What is the ideal way to maximize value in my business before, during, and after-sale?
Begin with the end in mind
Confirm what the value of your company needs to be before an impending sale. Work with an advisor who can also support your personal planning issues so that you can determine what cashflow goals are during your lifetime, and what legacy and estate transfer intentions are. Once you have a reasonable understanding of this, consider whether a business sale (less taxes and debt) meets the goals you have established. What is the “gap” that remains to achieve the goal?
Bridging the gap
Since the business value is likely your largest asset, this asset is likely the one that can make the most impact on your net worth and help you achieve your goals.
Focus on being better than industry indices about financial performance. Most of the suggested targets are “averages” of your peers. Typically, the largest driver of value is the business’s ability to produce cash flow. Make the effort to normalize expenses, and optimize margins for a sustained period. Work hard on capturing one-time expenses and capitalizing investments made in the business so that your “normalized cash flow or adjusted EBITDA” is not impacted.
Increase your opportunity by identifying your capacity to access additional capital, by investing in more ideas that generate profit (i.e, new products/services, recurring revenue options, supply chain improvements, more automation, etc.), investing in more ideas to generate sales (i.e., a better lead generation, expand geographies, sales team), investing in more ideas to improve your team or product, investing in growth strategies – acquire companies that fit your strategy.
De-risk what you can control by minimizing the reliance on the business owner by placing processes around the business owner that can become routine for others that can become routine for others. Also, identify employees internally and externally that can be groomed to take on more responsibilities (i.e., if the owner is a great salesperson and there isn’t a sales force or sales team, document and build in that area). Other considerations that you can control include updating legal documents to support the business value, protecting your intellectual property, and creating less reliance on customer or vendor concentrations by diversifying your customer or vendor base.
Optimize taxation by preparing your family and estate to defend against income and estate taxes before a future sale, by identifying the right structure of the entity that can provide the capital gain or deferral that can minimize your total tax exposure, by identifying the ideal timing of sale or receipt of proceeds.
Closing the gap
Once the value from a business sale can achieve your desired goals, it is time to maximize value in a sales process.
Timing the market: Timing the effects of external factors – industry factors, business lifecycle, economic factors, interest rate trends, tax policy, supply and demand, etc. and internal factors – age and health of leadership, age of the workforce, ability to attract talent, etc. is no easy task. With tax rates likely to increase as this article is published, many active sales processes will be working hard to close before the enactment of rate increases.
Staging the buyer/expanding your perspective of value: Most business owners will only sell once in their life. Since they have never sold a business before they might consider gaining more perspective before committing to a sale. If you have a longer timeline, consider hiring an advisor to reach early to prospective buyers early to gauge interest in your business along with valuation guidance from the street, to gather further suggestions on how to improve the value of your business, to measure market trends, and to get a head start on creating an engaged buying pool.
You will need to talk to multiple buyers to get the deal you want and you should hire an M&A expert to be efficient with your time. The targeted list of prospective buyers should be strategically developed based on the likely buyer along with ownership goals for the future of the business. Your advisor should vet the buyer’s capability to buy, access to capital, culture fit, be tax-friendly, etc.
Competitive process: Decisions will need to be made on the timeline of the outreach and the phases of engaged buyers. Many business owners or brokers will get one offer and push it through without completing the full outreach limiting their ability to reach maximum value. Your leverage as a seller is the strongest while you have clear competition. You will get more value at the end of this process as buyers who want something bad enough may increase their offer very late in the game.
“From LOI to closing”: Final pieces are negotiated here, depending on the buyer they may want owners to stay longer and might be willing to share more in the future. Once it is clear we are in the range of value, anything more can be in addition or upside we will ask the before LOI. Once the LOI is signed our goal is to preserve the deal that both parties are committed to, close timely, and maximize the ability to achieve the upside options with clear targets and objectives.
Due diligence can be costly to both sides: being prepared with an organized deal room and lead advisor to manage the diligence process focused on keeping the CPAs, attorneys, and lenders on task can minimize costs and delays.
Finishing on your terms
Post-closing: Continue to monitor any unrealized equity, incentives, notes, or earnouts and support the company to meet those objectives. With regard to taxation, there are several options to mitigate tax-favored investments, tax credit investments, real estate deferral opportunities, and retirement planning options. Consider reinvesting into tax-deductible enterprises that you might become involved with after the sale. The most important way to maximize value is to find what you enjoy the most with your time and invest in that.
