“I’m thinking of selling my company.” These words have been uttered by business owners far and wide – and while the intention is real, it’s hardly ever immediate.
In fact, among owners that intend to sell their business, nearly half plan to do so within a period of five years — but a large majority (75 percent) believe they can sell inside of 12 months without taking necessary steps to prepare1.
This is a common misconception: the assumption that a possible, far off sale of the business requires no immediate attention. The truth is, a successful exit takes years of preparation. Even if a sale doesn’t take place for five years, or even 10 years, there is much that can be done now to increase the value and attractiveness of the business, while also preparing the owner for an ultimately successful transaction. If a sale never happens — should the owner change their mind, for example — the company still comes out ahead for having built a more sustainable and profitable business.
Here are critical things owners contemplating a future sale of their company should consider and act on now:
1. Understand company valuation: Even years ahead of a potential sale, it is important to have a realistic idea about your company’s value. This affects planning, and ultimately your financial well-being.
While owners can be influenced by stories about friends who sold their companies at astronomical multiples, it’s important to not overestimate. Ultimately, a company is only worth what someone will actually pay. It can vary based on the condition of the business and the industry it operates in; supported by its ability to generate sales, cash flow and/or profits, as well as the value of assets.
2. Know the drivers of value: If you have a realistic sense of company value, the next thing is answering this question: what are the value drivers in your company? Knowing that answer allows you to focus time and energy on improving value drivers that are deficient, and to nurture and protect those that are performing well. It is also important to consider what elements of the business will best motivate the buyer. A seller who is seeking a financial buyer might focus on increasing profitability, whereas as seller who wants to attract a strategic buyer might focus on enhancing the brand and market share.
3. Reducing owner dependence and building the team: Often easier said than done, building a company structure that depends less on the owner and more on the team is an important item on the “to-do” list for those even contemplating future sale. This is a task best started sooner rather than later because it also provides protection in the event of unforeseen illness or even death. Having a strong management team in place can also make the business more attractive to future buyers and will help ensure a smooth transition after the sale.
4. Professionalize company processes: Many successful small businesses can get away with ad-hoc, informal processes and systems, but these will detract from company value when the day comes to sell. Improved documentation, operating controls and governance go a long way to allowing a company to look better to potential buyers. Central to this is an accurate, timely accounting of historical information and use of forecasts and budgets to guide future performance.
5. Understand quality of earnings: Looking at your company the way a potential buyer will helps you understand how best to maximize personal wealth when it comes times to sell. Remember, offers are developed using specific formulas that take into account assets, earnings, industry, and any debt or losses. Regardless of the equation used, the “E” (earnings) is an objective determination — so eventual money in your pocket is often a function of earnings times a multiple. The multiple is a subjective one, usually based on the potential buyer’s assessment of the quality of your company’s earnings. Simply put, improving that quality will help drive superior valuations, but it takes time.
6. Turn to the experts: Exit is a reality for all business owners. Whether it’s decades from now or years away, driven by ambition or necessity, careful planning and support from investment banks undoubtedly ensure the best results with fewer obstacles.
Auctus exists to help businesses identify opportunities and navigate their way through M&A transactions to maximize value and achieve favorable outcomes.
Contact Auctus Capital Partners to learn more about M&A and other advisory services it provides clients. Whether our client is public or private, selling a business unit or the entire company, we have a passion for what we do and dedicate senior bankers to every transaction from start to finish.
By Stewart Greisman, Senior Managing Director of Growth Advisory, Auctus Capital Partners
1 UBS Investor Watch — Who’s the boss?’ Survey, February 2018