Looking to sell your company someday? Here’s a two-year plan
Some of our most successful deals came to be as a result of the owner having a vision and unbending commitment to ready their business and bring it to market at the right time, for the best value.
Selling a business is different than selling a real estate asset. Real estate and equipment can generally be sold at a good price and fairly quickly. Selling a business takes extensive preparation, thought and, most of the time, years to obtain maximum value.
Creative Business Services understands that selling a business most times is a long-term scenario.
Throughout Creative’s 40-year history, we have come to learn to take the long view. This happens by developing relationships and establishing credibility with various business leaders so that when they are ready to sell, we can:
- Help and suggest ways to build the value of the business.
- Come to fully understand the business.
- Be prepared to identify the business’s best strategic buyers.
The theme here is to build business value and examine some of the best steps the business owner can take to prepare the business for the market and get the best value with the right terms and conditions for that business owner.
Realize the Nature of Values. When considering selling your business, it’s of the utmost importance to look at its value — or, more succinctly, its two values: academic value, determined by a professional business valuation, and true or fair market value.
Academic value is determined with a formula based on the company’s tangible assets, cash flow, industry averages and multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
A fair market valuation takes the above items into consideration too, but then weighs in on what buyers are really looking for and willing to pay. If it’s a strategic buyer, synergies between the two entities may fetch an attractive premium in value.
For many small and mid-sized businesses, tangible assets — e.g., equipment, vehicles, real estate and inventory — are important, but value is also based on earnings and intangible assets. Some of which are reputation, market share, employees, proprietary processes, intellectual property, customer lists, location and business relationships.
To get the most out of a fair market value of your business, focus on those intangible assets. Start taking a forensic look — through a buyer’s eyes — at issues that could render your company vulnerable to realizing its ultimate value.
- Identify and develop your niche
Being a “jack of all trades” is just that and not specializing in anything. Create that niche or niches that are high quality and unique. Buyers will pay a premium for niches that have barriers for competitors to enter.
- Straighten up your financials
A good M&A advisor can help you position your financials in the most positive light, but it’s ultimately your responsibility to clean them up to do that. You should:
- Be absolutely sure your inventory and asset records are in sync with what is physically there.
- Fortify your ratios: working capital, debt-to-equity, price-to-earnings, return on equity, etc. (This takes time and will not be accomplished quickly; this would be a good time to test the medal of your financial advisor to break them in.)
- Non-business items need to be removed. Less than kosher manipulation of your finances to lower your tax bill raises eyebrows and creates doubt with prospective buyers
- Amend cash flows
An experienced buyer wants to see the “real” cash flow. In the real business world, cash is king. Drive as much income as possible to the bottom line.
- Reappraise your assets
If you have unproductive assets or inventory that is unsalable, get rid of it. Eliminate or buy off any assets that are typically used for your personal use.
- Enhance and develop key employees
Buyers generally have issue paying top dollar for a business that is heavily reliant on the owner for the business’s success. If you haven’t done so, start delegating responsibility to key employees, incentivize them to be successful and involve your senior staff members in the decision-making process. Giving your company depth through the combined effort of your employees and demonstrating that your company’s success rests on your team and not just you, is key. This is what an experienced buyer is looking for.
- Verify and document everything
Employees and their job descriptions, operational functions, and a 5-year business plan should be well documented. If your records and plans are documented, a buyer is going to have much more assurance that he or she will be able to sustain your business’s successful growth, which will enable the buyer to get financing when needed. Make sure to keep your business records legible and well organized. They would be sales, expense reports, P&L statements/balance sheets and tax returns.
- Create and build diversified relationships
Your business value in part is connected to your reputation, brand name, customer recognition and market awareness. These are all part of your business value. Your most valuable commodities are your relationships, product quality and customer service. Diversify your customer and supplier concentration. Try not to have any one client be more that 10% or 15% of your total revenues.
- Minimize risk
What a buyer is willing to pay is a function of risk. Buyers are affected by their sense of business risks. Areas that influence business risk for long-term viability include:
- Risks of customer concentration.
- Supplier dependency.
- Absence of contracts with key employees.
- Environmental issues and regulatory compliance.
- Legal challenges.
If you are looking to sell your business, it’s important to keep these intangible assets in mind. They tell a story that your financials and tax returns cannot. Plan ahead, if you’re looking to sell. It is highly recommended to address the risks and intangibles well in advance of putting your company on the market.
When you finally decide to market your business, remember it’s very important to develop a team of specialists to help you prepare your business and put it in its best light for potential buyers. They will help make the most of your transaction. They are: an experienced mergers and acquisitions attorney, a CPA firm that is familiar and effective with business transactions and, finally, a strong reputable mergers and acquisitions advisor that can successfully guide you through the sale process with a minimum of issues, to name a few. Always keep in mind, you may only have one chance to sell your business for top value, so follow the aforementioned steps and do it right.
It’s never too early to prepare your business for sale. In fact, you should always operate your business like it’s ready to sell. You can start the process today if you’re willing to take the long view toward maximizing your selling price.
Bob Wolter is Mergers & Acquisitions Advisor of Creative Business Services/CBS-Global.
Call us to 920-432-1166. All your inquiries are strictly confidential.