Are you maximizing value where it matters?
Begin with the end in mind
There are many reasons why a business owner strives to maximize value during a sale, including achieving the highest amount of value or cash at close. These reasons include the opportunity for employees and continued employment, but also include a desire to have continued involvement in the business, a quick retirement and transition, or security for the family. Some business owners desire to make no changes to the business, only maintaining the location and name of the company the same, or to pass control and operations to a family member, keeping the business in the family.
Regardless, business owners must confirm what the value of your company needs to be before an impending sale. A business management advisor can support your personal planning issues so that you can determine what cashflow goals are during your lifetime, 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, it is very likely that this asset is the one that can make the most impact on your net worth and help you achieve your goals. Quest provides business valuation advisory services to assist you in this step.
Most of the suggested targets are “averages” of your peers. Typically, the largest driver of value is the business’s ability to produce cashflow. Make the effort to normalize expenses, optimize margins for a sustained period of time. Work hard on capturing one-time expenses and capitalizing investments made in the business so that your normalized cashflow or adjusted earnings before interest, taxes, depreciation, and amortization (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. Also, identify employees internally and externally that are ready to take on more responsibility. Other considerations that you can control include updating legal documents to support the business value (such as customer contracts or employment contracts), 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 prior to a future sale, by identifying the right structure of 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. Quest advisors decide when the right time to sell is by analyzing both external and internal factors. External factors consist of industry factors, business lifecycle, economic factors, interest rate trends, tax policy, supply and demand, etc., while internal factors are age and health of leadership, age of the workforce, ability to attract talent, etc. This determination is no easy task and there are some things that cannot be controlled. With tax rates constantly increasing, many active sales processes will be working hard to close before the enactment of rate increases.
At Quest, we are experts at helping business owners maximize value in a sale so they can focus on the most important things in life – like family, their personal life and professional growth.
Click here to contact us and let’s talk about how we can help you achieve your goals during your sale.