Your business is more than likely one of your biggest, if not THE biggest, asset you have. The better organized and prepared you are in your business, the higher value you can demand. That means your thought process around a sale starts right now, even if you don't plan to sell for years. Consider the following points to be keys necessary for having a successful transaction when the time comes for you to sell your business as well as a way to ensure you get the most value out of your sale.
"But I'm not ready to sell!" Having the mindset to be ready to sell at any time, but run it as long as you need, allows you to have the processes in place that potential buyers will pay top dollar for. Fixing things before a sale pokes holes into the organization that you don't necessarily notice until you go through the process. And, trust me, the buyer will notice one way or another in their due diligence. Arguably the most important point in this entire blog, make sure you can easily be replaced. If your business cannot operate without you, it is far from a flourishing organization which will hinder your ability to sell.
Buyers will price your business on past performance and trends, but your vision of the future will allow more context to the buyer for what it is they are buying. Finding synergy for the buyer, not making them look for ways to justify their purchase, puts you in the driver’s seat. This will avoid any grey areas in potential buyers’ minds as to what they are purchasing for the price they are willing to pay.
More often than not, business owners feel that certain things they do or don't do will affect their value, when in fact, it may not at all. What that results in is wasted time and dollars toward the wrong initiatives that do not provide the intended increase in value.
All buyers willing to engage in the transaction of your business are going to do detailed due diligence and research into the business they are considering for purchase. Most buyers even hire or outsource professional due-diligence teams to verify representations and find any concerns or discrepancies that may be present from a value-add perspective. You can avoid any surprises and ensure a smooth transaction by staying ahead of your potential buyers in doing your own due diligence. Overall, many of the last-minute issues that arise during mergers/acquisitions are unbeknownst to the business owner.
Customer concentration and supplier concentration are the two main areas of risk that can affect business continuity from the perspectives of potential buyers. Having a business that is dependent on a select number of customers or suppliers will negatively affect the valuation of your company. Wherever and whenever possible, be sure you are trying to find ways to diversify your customer and supplier base to mitigate these risks. The moral of the story is that big clients are great, just make sure only a small group of them make up the majority of your business.
Another area where risk arises for potential buyers is your company’s dependency on a few key players or employees. Most buyers do not operate their new business with the intention of firing employees in hope of saving cost, they look to retain key talent. They also want to make sure key talent doesn’t walk away with trade secrets or clients. So, they want sellers to focus on employee retention and retaining leadership. By locking in key employees through different tools like non-competes and non-solicitations ahead of time, you can ensure a smooth transition as well as a stronger valuation when the time comes to sell your business.
Potential buyers must have absolute confidence in the accuracy and transparency of the financial representations you make regarding your business. Further, they will most likely come equipped with a team of financial due-diligence analysts when the time comes for them to consider the purchase of your business seriously. The overall quality and impenetrableness of your financials will play a key role in the valuation of your business and solidification of your transaction. Be sure that your financial statements are reliable, accurate, and available in a timely and organized fashion.
You would be surprised how many business owners leave money on the table when selling their businesses because of their lack of understanding or ability to manage working capital. Surprisingly, you can significantly increase the value of your company by reducing its current assets. Having your money working for you through reinvestment, growth and development will increase the value of your company from the perspective of business succession.
When finally approaching the time of transfer, it can become easy to misconstrue the value you are walking away with after lots of large numbers are brought to the table. The true value of the transaction lies in the after-tax yield of the sale, not the large number agreed upon between the buyer and seller. Meaning, it's what goes in your bank account, not what number goes on the check. It is absolutely crucial that any deal you make be structured in a tax-efficient manner. Depending on whether your firm is set up as a C-Corp, S-Corp or an LLC, you could face double taxation at the time of sale. In this step, it is also important to consider estate planning. This is why waiting until you're ready to sell to start planning can be disastrous to your outcome.
The most important thing to do, at the end of the day, is to keep running your business and continuing to execute on the things you have been doing. If you are preparing your continuity plan, chances are you already run a successful business that will have value to offer potential buyers. If nothing else, make sure your business keeps running efficiently and remains attractive in terms of its ability to provide value to clients/customers. The last thing a business owner wants is to neglect their business while making critical decisions like preparing for sale. This highlights the importance of hiring a team of trusted professionals to guide you through the process allowing you, the business owner, to continue the successful operations of the company.
Preparing your business for sale is not a task to tackle at the eleventh-hour; it’s a continuous journey essential to maximizing the value of your company. Further, it’s important to remain proactive in optimizing efficiencies and ensuring operational independence from yourself, the business owner. Finally, the true measure of a successful merger or acquisition is not the sale price associated with the transaction, but the after-tax yield acquired by the business owner(s) after closing. This highlights the importance of working with a team of trusted professionals whose expertise lies in the areas of tax mitigation, business succession/continuity planning, and estate planning.
Source: 12 Critical Steps to Prepare Your Business for Sale -Prepared expressly for VISTAGE members. By, The DAK Group.
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