A business owner’s exit strategy is an often-overlooked aspect of his or her business plan. As a sell side mergers and acquisitions specialist with Chapman Associates, I constantly field questions from middle market entrepreneurs and business owners on all aspects of selling a business. The following is my response to some common questions from those interested in eventually selling their companies.
1. How do I determine if it’s a good time to sell?
There are two answers to that. If your company is doing well and the economy is generally in good shape, then is it probably a good time to sell. A more personal answer really depends on what your goals are and what you’re trying to accomplish. If you are at a point in life where you are ready to retire, then it’s a good time to sell. If you feel you are at a point where you can’t grow your business any more than you have already grown it due to various constraints, then it is probably a good time to sell or bring in a partner.
2. At what point should I hire an intermediary?
If you’re ready to sell, you should have hired one about 5 years ago. The biggest thing in this space is planning. It’s tremendously important. There is a fine line between consulting with an intermediary and actually hiring them to put a plan into action.
You can do a lot of things to improve the value of your business well in advance of a transaction, so it really makes sense to start talking to intelligent, competent intermediaries when the idea of a sale is still a glimmer in your eye rather than something you want to do tomorrow. Somebody who knows the process and can predict what potential buyers are looking for is invaluable in planning and setting up your business in a way that can maximize the value you’ll get in return.
3. What can I do to increase the value of my business prior to sale?
There are a few things here. The most important is to invest in people and processes. A lot of time businesses get in trouble because the business owner tends to be very involved in various activities, and this is true even in significant sized businesses. So often the owner is the CEO, CFO, sales director, and chief janitor. When that business owner is ready to sell the company, it’s very difficult to make it a valuable business because he or she is just too involved.
This again goes back to planning. It is really important for the owner to put the right people in place and build a management team including a CFO and a vice president of marketing or sales. You need people who can continue operating the business even after the transaction is completed. Similarly, in terms of processes, make sure that your finances and financial processes are in line with what a potential buyer is going to want to see. I’ve heard a lot of people over time tell me that they keep their financials in a way that is “good enough for me.” I understand that sentiment, but at the end of the day a buyer doesn’t care about what’s good enough for you. This person wants what is good enough for them. Putting in place a set of financial processes and business processes that works for the buyer is going to make your company much more valuable.
4. How do I find potential buyers?
That’s really my job at the end of the day. We look at a variety of sources for potential buyers. To start, we have a proprietary list of potential buyers we have contacted over time and who have looked at deals we’ve represented. Secondly, we look at publically available information. Third, we research the company and look deeply into who potential buyers are and reach out to them. The key is finding the right industry contacts within corporations and financial buyers who could be interested in buying the company we’re representing.
5. Is it safe to include the value of my business as part of my retirement plan?
For many business owners, the business represents the vast majority of their wealth. Most of them have rolled a ton of money back into the business in order to grow the business. As a result, they end up with a lot of their money tied up in the business. So yes, I think it is safe to assume that the business is going to have value at the end of the day.
That highlights the importance to plan and to look at how you’re going to monetize that business at some point down the road, which requires good planning and advice. The advice shouldn’t just come from someone like me in the mergers and acquisitions space, but you need to make sure you’re getting great tax advice and estate planning advice. It’s not just about the value of the business, but also how much money you can ultimately put into your retirement nest egg after the transaction.
6. Are there any potential challenges or obligations after the sale?
Yes there are. The biggest thing is that buyers want to buy a sustainable business. They want to have a business that can continue on for the foreseeable future, and the more that you are involved and required to stay in the business to maintain sustainability, the more obligations you will have going forward after the sale.
For example, if before the transaction you work 80 hours a week because you are the only one who knows everything about the business, then yes you will be obligated after the transaction to stay on for a significant amount of time in order to smoothly transition the business over to the new ownership. On the other hand, if you were able to make that transition over to a management team prior to the sale, then your obligations after the sale will be much reduced.
The bottom line is that you will need to transition your role in the business to other people at some point. You can do that before the sale or after the sale, but you can be rewarded handsomely for it if you do it before the sale.
This post was originally published in Michael’s LinkedIn blog.Share: