A quick guide for the potential sale or succession of your business.
Sergei Galeano, CPA* – Principal
Every day business owners are making the decision to exit their businesses. This is usually the event that has the greatest financial impact in their lifetimes (although most of us swear it is having children). Unfortunately, many owners don’t plan for this event and leave themselves in a position to receive much less for their greatest asset than they may have with some planning. Many owners only get one bite at this apple, so make the most of it. Here are some of the things that each owner should consider:
- Plan – This is the most important step.Don’t decide one day it is time to sell now and not prepare to get the maximum value out of your business. This can mean two to four years of planning and preparation, but even just months of preparation can have a great impact. Identify your goals and objectives for exiting. Do you want out altogether, remain involved in some capacity, transfer to family members or sell your interest to a third party? Do you know what you need to get out of your business to support your after-business life?
- Owner Involvement After a Sale– An owner will generally follow one of two options regarding their future participation after a sale. The first is to continue working with a meaningful executive role in the organization. In some instances, the buyer will insist on this. The second is to leave the company immediately upon its sale. A strong executive team is crucial, as any buyer will want to have the strongest management available that is familiar with your business. At the time of sale, your business should be able to run without your daily presence. In this circumstance, key executive with strong customer and vendor relationships will be viewed as needed assets and will significantly reduce risk in the eyes of an astute buyer. It addition, well-documented processes and procedures help ensure a seamless transition to new ownership.
- Get Your Financial Reporting in Order– Accurate, detailed and consistent financial information is essential. Potential buyers want to be able to understand how your business has performed, its sources of revenue, the expense structure, and much, much more. Most importantly, they want to minimize their risk by having confidence in those statements to avoid surprises. The first order of business is to produce consistent reporting. The recording of revenue and expenses needs to be consistent from year to year. Reporting in accordance with Generally Accepted Accounting Principles (GAAP) would be best, although cash reporting can suffice with proper additional explanation and disclosure, particularly of unreported liabilities. Also, there may be some industries that generally report with some variation of GAAP. A second critical aspect is to not mix personal expenses with your business reporting. Buyers will spend a considerable amount of time segregating business from personal expenses for their analysis and will never be fully comfortable that they have identified everything.
- Consider Getting Financial Statements Reviewed or Audited– The same company becomes more valuable with reviewed (good) or audited (best) financial statements from a respected CPA firm. This helps reduce risk in the buyer’s mind and could also help you identify accounting and reporting issues that you should address before a sale. You may also want to get a Quality of Earnings report to support the strength of your sales and net income for the future. This is usually performed by a CPA firm.
- Implement Standard Processes and Procedures– Buyers would prefer a business that is easier to run, that they can take over and keep or get running in short order. Documented procedures can simplify tasks and make general operations more efficient and reduce errors. New owners don’t want to have to reinvent the wheel. Formal procedures make taking over a business or replacing personnel much easier. Make them detailed enough, yet simple to follow. This includes activities such as customer order initiation and processing, procurement procedures, providing services, accounting and financial reporting, invoicing, production, human resources processes including on-boarding new employees, safety procedures and requirements and many other business activities.
- Identify Key Employees– Who do you need to keep around to make your business more valuable down the road? Your sales manager, CFO, top salespeople, operations manager? Make sure to identify these people and have compensation plans that are designed to keep them around.
- Drive Short to Mid-Term Growth– As noted below, many sale prices are based on multiples of recent and current financial performance. This could be multiples of EBITDA, cash flow or revenue, as examples. Consider those strategic decisions that will enhance the value of your company in the timeframe that you envision a sale, without a material negative impact to the future. These decisions may differ from those you would make when considering a longer time horizon.
- Consider the Timing of the Sale– You would prefer to sell when you have had a good two or more years of operating results and expectation of future growth. If you see something positive coming up in the next couple of years, the wait could be very beneficial as many sales are based on multiples of trailing EBITDA or some other operating factor. Will the industry be taking a downward or upward turn? Is your business seasonal? Is a major competitor coming online soon? Take all this into consideration as timing can make a huge difference.
