Building business value: Maximizing the results of selling your company
INSIGHT ARTICLE |
A unique opportunity is developing for business owners. Many larger companies and private equity groups have a significant amount of cash available to make purchases. Many baby boomers are or will be looking to exit their businesses and maximize sale proceeds in order to accomplish other goals in their lives. However, there are opportunity challenges. Many owners have never sold a business before and while opportunities are apparent in the market, it takes time and careful planning to optimize the sale price in a transaction.
The current selling environment
For many business owners, the last 10 years have been a difficult period for growth and profitability. Candidly, many owners may be tired and ready to sell or liquidate their business and transition on to other personal or professional activities. Other companies, however, have done extremely well, but because no family or management team members are in a position to buy the business, the owner must find an outside buyer that will pay a reasonably compelling price.
The process of selling a business has become more complex as globalization has increased. On one hand, companies fall in and out of favor at a more rapid pace; however, the pool of potential buyers has also grown significantly due to foreign investment. Because of a lack of familiarity with the sale process and available opportunities, owners often approach a business broker and sell the company rapidly at a lower than optimal price. To successfully optimize business value and choose the right buyer, you must be patient and plan for a three to five year process to complete a sale and transition the business to the new owner.
Many owners do not plan early enough for a transition, and through a variety of circumstances, may want to sell before they maximize their business value. This situation leads to less value received from a sale. The goal is to position the business for an optimal transaction. To properly increase the value of the business, owners must plan for a successful exit by developing a two- or three-year plan to better position the business for a rewarding sale.
A common situation that delays exit planning is when an owner has a sale in mind, but postpones it because the business is doing well. A high point in earnings is the exact time to start thinking about the prospect of selling, possibly to a competitor or someone that is looking to enter your industry. Unfortunately, success and growth are not going to continue forever, and it is important to evaluate the marketplace and choose the right time to sell to optimize the proceeds received.
Building incremental value
A key to increasing value is to understand how a potential buyer views your business. Many owners have an inflated view of their business value versus what the market thinks. An objective advisor can help you get a perspective on the perception of your business, pinpoint value drivers and ultimately increase your business’ value and sales price.
Once you understand the current value of the business, you can identify tactics to increase that value. Key business value drivers may include:
- Sales growth trends
- Product and service margins favorable to industry
- Balanced and growing customer mix
- Strength of sales backlog
- Strength of market niche
- Strong products and services brand
- Highly skilled, efficient and loyal work force
- Solid vendor relationships and leverage
- Production advantages and product differentiation
- Product and service innovation
- Strong management team that can transition to the new owner
- Clean and efficient (lean) working environment
- Up-to-date systems, processes and operating tools
- Strength of management information systems (financial and operational)
- Improving profitability and earnings before interest, taxes, depreciation and amortization (EBITDA)
- Barriers to competitive entry
A timeline of at least two years should be used to increase the value drivers of your business when possible. In many instances, a buyer will want the owner and current management team to be in place and ready to manage a successful transition. Furthermore, minor cosmetic issues can also be corrected during this time period to build incremental value and avoid lower offers during negotiation due to avoidable issues.
During this timeframe, major areas to focus on include:
- Estimating current business value – Knowing the true market value of your business long before you put your company up for sale
- Knowing industry-specific business sale transaction information – Gathering detailed information about comparable sale proceedings among your industry peers
- Identifying key business value drivers and other items to increase the ultimate sale price – Determining what areas can be improved on to drive an increased value toyour business
- Organizing periodic value building success and accountability meetings – Meeting with your leadership team and key stakeholders periodically to discuss progress and additional opportunities
- Implementing profit improvement programs – Evaluating areas to cut costs and become more efficient
- Managing revenue expansion and gross profit margin – Carefully monitoring financial metrics to make better business decisions
- Optimizing procurement and strategic sourcing – Cost savings and increased value can be realized by evaluating your procurement and sourcing partners and contracts
- Facilitating owner, family and management organizational planning efforts – Ensuring that all stakeholders share the same strategy when pursing a sale
- Quantifying management’s proposed adjustments to historical actual earnings and EBITDA – Having facts and projections in order to provide reasoning for the sale price you seek
- Performing sell-side due diligence – Increasing the likelihood of successfully completing a sale by addressing issues before you find a buyer
Company culture and existing customer relationships are also two critical areas where you can add business value that are often overlooked. If a business is sold, it is important to ensure that employees will accept and embrace the culture of the buyer. The buyer will want to maintain or boost morale by positioning the sale as a positive and a new opportunity for employees. The buyer will also want to increase the likelihood of customers continuing their relationships through a transition. Employees and customers negatively perceive change, but if your business is performing at a high level, it is unlikely that a new owner will make significant changes. Both of these buyer concerns can be assisted by the seller staying on as an employee for a period of time.
Maximizing the sale proceeds
After two or three years of focusing on value optimization, your business worth should increase in the eyes of potential buyers. Understanding your company’s value and building upon it leads to a larger sale price and maximizes the wealth transfer from the business to the business owner. When an agreement is made on a purchase price, if the process has been carefully carried out, the added value will stand up under due diligence and the seller representations will be confirmed as accurate.
If you are considering a sale, the process of building business value should begin as early as possible. As mentioned earlier, a buyer typically wants a business owner to continue their involvement with the company, frequently up to an additional three to five years. The buyer will want to retain the experience of the seller to continue what has made the company a success.
Continued owner involvement and development of a strong management team has become even more important, as earn-out requirements are commonly integrated into a sale price. Performance stipulations tied to profits and revenue are frequently included in the purchase contract that must be attained in order to obtain the full purchase price.
Many business owners view their company as a part of their family and sometimes that company even carries their name. They want their business to be in the right hands moving forward, while obtaining maximum value from the sale to accomplish their future goals.
If you are considering selling your company, the time to act is now. You must allow sufficient time to prepare for a transaction to correct any issues and build incremental value in your business. Hiring an objective advisor can help better position your company for a sale, initiating the process, setting expectations and managing both the major and minor areas that lead to a successful sale.