Most every business that I have worked with over the last 25 years has what I like to call “The Unknown Product.” Every business has this product. But, most business owners don’t even realize they have it, how to maximize it, or how to take advantage of it.
That product is the business itself. Yes, you heard me right, the business itself!
When I tell clients that, they always ask, “What do you mean by that?” There are a couple ways to build a business. First, you can build a business that will help you pay your bills and provide you a living. The second, you can build a business that becomes an asset that can be sold down the road and become part of your retirement plan/estate.
When offering options to clients, I tell them I prefer the second one. This is the strategy I’ve used for Cruise & Associates.
Building a business to become an asset is easier than you might think. Some of the steps to take are as follows:
First, keep good financial records. These include monthly financial statements.
Second, it is important to report all income. The more profitable the business is, the easier it will be to sell down the road. Here’s an example. A business owner didn’t report all income received from their business. A few years later, a prospective buyer came along requesting profit & loss information to apply for a business loan. The bank would not give them the loan due to poor cash flow.
Third, treat the business like it is a separate entity. That means you should take your salary and some distributions but don’t treat the business checkbook like a personal checkbook. The IRS likes you to keep it separate, and so do the courts. It makes a better, more valuable product to sell down the road.
Fourth, deduct reasonable and true business expenses. Once again, the more profitable the business, the more it is worth. And the more you can sell it for!
In reality, most people don’t need to start to worry about selling their business until roughly three years before they want to retire. Normally you will need to provide financial statements and tax returns for the last 2-3 years for buyers, banks, accountants, and business brokers to make a decision.
NOTE: This information should not be considered as tax/legal advice. You should consult your tax/legal advisor regarding your own tax/legal situation.