Maximizing the Value of Your Businesses Sale Transaction –tips to help plan & prepare to get the best value
By: Neil Suffa
For many entrepreneurs, owning and growing a business is your dream. You put your heart and soul into the business and watch it slowly grow while you and your investors prosper. Then comes the hard part- – what do you want to do with it? Has the business succeeded so well that others want to purchase it and add it to their existing portfolio? Or is the sale of your business your retirement plan? Or do you simply want to grow the business? No matter what the reason is for your transition, the better prepared you are, the more value you will get for your business.
Immediately before joining Warren Whitney, I spent half a dozen years as a Controller/CFO of a private equity-owned manufacturing business. During that time, we went through the sale of our business twice and purchased another business with a third private equity sponsor. As a former CFO, Controller, and auditor, I also realized that planning and preparing for the sale of a business made the process easier and ultimately yielded the highest sale price for the business. Are you unsure what to do to plan for the next steps for your business? Here is an approach to help streamline the process to help you maximize the value of your business.
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Steps to selling your business
- Ask what is in it for you and if you are ready to let go. The hardest part of selling the business you have built is what the next step is for you and any partners. One of the first questions to answer is if you want to remain with the company or exit the business. Additionally, you need to seriously consider if you are actually ready to let go.
- Develop the Plan. In order to execute and maximize the benefits of preparation, think through your transaction strategy early. How early is early? You should begin planning for the sale of your business at least a year (sometimes 3-5 years) in advance of listing it for sale. Part of this plan should be seeking the advice of a good tax advisor.
- Determine what your business is worth. Another huge challenge to selling a business is your emotional connection with it. It’s hard to value your own business. Mergers and Acquisitions (M&A) advisors and valuation specialists can estimate what the business is worth.
- Organize your records. An easy way to improve how a buyer looks at your business is to have clean business records. Many financial investors (as defined below) like to generate a Quality of Earnings Report when valuing a business. It pays to bring in a professional to organize your records to prepare for the process.
- Find your buyer. Decide if you want to market your company or identify an M&A advisor who can assist you with marketing your business. An advisor may cost more money, yet can add a significant return at the end of the day.
i. Determining what’s in it for you
- Certain business owners want to remain active in the business after the sale. If so, looking for a strategic investor (a company that wants to leverage synergies and continue to build and grow around a similar model) may be the right purchaser for your business.
- Alternatively, some business owners want to maximize the return on their years of building the business. In that case, looking for a financial buyer probably makes the most sense. Financial buyers typically purchase a company as an investment with an exit strategy and date in mind when they purchase the business. More often than not, these tend to be Private Equity Firms. In talking with people, I often hear the question – what are Private Equity Investors/Firms?
Private Equity Investors – Who are they?
Investors in the marketplace are always chasing yield and how to increase their income. Over time, real estate, bonds, and stock have given way to alternate investments, such as Private Equity, as a way to increase returns on investments (ROI).
Private Equity investors typically aim to create value in a private business by financing growth, operational improvements, or other efficiency changes. With active ownership, financial leverage, and a specific time horizon, their goal is to realize greater returns than one would typically find in the public marketplace. Private equity companies typically get equity from a group of investors, sometimes raising capital in a fund similar to how closed-end mutual funds work, and leverage the business with bank financing or other debt instruments to purchase a business. The typical model for a private equity investment will be to buy ownership in a “Platform,” a core business, and then look to expand the business by purchasing similar or complementary businesses to grow the business. Most private equity groups have a time horizon of 5-7 years before they realize their investment and sell the business to another owner.
ii. Developing the plan
Developing your plan needs to be comprehensive. Things to consider include the following:
- Why do you want to sell? Is your business in the right position to sell?
- Have you lost an important customer?
- Have you lost an important employee?
- Have you invested in your building or infrastructure or taken cash out of the business?
- When do you want to sell?
- Is there a pressing need?
- Do you want to retire?
