So You’re Ready to Sell Your Business... or So You Think.
For many business owners their ownership interests are their single largest asset, and they are betting on a liquidity event to help fund retirement. More often than not, owners are so focused on the day-to-day operations of their businesses they overlook a well-planned and carefully executed exit strategy.
“Clients that take a proactive approach to planning for a sale transaction achieve better overall results,” said John Hull, Managing Director of The Fortune Group, an investment banking firm located in Clayton. “Proper planning typically results in a higher sales price, and, equally important, reduces the chances of a deal blowing up before closing.”
To implement a successful exit strategy and achieve top dollar for your company, you should, at a minimum, implement the following value drivers.
- Get Started Early. Get started at least three to five years before you plan to market your business. Potential buyers aren’t just going to look at your company’s performance over the last 12 months. Instead, they will be looking at trends in your company’s financial performance over time. They want to see how your company has performed in good and bad times.
- Quality Information. Buyers want and expect quality information, which includes properly prepared independent accrual financial statements, customer lists, tax returns, corporate minutes, and interim financial statements. Information is the key to a successful transaction. While it may not necessarily increase your sale price, a lack of quality information will certainly yield a much lower purchase price.
- Taxes. When a transaction is contemplated, oftentimes taxes are an afterthought that get “sorted out” after the transaction closes. Tax liabilities can be significant and can take away from your sale proceeds, but with proper planning this liability can be minimized. It is important to start thinking about your tax strategy both from a business standpoint as well as from a personal/estate standpoint early on in the process.
- Decrease Your Company’s Risk. Elevated levels of risk create uncertainty in your business and detract from the price buyers are willing to pay. Two common areas with elevated levels of risk are:
- Customer Concentrations. Companies are often built around one, two or three customers that account for a significant majority of the company’s revenue. Sometimes these relationships are not governed by a written contract, but rather an understanding between the company and the customer. You need to keep these “core” customers, but also diversify your revenue base so that your company’s performance isn’t so closely tied to a few customers. The same can be true for supplier concentrations.
- Employment Agreements. Are your company’s key employees covered under a legitimate non-compete agreement? If not, what’s to stop them from going down the street and starting a competing business just after your sale? Buyers need reassurance that the business’ key employees are locked in; if they are not, buyers will offer much less.
- Increase Profitability. When you market your business you will want your company’s operations to be as lean as possible. This includes eliminating any personal expenditures and unnecessary items being run through the business. Additionally, it is important that you pay yourself a “reasonable salary.” Potential buyers will perform their own profitability analysis with seller add-backs for non-important items, but the more you can do on your end to eliminate these early, the more comfortable potential buyers will be with their own analysis.
- Obtain a Quality Business Valuation. Having a business valuation performed at the beginning of your planning process will allow you to do two things: 1. obtain a base value for the business so you can measure your exit strategy’s success, and 2. the valuation analyst can point out specific value drivers to which your business is particularly sensitive. Working closely with your business valuation analyst will give you additional items to improve upon, and help you monitor your success over time.
Consider these as six key starting points, not an all-inclusive list. Don’t wait until you want to retire to start thinking about an exit strategy. Proper planning and execution of your exit strategy will not only help maximize your purchase price, but will also help streamline your negotiation process, eliminating many headaches along the way.
To discuss an exit strategy for your business, schedule a meeting with Bryan Graiff, Principal, Transaction Advisory and Litigation Support.