Maximizing the Value of Your Business

Business Succession Planning II

By: Eric Treworgy 

If you’re like most small business owners, you’ve probably focused intensely on minimizing your tax liability in order to preserve cash and reinvest in your business. Maybe you don’t pay yourself a regular salary but instead write the occasional check to cover personal expenses and label it an “owner draw.” Often, businesses don’t even know how profitable they’ve been until it’s time to file taxes.

That approach might work—until it’s time to sell.

When you’re ready to exit your business, potential buyers will want to see exactly how much income the business generates for you. Why? Because business valuation is directly tied to what’s known as Seller’s Discretionary Income (SDI)—the total financial benefit you’ve received from owning the business. A quick online search of SDI will give you plenty of insight, but here’s what you really need to know:

Start Paying Yourself

It’s never too late to start documenting your income properly. One of the simplest and most effective ways to show a buyer (and their bank) that your business is profitable is to add a clear line item in your budget for owner compensation.

Better yet, rather than paying personal expenses directly from your business account, transfer money to yourself and pay those expenses personally. This method clearly shows that the business is generating income, which boosts your valuation. Yes, you may pay more in taxes—but that cost is minimal compared to the return you’ll get from showing strong earnings when it’s time to sell.

If you’re in a special situation, such as receiving Social Security and needing to limit reported income, consult your accountant. They can help you strike the right balance between tax planning and presenting an attractive, profitable business to a buyer.

Cost of Goods Sold (COGS) refers to the cost of materials or ingredients used to produce your products. It does not include your or your employees’ labor. Many small business owners unknowingly inflate their COGS by including personal purchases or unrelated expenses—making the business look less profitable than it is.

Buyers will scrutinize your profitability. They typically expect to see COGS at 30% or less of total sales (though this varies by industry). If your COGS is high, it may be because:

• You’re absorbing personal expenses in business purchases
• You haven’t raised your prices in years, despite inflation
• You’re not tracking inventory or waste accurately

Take a fresh look at this area—it’s one of the biggest levers in boosting your business’s market value.

While reviewing COGS, evaluate your suppliers and your product mix. If you’re in retail, prune slow-moving or low-margin items. Focus on bestsellers with high profitability, and brainstorm how to grow sales around those winners.

Also look at shipping—both incoming and outgoing. Small changes in shipping strategy or negotiating better rates can result in significant savings and stronger margins.

Most buyers aren’t just buying what you’ve built—they’re buying what it could become. Unless your buyer is paying 100% in cash (which is rare), they’ll likely need financing. That means the business must generate enough income to cover both personal expenses and loan payments.

If your current financials don’t show that level of income, you need to paint the picture of how the business could grow:

• Are there untapped markets?
• Could you expand your product line or services?
• Is there potential for online sales, events, or partnerships?

These ideas not only help prospective buyers envision growth—they might even help you generate new revenue in the short term while your business is on the market.

So don’t wait until you’re ready to sell—start now. The effort you put in today could make a six-figure difference tomorrow.

About Eric Treworgy

Would you like help getting your numbers in order or identifying areas to grow value? Reach out—I’d be happy to connect you with free, confidential advising services to guide you through the process.

Eric keeps an office at URCI and is a business advisor for Coastal Enterprises (CEI) in Brunswick, Maine. He has more than 35 years’ of entrepreneurial experience and specializes in business start-up, strategy, sales and marketing, retail, food and beverage, computer software, and operations management. Through CEI, Eric offers free confidential business advising to help navigate the start-up process, your succession planning, and everything in between.