Archive for August, 2009

When it comes to reporting income, you, like most small business owners, want to pay as little in income taxes as possible. Consequently, you and your accountant actively look for ways to delay reporting revenues and accelerate reporting expenses.

When it comes to selling your business, you have just the opposite objective. You want to show the business making a large profit for many years.

Buyers usually look at the tax returns for the previous two to three years. This is why it is so important to start the process long before you want to sell your business.

There are three ways that you and your accountant can accomplish these conflicting objectives:

• Identify and create an audit trail of those items that are expensed on the business tax returns but will not necessarily be incurred by a new owner, i.e., personal use of a business vehicle.
• Do not deduct items which are personal in nature for which you do not wish to create an easy-to- follow audit trail.
• Make sure that all income is being reported on the tax returns

The tax return is one of the key documents that buyers will use when they are deciding if the business is really earning enough money to justify buying the business and how much they should pay for the business.

Small businesses usually sell for between one to three times historical earnings from tax returns. Every dollar of income that is hidden in the tax returns can mean one to three fewer dollars in your pocket when you sell your business.

Last Saturday, I had the honor of being a guest lecturer at an Entrepreneur class at Wake Tech. Many of the students were considering starting a business with a partner. 

I shared with them both my personal experience and the experience of many of my clients over the years.

Having the right partner can make being an entrepreneur less lonely and less challenging. But having the wrong partner can kill your business and/or if the partner was your friend, kill your friendship.

There are at least three criteria you should use before deciding to bring in a partner:

1. You can trust the prospective partner with your wallet and checkbook.
2. The prospective partner brings something to the business that you are lacking.
3. Both you and the prospective can agree upon a defined set of responsibilities and how decisions will be made.

If you know your prospective partner well, this process can go very quickly. If you do not know him or her well, consider “dating” for a while before a decision is made on becoming a partner.

After my discussion, at least half of the students who wanted to bring in a partner early decided to hold off on that decision until they did some due diligence. Perhaps my Saturday morning talk saved at least one budding entrepreneur from making a terrible mistake.