- Get Your Business Valued– Obtaining a valuation of your business serves several purposes. You can get a better understanding of the pricing to expect. You will understand how people outside of your business perceive its value and the factors that will likely be taken into consideration. You will be able to more easily identify ways to enhance the value of your business as you proceed with your exit strategy.
- Don’t Go It Alone– Assembling a team of experts is a path to a successful transaction. While you know your business well, a team of seasoned professionals can assist you with developing your business to the point where interested buyers may be able to view your business the same way you do, increasing the likelihood of reaching transactions terms that are attractive to both sides. A CFO advisor, an investment banker/business broker and/or an M&A attorney are good places to start, depending on how sophisticated your situation is. Having these experts at your disposal to guide you through the process will enhance the value of your business and a resulting increase in sales price should more than offset the additional costs incurred by using these experts.
- There are a host of other areas that you should also consider in your preparation depending on your business and industry– The appearance of your facilities is critical. Make sure your warehouse and office space looks professional and organized, as first impressions are crucial. You should also review your compliance issues to assess risk to ensure you don’t have problems from a tax, legal, governmental or environmental perspective. You don’t want surprises during due diligence, when a buyer is assessing all aspects of your business. In addition, there will be different concerns from a buyer depending on if they are a financial buyer (view your business as an investment and looking for return on investment and strong management) or a strategic buyer (usually a company that thinks your business is a good synergistic fit to their current business and may want your continuing assistance in the near term post-sale).
Who Can Help?
- CFO Advisor (of course) – Get your financial house in order and create processes to standardize operations. A strong CFO can lead and manage the sale process and allow you to continue to focus on running your business, and can also articulate your company’s strategy and operational performance in terms of its financial importance.
- M&A Attorney – A good attorney will ensure that you are fairly represented and that the terms and conditions of the transaction are clearly understood and are properly represented in the legal documents. There are often many legal circumstances that arise in a sale process that aren’t evident in the day-to-day process of running the business. Strong legal counsel will help ensure that your interests are properly represented and that you won’t find yourself in unanticipated circumstances that are detrimental to you.
- Investment Banker/Business Broker – They know how to market your company to prospective buyers and help negotiate the best deal. They, along with the CFO and M&A attorney, navigate the sale process with the prospective buyer. Investment Bankers also have the ability to raise capital for general business needs. The decision for using an Investment Banker versus a Business Broker is often determined by the size and the complexity of the deal.
- Tax specialist – There are often opportunities to structure transactions that will minimize the tax burden. There are many considerations in such transactions, and having a strong tax advisor will ensure that all of the relevant options are considered to minimize the tax burden as much as possible.
- Investment advisor/Estate planning attorneys – You will need to have a solid understanding of your plans post-sale, and those plans must include your intended use of sale proceeds as well as planning your estate so that your desires are met either before or after the sale. There have been many instances where this type of planning was not done, and that often leads to very contentious circumstances with the remaining family when the intentions of the business owner were not clearly defined. You can save yourself and your family a lot of grief by taking the time to consider what you want to have done and putting plans in place to make those intentions a reality. A good investment advisor can assist you with structuring investments to preserve the capital generated from the sale of your business, while the estate planning attorney can help you ensure that your wealth is directed to the recipients of your choice.
- Examples of other service providers who can aid in the process include your insurance broker, who can ensure you have the right assets and business exposures covered, an HR specialist, who can ensure you don’t have any potential liability issues along with sound employment policies and procedures, an IT specialist who can ensure that your operating platforms, data and disaster recovery programs are effective and secure, and a social media expert who can ensure that your online presence is appropriate for your business.
The key takeaway is plan, plan, plan. Obtaining maximum value from your business requires great planning and execution. It is often said that the most successful people surround themselves with the best and brightest talent available. When contemplating the sale of your business, there is no better time to ensure your team is the best and brightest.
If your company or one of your clients can benefit from our experience and knowledge, please contact us:
Sergei Galeano 603.661.1085 email@example.com
Gary Colbert 941.323.9555 firstname.lastname@example.org
Russell Slappey 407.448.1781 email@example.com
Alma Kadragic 954-651-8044 firstname.lastname@example.org