South Florida Business Climate in 2023
Business owners in South Florida who are thinking of selling their business in 2023 face unique advantages compared to business owners in other parts of the country. Almost 1,000 people per day are moving to Florida, and this trend is expected to continue at least thru 2025. Many of these new residents are attracted to Florida’s low taxes and business-friendly regulatory environment, and end up purchasing businesses to realize their entrepreneurial dreams. Despite higher interest rates having a negative impact on business valuations, South Florida business sales have never been stronger.
Prepare Prior to Meeting Business Broker
South Florida business owners seeking to take advantage of the strong business sales environment in 2023 may take preparatory steps prior to listing the business for sale. These steps include having an organized and coherent set of financials, de-emphasizing the seller’s role in the business, determining the accurate capital base (or cost basis) of the business for capital gains tax purposes, and obtaining a sales tax certificate of compliance. Accomplishing these tasks helps the business broker determine the best possible asking price and prepares the seller for the tax ramifications of selling their business in 2023.
The most critical step that a business seller must take prior to putting their business for sale in 2023 is having an organized, accurate, and up to date set of financials. The financials should consist of the last three years of tax returns or profit and loss statements. Significantly, the financials should include the 2022 profit and loss statement if the 2022 tax return is not yet available. Most business buyers prefer to see a trend of three years worth of financials. If business was interrupted in 2020 due to the Coronavirus, then 2019 financials should be provided so that the buyer understands how the business performed prior to the interruption from the Virus.
Identify Adjusted Owner Benefit
- The purpose of having an organized set of financials is to derive the adjusted owner benefit of the business.
- The owner benefit refers to the true economic profit derived from the business by a working owner.
- This incorporates the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of the business, and then adds back ‘hidden assets’ such as the owner’s salary, personal expenses of the owner that are expensed through the business, unrecorded cash, and any other necessary adjustments to reflect what a working buyer of the business would expect to receive in annual owner benefit.
- Many business owners have a large amount of these ‘hidden assets’ – especially personal expenses that flow through the business – but do not accurately track them in their financials.
- A prepared business seller may significantly increase the realized value of their business by identifying these hidden assets in a way that is coherent and provable to a reasonable buyer.
De-Emphasize Seller’s Role in Business
A business that is operated in a manner that is ‘owner-absentee’ will sell for a significantly higher purchase price than a similar business that is operated by an active owner. This is because an ‘owner-absentee’ business is not tied to the value of the individual owner (or seller) who eventually will leave and need to be replaced (if even possible to do so). The less personal interactions the seller has with customers, suppliers, and employees, then the less likely it is that the buyer will fear that the business will suffer after the sale. If buyers are worried about their ability to establish the same personal relations with the customers, suppliers, and employees of a business then the lower the price they are willing to pay for the business.
Reduce Seller’s Personal Interactions with Customers Prior to Sale
For these reasons, it is crucial that a business owner de-emphasize their own role in the business (if possible) prior to its sale. For example, business owners should reduce their schedule and time spent physically in the business, reduce their personal interactions with customers, and avoid having their personal cell phone number as the point of contact for business customers. Such steps will show the buyer that the seller is not irreplaceable, and that the seller will cooperate with a smooth transition after the sale occurs.
Obtain Accurate Taxable Cost Basis of Business
An important preparatory step for a potential business seller in 2023 is determining the cost basis of the business. The cost basis is necessary when calculating potential capital gains taxes from the sale of a capital asset (such as a business or real estate). The current long term capital gains tax rate is up to 20% (but only up to 15% for capital gains less than approximately $500,000). The capital gain is derived by deducting the capital asset’s cost basis from the proceeds received from the capital asset. The cost basis of a business asset is the initial investment to acquire the asset (including start-up costs) minus any depreciation taken on that capital asset. Business owners may review their 2022 tax return and consult with their accountant in order to determine the cost basis for their business, and prepare for future capital gains tax liability.
Obtain Sales Tax Certificate Prior to Sale
Prior to the sale of most businesses which sell products or services subject to Florida’s sales tax, a buyer will request that the seller present a sales tax Certificate of Compliance from the Florida Department of Revenue. This certificate ensures the buyer that the seller has no outstanding liens or liabilities with the Florida Department of Revenue. Having this certificate in place and sharing it with potential buyers saves time and hassle down the line for the seller. It often may take a few weeks to receive the certificate, and having it prepared well before closing will give the buyer assurances that the seller is in full compliance.
By taking preparatory measures to organize their financials and business records, as well as de-emphasizing their personal role in the business, business sellers will realize maximize value for their businesses in 2023.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.