Maximizing your way through M&A takes careful planning and a firm understanding that achieving optimal value requires action before, during and after the sale of your business.
At Quest, we recommend clients begin the planning process with the end in mind. This means that instead of setting the arbitrary aim of maximizing the sale price without a specific target in mind, we work backwards to ensure that your business sale (less taxes and debt) will achieve your future goals.
Our process for confirming what the value of your company needs to be before an impending sale includes:
- Supporting your personal planning issues to determine your lifetime cashflow needs
- Defining your legacy and estate transfer intentions
- Calculating the gap between your current business valuation and the valuation required to meet established goals
- Guiding you through the process of bridging this gap by maximizing business value
Strategies for driving business value prior to sale
To successfully generate business value prior to a future sale, you should allow yourself a sufficient timeline. Business advisors recommend exit planning begin as soon as possible, to provide ample time for pinpointing and enacting on opportunities.
The first order of business is to focus on being better than industry indices with regard to financial performance. Set your sights above suggested targets as these numbers typically reflect industry averages and not high performers. Generally, a business’s capacity to produce cashflow is the largest driver of value. Make an effort to normalize expenses and optimize margins for a sustained period of time to improve your numbers. Work hard to capture one-time expenses and capitalizing investments made in the business so that your “normalized cashflow or adjusted EBITDA” is not impacted.
Next, increase growth opportunity by:
- Confirming access to additional capital
- Improving the quality, value or salability of your product or service
- Investing in business initiatives that generate profit, such as new products or services, recurring revenue options, supply chain improvements or expanded automation
- Supporting creative ideas to generate sales, including improving lead generation, expanding sales territories or strengthening your sales team
- Advancing your team through additional hiring or training
- Investing in growth strategies
- Acquiring companies that fit your strategy
Business risk puts downward pressure on valuation. Combat these effects by de-risking what you can control. Start by minimizing operational reliance on the business owner through improved processes and the grooming of internal or external employees to take on more responsibility. Put systems in place to retain continuity after the owner has exited the business.
Further lower future risk to the buyer by updating legal documents to support business value including customer and employment contracts, protecting your intellectual property, and lessening reliance on customer or vendor concentrations by diversifying your customer or vendor base.
In addition to pushing the eventual sale price of your business up, value can be equally added by minimizing your total tax exposure. Optimize taxation by preparing your family and estate to defend against income and estate taxes prior to a future sale by identifying the right entity structures for favorable capital gain or deferral and by determining the ideal timing for the sale and when to receive the proceeds.
Maximize business value during the sales process
Once you have generated sufficient business value during the preparation stage that a sale will achieve your desired goals, you can move on to realizing even more value from the sales process.
If you have not already hired Quest during the earlier stages, this would be the time to do so – not only to be more efficient with your time but to gain outside perspective. Most business owners sell only once in their life. Get it right the first time by adding an advisor to your team with experience in facilitating a sale. Advisor fees typically constitute just a fraction of the ROI you’ll achieve from added business value. Professional guidance improves due diligence, prepares an organized deal room and manages CPAs, attorneys, and lenders to minimize costs and delays.
Effective strategies for maximizing business value during the home stretch include:
- Timing the market – Determining the right time to put your business on the market is a challenging balancing act that takes into consideration the effects of both external (industry trends, business lifecycle, economic influences, interest rate movements, tax policy, supply and demand) and internal (age and health of leadership, age of the workforce, ability to attract talent) factors. For example, with tax rates likely to increase as this article is published, many active sales processes will be working hard to close before new laws are enacted.
- Staging buyers with early outreach – Reaching out to prospective buyers to gauge interest prior to putting your business on the market works to develop an engaged buying pool that can later bolster your leverage as the seller. Work with your advisor to strategically identify targeted buyers who are vetted for their capability to buy, access to capital, cultural fit, compatibility with your tax strategy and alignment with ownership goals for the future of the business.
- Encouraging a competitive process – Resist the temptation to push a single offer through, as failing to complete your full buyer outreach potential will limit your ability to maximize value and get the deal you want. Working with multiple buyers creates clear competition that can drive value up as competing buyers increase their offer late in the game.
- Successfully navigating LOI to closing – Negotiating the final pieces with the buyer provides one last opportunity to add upside prior to LOI. Depending on the buyer, owners may agree to stay longer for an additional share of future earnings. Once the LOI is signed, the final step is to preserve the deal that both parties have committed to, close in a timely manner and maximize the ability to realize any upside options with clear targets and objectives.
Finishing on your terms post-closing
The closing of your business sale is not yet the end of the value maximization process. At this stage, you must shift gears towards protecting the value you have brokered in the deal. This means continuing to monitor any unrealized equity, incentives, notes or earnouts and supporting the company in meeting those objectives.
Additionally, considerations will need to be made for mitigating taxation via:
- Tax favored investments
- Tax credit investments
- Real estate deferral opportunities
- Retirement planning options
- Reinvesting into tax deductible enterprises
One final step: Maximizing value by doing what you love
Often overlooked by business owners during the M&A process, the most important post-sale move you can make is to invest proceeds into what you enjoy most. Working with Quest business advisors can help you better prepare for what’s next so that you’re selling your business with a personal purpose in mind.