For medium-sized family businesses, in contrast to groups, balance sheet policy ambitions consist primarily of maintaining financial resources in the business and regularly optimising the tax burden. Our KERN partner Thomas Dörr explains how the value of your company can be increased with targeted balance sheet adjustments.
“Those who have the duty to pay taxes also have the right to save taxes”.
With this sentence, no less a person than former Chancellor Helmut Schmidt gave his blessing to prudent businessmen to exhaust the possibilities of tax law within the given framework. So!
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Different with the sale of a company
However, if the company is to be sold - for example on the occasion of a planned company succession - other principles apply. In this case, the values of the company must be presented transparently. This principle also enjoys the highest priority with regard to the attractiveness of the company to potential investors. This applies above all to frequently occurring hidden reserves in the balance sheet. If possible, these should not remain silent. This principle remains correct even if the lifting of hidden reserves results in a higher tax burden in the short term.
Most important goal: the separation of the areas between the former shareholder and the company to be divested
In principle, the aim is to reduce the balance sheet total as much as possible through a balance sheet adjustment and to dissolve tax optimisations and pension provisions. All balance sheet items that are not clearly attributable to the company should leave the balance sheet. On the assets side, this includes vehicles and, somewhat less frequently, real estate, provided they are also used privately. On the liabilities side, a pension provision of the company owner is often the largest item to be adjusted. This should also leave the balance sheet by way of a reinsurance solution. As far as possible, shareholder loans should also be repaid or replaced at an early stage. The overriding goal is to clearly separate the areas of the former shareholders and the company to be sold in the run-up to the sale process. As a rule, this positive side effect alone improves the balance sheet ratios.
Whether assets or liabilities - Carry out market valuations
Is the Calculate enterprise valueAll assets must be checked for their realistic market value. Has the value of receivables been adjusted appropriately? Have inventories and stocks been valued realistically or has accounting leeway been used? In the run-up to the sale of a business it is generally important to keep inventories low and to clear them of old stock and slow-moving items. Fixed assets should also be checked for plausible market values or replacement values. In cases of doubt, an external valuation should be obtained. It cannot be ruled out that this may reveal hidden reserves as well as encumbrances. On the liabilities side, provisions must be checked for adequacy. For example, are warranty provisions realistic in the amount shown in the balance sheet? Is the use of savings provisions actually planned? In view of the intended sale, all major investments should be deferred anyway or the investment decision left to the new owner. In conservatively managed, profitable family businesses, hidden reserves are often found in the accounting of provisions.
The last three financial years are very important for the balance sheet adjustment
The entrepreneur should definitely start with the targeted balance sheet adjustment in good time. In the case of a company sale, the last three financial years are of particular importance. They are important for the Due Diligence by the acquirer. During this period, no significant long-term binding contracts should be entered into, which would burden the profit and loss accounts after the sale of the company. The departure from tax-optimised, conservative accounting may result in higher income taxes in these and possibly previous business years. At the same time, however, both the operating result and the key business figures of the company improve. The effect on the value of the company and thus the possible sale price is usually higher than the possible tax effect.
The last three business years are also in the foreground in the analysis of the past within the framework of the business valuation. They contribute significantly to the plausibility of the target figures. Since the Company sale valuation is nothing more than the “cash valuation” of the planned results, the purchase price that can be achieved later increases. The adjustment of the balance sheet helps to partially close the gap between the buyer’s and seller’s purchase price expectations.
Of course, the seller can leave the analysis and identification of the balance sheet reserves to the company valuer or investor. However, as everywhere else, the market for Corporate transactions fierce competition. Therefore, the first look at the figures must be right in order to attract the right investors and generate lasting interest in your own company. To optimise purchase price conditions, experience has shown that: Do good and talk about it!
For further questions on the topic of targeted balance sheet adjustment, please contact us by telephone at: +49 6196 - 52 53 957 or by e-mail to: doerr@kern-unternehmensnachfolge.com
TIPS for further reading:
Costs of a business succession or an M&A project
Talking helps, also with business succession
Love is blind - even when buying a company?
Selling your business - how to increase the value of your business!
