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After pouring your life's work into your company, it is now time to sell your business. For most business owners, this is a one-time, make-or-break opportunity. You need to get this right — but you have no prior experience in selling a business. In order to avoid common pitfalls and reap the harvest of a lifetime of work, consider the following five tips to maximize the sale of your business.
What do you want your post-business life to look like? How will you adjust to "letting go" and moving on? What are your specific goals for retirement? Will the proceeds from the sale be sufficient to fund your lifestyle? What is your investment strategy following a liquidity event? Have you considered estate and trust strategies?
Considering these and other key questions early on in the process will save you many headaches later if you need to change directions or re-trace ground already covered toward a potential sale transaction.
Discussing your goals with your advisory team (attorney, accountant, wealth advisor, business broker, etc.) will inform your trusted advisors to ensure they are serving your best interests and leading you toward the most desired outcome.
Preparation, ideally, begins three to five years prior to a sale. However, the truth is, you should always be prepared to sell. The same business principles that make a company attractive to a buyer are the same solid operating principles for the ongoing business.
Plus, you never know when you may be approached by a prospective buyer. In today's competitive marketplace, many proactive suitors will not wait for a business to be put on the market. If an offer you can't refuse comes your way, you don't want to be caught flat footed.
The due diligence process of a sophisticated buyer will expect you to have your ducks in a row, including legal documentation, financial reporting (that is accurate), management team, operational processes, and IT systems. Some sellers will engage advisors to perform sell-side due diligence in order to identify any financial, legal, or operational areas of concern so that management can address these matters prior going to market.
As the old adage goes, "timing is everything," and if you start early and are prepared, you stand a much better chance of selling at the right time in order to maximize the sale of your business.
Pulling together an experienced group of trusted advisors is a critical early-stage task. The sale of a business is a complex process full of hazards and missed opportunities. Working with professionals who guide business owners through transactions on a regular basis can add immeasurable value to the process, and help you avoid common legal, tax, valuation, and selling mistakes.
In addition to your advisory team, developing a skilled and experienced executive management team is vital to giving a buyer comfort that the company's earnings trend will continue on without you. If you continue to make most of the key decisions, as well as maintain the primary relationships with key customers and vendors, your company will be seen as a risky investment for a new owner.
Equally critical is the ongoing performance of your company during the sales process. If an owner is immersed in every aspect of the sales process because they are not supported by a capable team of advisors and senior management, the financial performance of the company may suffer significantly.
The sales process can be long and arduous. Decreasing sales during this critical time period can spook a buyer into reducing their offering price, thus wiping out significant value earned by your many years of hard work. Declining sales and profitability are also red flags for lenders and can be deal killers, so keep your eye on the ball and rely on your team where needed.
Understanding the drivers of business value can have a huge impact on the ultimate sales price down the road. Buyers are seeking a return for their investment and are willing to pay a premium for a company with a healthy outlook and growth trend. A strong brand, loyal customer following, and emerging market position are all enticing to a future owner. Mitigating risks such as customer concentration, product diversity, and geographical limitations are also ways to enhance value.
Be careful about making large capital expenditures leading up to your sale. Working with a business broker or investment banker who understands your industry and is skilled at creating a competitive bidding environment among multiple buyer candidates can also greatly improve your net result.
A high level of assurance over historical and pro-forma financial statements is also a must. Three years audited financial statements is a best practice, although some buyers may accept reviewed financials instead. Identifying supportable add-backs to earnings can also pay off, including any personal expenses, charitable contributions, or significant non-recurring expenses.
It is a good thing to be confident in what you are selling. After all, that is what made you successful in your business to begin with. However, temper this confidence with a strong dose of reality when determining your sales price.
First-time sellers are often guilty of setting a price before conducting a thorough evaluation of the true market value of the business. An over-priced business can become tarnished by sitting on the market for too long with limited buyer interest.
In a sales transaction, valuation is primarily based on quantifiable data, as opposed to personal opinion. A professional business valuation can be an invaluable benchmark for weighing your sale offers. Make sure the company performing your valuation has access to current market comparison data for transactions similar to yours (size, industry, and location). Once you have a good feeling for market value, you can set reasonable expectations for your sale, or go back to #4 above and further build the business before marketing for sale.
In addition to the above high points regarding how to maximize the sale of your business, there are a myriad of other questions and issues to navigate when planning and executing a business transaction, sale, merger, or acquisition (stock vs. asset sale, tax matters, confidentiality, allocation of purchase price, transition, personnel issues, strategic vs. financial buyer, etc.). The owner who plans for their business exit by implementing a long-term plan in an organized, systematic manner will be much more likely to sell on their terms and ultimately achieve their stated goals for both the business and their family.
Are you considering a business exit? Contact us today so we can help you make more predictable and profitable business decisions.