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Leave Your Business in Top Financial Form for Next Generation of Owners

For those in the food and beverage industry, transferring ownership is a discussion best served earlier than later.  Leaving a business in the best financial shape for the next generation of proprietorship requires open communication and transparency among all involved principals, regardless of whether the company’s future lies in the hands of family members or non-relatives.

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For those in the food and beverage industry, transferring ownership is a discussion best served earlier than later.  Leaving a business in the best financial shape for the next generation of proprietorship requires open communication and transparency among all involved principals, regardless of whether the company’s future lies in the hands of family members or non-relatives.

For those in the food and beverage industry, transferring ownership is a discussion best served earlier than later. Leaving a business in the best financial shape for the next generation of proprietorship requires open communication and transparency among all involved principals, regardless of whether the company’s future lies in the hands of family members or non-relatives.

Understanding the tax ramifications associated with change of ownership is paramount, as is strategizing how best to leverage taxes while the business is in transition. Professional legal and accounting assistance can guide businesses toward the most financially prudent avenue to structure the transfer. The importance of this aspect cannot be overstated. When working with clients in the food and beverage industries, advisors in the blumshapiro food and beverage division work with sellers to conduct the due diligence necessary prior to their clients placing their business on the market. This process ultimately ensures all accounting, legal, human resources and information technology elements are in the proper shape for transition. All too often, these critical aspects are placed on the back burner by owners, owing to busy schedules conducting day-to-day business.

A full business valuation is essential to a succession plan as it will compare your company against industry peers and provide a snapshot of the broad economy’s impact on your operation. A financial ratio analysis can benchmark your business against others in the regional food and beverage industry and works to take the temperature of your financial strength. Strong working capital and current assets that can keep ahead of current liabilities is where you want to be.

Recognize that a typical current ratio between assets and liabilities for food and beverage manufacturers is 2:1; therefore, the level of cash, accounts receivable and inventory is two times greater than current liabilities, such as accounts payable, accrued expenses and portion of debt. Should a family be in line for succession, a thorough valuation will make certain the business is not overvalued; if that is the case, the next generation may be saddled with debt that could ultimately lead to the downfall of the business.

Inventory management is another critical spoke in the due diligence wheel. The amount of inventory that is genuinely “on the shelf” and its true worth must be accurate. If not, the business you worked so hard to make a success of can be left in a weaker financial position for the next generation of ownership. Regular periodic inventory should be strongly considered by all in the food and beverage industry, regardless of whether a transfer of ownership is imminent or nowhere near being on the table. It just makes good sense.

To properly assess earnings capacity it may be necessary to make adjustments to balance sheets or income statements to “normalize” these reports. By adjusting or normalizing statements, a more accurate economic picture of the business is presented. For example, some small business owners may pay themselves more or less compensation and prerequisites than a comparably qualified non-owner would be paid. Items of income or expense of a non-recurring nature might also distort the earning capacity of a business.

And now on to the topic of family members on the payroll, also referred to as “family welfare.” They may be your grown children or grandchildren but do not make the mistake of paying them more than market compensation. This only creates a dependency in family members for a particular lifestyle – when you bring in family, pay them what they are worth. Not only does an inflated salary foster unhealthy reliance, it also leaves the company in a weaker financial position when the time comes to sell.

If you’re looking to transition your food or beverage business, be sure to plan ahead and know you can rely on the experts at blumshapiro.

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