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4 Steps a Business Owner Can Take to Get from Selling, to Sold

12.21.2017

Many professionals working in the M&A industry feel that in terms of the bull market clock on higher multiples, we are at 10 o’clock and any downturn in the economy or a stock market recession could cause the clock to quickly strike midnight. That could result in a number of business owners holding a pumpkin again, similar to what happened prior to the Great Recession in the late 2000s. 

There is still time to take advantage of some of the highest transaction multiples in history and attract the right buyer that is sitting on dry powder looking to make an acquisition. For example, the owner of a $80 million distribution business recently prepared to make the biggest decision of his life by taking the following steps to construct a successful exit strategy.

1.   Perform a business valuation

Before deciding to sell, the business owner wanted to know the approximate value of his business. Business valuators used proprietary discounted cash flow models and recent transactions in the industry from researching their database to estimate an approximate selling price range that the owner felt was a good value for his business.

2.   Calculate after-tax proceeds and, if applicable, review estate plan

After determining an approximate value of the business, it is important for the owner to understand the amount of tax that will be paid upon the sale. Tax professionals can prepare various scenarios to show the potential after-tax cash flows upon exit and coordinate with the owner’s estate attorney. These calculations usually factor in different transaction structures and the optimal strategy for both the buyer and the seller. 

3.   Prepare a sell-side quality of earnings report

In the example, once the owner determined that the estimated after-tax proceeds were sufficient for his retirement needs, he proceeded with the sale process. The next most important step was to get the owner’s financials in order. Businesses wanting to sell should have reviewed or audited financial statements available for potential buyers as a minimal starting point. However, it’s extremely important to remember that these statements are not sufficient to prepare the owner for a successful transaction and could significantly lower the value of the business in the eyes of a buyer.

Owners that are serious about selling should perform a sell-side quality of earnings review. A quality of earnings report will help to prepare the company’s adjusted earnings before interest, taxes and depreciation (“EBITDA”). This is most often the metric that is used by potential buyers to value the company and is usually much higher than the regular EBITDA or net income reported on the financial statements or in a tax return.

4.   Recruit the right team

It is important to have the right transaction team of professionals working with the owner and their business. These professionals all work together to develop the optimum negotiation strategy for getting the deal closed for maximum value. For example, although a business owner might already be working with a good corporate attorney, a transaction advisor can help the business owner select a transaction attorney and an investment banker who specialize in sell-side transactions within the owner’s industry and might be better suited.

Throughout the transaction process, a business owner can benefit from continuous transaction advisory support and advice. Time often kills deals, so having the right people in place early in a sale process can help prevent the clock from striking midnight before the company can be sold.   

Team

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