- Protecting a Legacy, Planning for the Future
- Thoughts on the IRS’s Proposed End of Valuation Discounts
- Thinking of Selling Your Business? How to Stack the Odds in Your Favor to Structure a Successful Deal
- Minimizing Seller’s Post-Closing Risk in M&A Transactions
- Sensible Rules for Using Rules of Thumb
- Exiting a Business on YOUR Terms - The Importance of Planning
- What Buyers of Companies Look For
- Exit Options Available for Business Owners
Thinking of Selling Your Business? How to Stack the Odds in Your Favor to Structure a Successful Deal
Before putting your house on the market, you might fix a broken step or clean out the garage. Before buying a car, you’ll research gas mileage, repair history, and resale value. Before taking on your largest order for products or services in the history of your company, you might give some thought to how you’ll deliver on the commitment. And, before you take your company to market, you may also want to do some research and planning. If you and your company are prepared and well-informed as you embark upon the third-party-sale journey, you may find fewer surprises and experience a smoother process when you decide to test the market.
Preparing a business for sale can mean many things, but certain realities of the third-party-sale process in the lower-middle market are important to understand up front. While private equity firms have emerged in recent years as active buyers for many of our business-owner clients, most lower-middle-market companies (enterprises less than $100 million in value) are sold to a competitor or strategic buyer.
Third-Party Sales Involve Risk
You may believe that a sale to a third-party buyer is less risky than selling to employees or another insider, but this is probably true only if your business can be sold for all cash, or if there’s simply no time to implement a carefully designed sale to an insider.
Buyers emphasize areas important to them, which may include:
- Attractive market sector and unique competitive advantages;
- Strong history and projections of revenues and profitability (right or wrong, EBITDA – is the gold standard any buyer will use to value your business);
- Strong fundamentals, such as customer base, accounting practices, and business processes;
- and PEOPLE – dedicated employees and capable management.
Of these four, people are oftentimes the most important factor – even for a strategic buyer. While many business owners fear that all their employees will be immediately let go if a competitor buys their company, this is rarely the case. The largest constraint most businesses encounter is keeping and retaining capable, reliable people. If your company has performed well, the last thing a buyer wants to do after acquiring it is to make significant personnel changes. It is likely that some jobs will change and certain administrative duties may be eliminated, but other opportunities will arise for many of those key folks.
Even if you’re not ready to sell today and it’s impossible to know everything that tomorrow’s buyers will want, simply waiting until the moment of retirement to think about what the market will think of your business carries risk. Inadequate transition planning exposes you to several risks:
- What if a qualified buyer doesn’t show up when you decide you are ready to go?
- What happens if, when you are ready to sell, the M&A market is dormant;
- Your industry niche has fallen out of favor,
- Or your business and/or the economy is in decline – or worse?
- What if something happens to you and you are unable to lead the company through the sale process? Will the company be in good shape relying on your family or your successor?
Timing is important, but planning is required to make sure timing works for you instead of against you. By creating a plan to transition away from the business well before you start looking at the exit, you will empower yourself with better:
- Understanding of the universe of most likely buyers;
- Positioning to exercise greater control over who the ultimate buyer will be;
- Knowledge of the likely sale price and tax implications to allow yourself to develop a comprehensive financial plan that includes the net effect of the sale (the largest financial transaction in most business owners’ lives);
- Opportunities to maintain ownership control of the business until you are fully paid; and
- Ability to shift the burden of the company’s future performance from your back to the buyer’s.
Avoid Unnecessary Risks
Successful business owners take calculated risks daily, but most have achieved their success by avoiding exposure to unnecessary risk. In exploring the sale of your company – whether the ownership transition is expected to be internal or external – preparing a transition plan that includes considering the third-party-sale option is the most effective way to mitigate unnecessary risk, position yourself to capitalize on favorable timing, and ultimately maximize your business value.
When you prepare a transition plan, a few things to consider are:
- Benchmarking your business to see where it stands today in terms of value, desirability, and competitive advantage, among other key investment considerations;
- Performing pre-sale due diligence to identify any skeletons in the closet and make sure they are cleaned out or addressed before a buyer finds them deep into the sale process;
- Developing and locking down critical management team members to drive the company forward before, during, and after a sale; and
- Getting your personal financial house in order to fully understand the financial targets and key deal terms that must be achieved for you to be willing or able to sell.
We discuss these issues with every client who believes that a third-party sale may be a desirable option, or who believes it is an important path to consider in his or her transition away from the business. A systematic, action-based approach to positioning yourself and your company for a successful sale doesn’t have to be a time-consuming burden that distracts you from your other responsibilities. Simply putting together a series of checklists, a plan of action, and a timeline may be just a few of the things you’ll need to set yourself up for a successful transition.
We’d welcome the opportunity to talk with you in more detail about preparing a customized action plan to help you transition away from your company, regardless of whether your time horizon is near or far.