- How long will it take to get your records in order? Where Warren Whitney can help:
- Streamline and document processes
- Improve efficiencies
- Find cost savings/shrink expenses
- Improve financial reporting and systems
- Will you tell employees about the sale, and how will you deal with attrition?
- What are the tax implications? Meet with a tax advisor to:
- Develop a tax-efficient strategy
- Determine the best way to structure the sale
- Design an effective exit strategy that aligns with your long-term financial goals
- Guide you through the complex tax documents and reporting obligations
Doing things quickly without thinking through all aspects of the business, your employees, and your financial situation, as well as thinking ahead to the next steps in your life after the business, can result in a less than advantageous situation.
iii. Assessing the value of your business
Valuation is one of the most challenging aspects of the process. Your blood, sweat, and tears built this business into what it is, so there is a deep personal connection. Common thoughts and feelings are:
- My business is worth more than Company XYZ because my product/service is better.
- Company XYZ sold for 5x EBITDA, and I’m being told my company’s worth is 3x EBITDA – I should get a better price.
- I don’t want to sell it to Company ABC because of _______.
This is the time to check your ego at the door and ask a professional for advice. A good buy-side advisor can help you to:
- Understand current market conditions, recent transaction data, and valuation metrics
- Provide an objective viewpoint to help you make decisions based on market realities
- Evaluate if an additional resource (i.e., a business development person, a financial professional, or buying a new piece of machinery) is needed to better position your business
iv. Getting your records in order
Most buyers will want to do due diligence before purchasing your business. Due diligence is the equivalent of “kicking the tires” on your business, and it is essential for obtaining a favorable valuation for your business- you don’t want to cut corners during this process. If you don’t have the resources internally, hire one. Potential purchasers will want to understand the following:
- Is your business seasonal?
- What are your historical sales and expenses over the last several years?
- Are there items in your records, such as a one-time repair charge, an unusual worker’s compensation cost, an increase in insurance premiums, or a gain on the sale of an asset, that might make comparisons not meaningful?
- Do you have the right insurance coverages in place?
- Do you have good processes and controls in place?
- Do you have the right personnel, and how much turnover do you have?
- Are your IT systems appropriately protected, or how vulnerable are you to being hacked?
- Do you have a sales and marketing strategy for growth?
- Are your HR policies effective and being followed?
- What are your relationships like with your bankers?
- How do you prepare your financial statements? Are they accurate?
If you invest the time to make sure you have these questions answered and your records are in order, you are more likely to have a positive outcome in the sale process.
v. Finding your Buyer
This is where the rubber meets the road. Very often, using an M&A advisor will help you maximize your ability to reach prospective buyers. Potential buyers frequently network with M&A advisors for other businesses that may be looking to grow their business either from a strategic or financial buyer perspective. They may also be able to field several offers from prospective buyers and help you sort through which transaction best meets your goals.
Summary
As was noted above, selling your business is emotional. Each step can be challenging, yet each provides opportunities to maximize the price you get for the company you have worked so hard to build. A well-planned strategy for executing its sale can make a real difference for you and your investors.
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Warren Whitney has a team of dedicated professionals who can work with you to best position your business for sale. We can plan your transaction, evaluate your HR and IT policies, review and prepare your financial data, and recommend financial advisors to value and market your business in anticipation of the sale.
Neil Suffa is Warren Whitney’s fractional CFO with over 30 years of extensive experience in finance, accounting, and leadership. He is a CGMA, CFO, and auditor and has been on the VSCPA private company reporting task force and was asked to write questions for the CPA exam. He has experience leading finance teams across many industries, including manufacturing, distribution, insurance, and retail. If you have any questions or seek further clarification about the content, please call us at 804.282.9566 or email Neil at nsuffa@warrenwhitney.com.
If you want additional information on how Warren Whitney might be able to assist you with your needs, please contact Stephanie Ford at sford@warrenwhitney.com. We do not charge for the initial call. We want to learn more about your business needs.
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