If you’re thinking about selling your small business, there are a few questions to think about before doing so. One of the first questions to consider is “how dependent is our business on my (owner’s) day-to-day activity?” Another is “how organized are our operations? And finally, one of the most important questions is “how easy is it to interpret our financials?”

We’d like to discuss one aspect of this last question that has been a challenge for some of our clients over the past two years. Often, when a business owner builds a business, he or she may have the opportunity create a sister company to assist the original company. When the owner does this, they may run both businesses out of the same entity, simply creating a DBA (Doing Business As) entity or filing for a fictitious name. There are several reasons for doing this, such as not wanting to form a second entity that would create additional expenses like start-up documents, franchise fees, etc. It seems like a great solution, and many small business owners operate this way for years without much problem. But when they are approached by a buyer or a need to sell one of the businesses, it almost always creates problems.

One primary focus of all buyer’s due diligence is a thorough examination of a company’s financials. While P&L reports are important, the number one item that most buyers want to evaluate to determine a company’s financial health is the tax return. If multiple businesses are run out of the same entity, it makes it nearly impossible to verify which income and expenses belong to which company. And when this happens, the buyer is forced to trust the seller’s word and explanations without any verification. No matter how trustworthy a seller may be, it is extremely rare for a buyer to pay an optimal price for a business without verifiable financials. A buyer may pay a discounted price to cover their risk, but an industry-standard price is unlikely. So, we recommend that you avoid running more than one business out of one entity.

In addition, most lenders require three years of financials to determine the health of a company, so we also recommend that all business owners begin preparing for a sale two to three years before they start the process of selling their company.

There’s an old proverb that says, “Every business has one of two destinies, it either sells or closes.” It’s our job to help you make sure your business sells and we have several tools we use to help you evaluate how prepared you are to transition to another owner. If you’re thinking about selling your business in the next three to five years, we’d love to discuss it with you.