The process of selling a business has become more complex today. Buyers are more cautious and much more rigorous in their due diligence efforts due to current economic uncertainty. A big reason why a deal fails is that owners do not plan early enough to sell their business. It’s clear that CEOs and owners should maximize the business value before putting it up for a sale, but often poor pre-planning can erode the value of a lifetime of success.
Many first-time sellers fail to realize that it takes time and careful planning to optimize the business value in order to maximize the sale price. Without appropriate time to carefully plan and prepare for a successful exit, a lower purchase price from a buyer, or worse, no sale at all, often results.
The business landscape changes every three to five years, and your company’s exit plan needs to keep up. Regardless of personal goals, there are some key issues every business owner must address to become transaction ready.
The key to increasing business value is to understand how a potential buyer views your business. That is a two-part job.
- Obtain an independent, professional valuation from an accredited valuation firm.
- Engage an objective business adviser, or a leadership board, to help you conduct a business audit and assessment to reveal the strengths and weaknesses of the business.
The advisors can help you pinpoint the value drivers. This can ultimately increase the value of your business and sale price by 10% to 35% or more. If the assessment reveals that some of your business drivers are weak, prioritize them and begin correcting or improving them immediately. Once you understand the current value of the business and the value drivers, you can identify tactics to increase its value.
Key business value drivers may include:
- Sales growth trends
- Balanced and growing customer mix
- Strength of sales backlog
- Strength of the market niche
- Strong products and services brand
- Highly skilled, efficient and loyal workforce
- Solid vendor relationships
- Service line differentiation
- Firm innovation
- Strong management team that can transition to the new owner
- Up-to-date technology
- Modern work-flow systems and processes
- Robust management information systems
- Continuous growth in profitability
- Barriers to competitive entry
- Strong company culture and loyal customer base
Company culture and existing customer relationships are two critical areas that concern most buyers. If a business is sold, it is important to ensure that employees will embrace the culture of the buyer. Both these buyer concerns can be mitigated if the seller stays on as an employee or consultant for a reasonable period of time.
We suggest business owners to take at least two to three years to increase and improve the value drivers of a business. During this time, you will be able to correct minor issues to help build incremental value.
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 to the business owner. If the business value process has been carefully carried out, the added value will stand up under the most rigorous buyer due diligence.
Continued owner involvement and the development of a strong management team have become even more important to buyers in today’s M&A environment. As earn-out requirements are commonly integrated into a sale price, performance stipulations tied to profits and revenue are frequently included in the sale contract to obtain the full purchase price.
If you are considering selling your company, act now. You must allow sufficient time to prepare for a transaction to correct any issues and build incremental value. While any specific market may strong now, strong markets do not last forever. Time is of the essence.
Remember, poor exit planning can erode the value of a lifetime of success.
At Collective 54, we provide personalized guidance from a core group of trusted peers to navigate the challenges of preparing to exit your firm. You can vet decisions by an experienced peer group who will offer unbiased advice in a confidential environment to transition your business. Join Collective 54 to engage in a multi-channel program specifically designed to help members successfully transition their firms, through the integration of principles and practices of preparing for a successful exit.
Sources: Stronebridge, 2020 and Adam Noble, 2020