Advice for developing a successful exit strategy when selling your business
If you have done the strategic analysis about your exit from your business and have decided that a sale is the best route to pursue, there are several important considerations.
In our experience, careful consideration and planning for the sale can help maximize your value. Following are things that should be in place:
- The company should have a full business plan.
- The plan should lay out the true business expectations based on current business.
- Projected new business from additional product lines or new markets should be addressed.
- Expansion capabilities should be considered.
- Other potential resources available to the business should be identified and quantified where possible.
The overall key is to spell out as many factors so the business is most attractive to a potential buyer.
Regarding timing, in an ideal world you would like the company to have been profitable during the last several years. While future growth is a major consideration, past performance is one of the best indicators of future profits.
A re-casting of the financial statements is often important when trying to sell a business. This will remove discretionary expenses, excess shareholder compensation and benefits, or one-time extraordinary expenses that may have impacted the bottom line. These should all be added back to reflect the true profitability to a potential buyer. Reflecting the true profitability of the company will maximize the price that a buyer will pay for a profitable stream of cash flow.
Another critical area is to remove excess assets or working capital from the balance sheet prior to marketing the company. We often see levels of cash, inventory and even accounts receivable that are in excess of the working capital required to run the business.
A potential buyer always looks at existing working capital and deems that to be the starting point, or benchmark, for initial working capital left behind in the deal. Adjusting (by removing) excess working capital initially will save you a lot of money and aggravation of negotiating the working capital requirement.
Lastly, it is not recommended for the owner to do his or her own negotiations. Owners are often too emotionally involved and invested in the companies they have created. A quick story highlights this point very well. Recently, one of our clients decided to sell the company by himself. He negotiated a deal and then, literally at the eleventh hour, discussed it with me. I showed him that he could get a better deal.
We bought in an investment broker, who brought five potential buyers to the process. The result: the client ultimately secured almost three times his original price from the deal he had worked on his own.
Working with an independent broker allows more reach to potential buyers. Brokers also can bring multiple parties to the table which creates competition and higher values. Most importantly, they handle negotiations, obviously based upon your parameters. Negotiating on your own is too emotional and mentally draining. In addition, a middle man can play the bad guy and insulate you from the buyer.
Selling your business is one exit strategy option and if you chose to pursue it, proper planning will ensure maximum value so your ride into the sunset becomes that much smoother.
Bob Hopper, CPA, a principal at Sax Macy Fromm & Co. PC who leads the firm’s manufacturing & distribution industry service group. He frequently counsels clients about exit strategy planning.