tell the potential Buyer about all the hidden treasure. This is partially the case. Even though Buyers know the cash flow is there, they might not necessarily know how much is there. They will definitely discount the price because of this. Unfortunately, that is only half the problem. When financing a deal is involved, it is the bank that’s making the final decision, and they do not consistently allow these add backs. Lenders will give the add backs consideration, but this consideration usually does not work out so well for the Seller. There is a saying among Bankers that goes, “They can either make the additional money when they file their tax returns or they can make it when they sell their company, but not both”. This is mostly true, but there is a way to have your cake and eat it too, but only a Business Broker with in-depth knowledge of the inner workings of financing underwriters will have the know-how to get you where you need to be.

When it comes time to sell, the bank requires 3 years of tax returns. They put a lot of emphasis on the last 2 years. The latest year leading into the sale must reflect the hidden numbers, because if they don’t, the transaction is walking with one foot in the bucket. The previous year needs to reflect a substantial portion of those numbers, and if it is necessary to facilitate the loan with a bank, an amendment will need to be filed for the 3rd year tax returns in order to bring them in line with expectations.  

Understand the profit column on the tax return isn’t the final step in the eyes of the bank; it is merely the first. The bank will recognize the following

  • Profit
  • Owner’s compensation W2 or 1099
  • Interest
  • Depreciation
  • Amortization (when applicable)
  • Pension Plans / Profit Sharing / Retirement accounts if directed to the Seller
  • Payments to family members if they are not working or an adjustable addback based on replacement value.

These are guaranteed addbacks and will be factored into the multiple used to value the company. The lenders will also be semi-lenient with other items (such as a vehicle that is written off or health insurance) if the Buyer can prove he doesn’t need it (if for example his wife has it through an employer etc). If the addback list becomes lengthy, the bank will disregard it entirely, so it is important to keep it to as little as possible. Again, only an experienced Business Broker can walk through this minefield of lender requirements and at, we’ve been there – over and over again.

And here’s a clue: Under no circumstances should it be divulged to a Bank or Buyer that addbacks are outside the boundaries of reasonable. Home electricity bills, payments on a boat or a house, etc. are areas to stay away from as it can kill the entire addback list. Banks will kill a deal quickly if they distrust the integrity of the numbers.

One thing to keep in mind is that the attitudes of banks change with the economy. In either an economic downturn, or a red hot overheating economy, they will tighten the rules and increase the obstacles to lending. In an emerging or stable economy, they tend to become more aggressive in their lending activity.

If you are planning to sell your company, call us early in the game and we can help you maximize your sales price. Not using a Business Broker that’s adept at the game of financing a deal can be a costly mistake.