On Your Mark, Get Ready, Sell

Written on August 29, 2014

The biggest financial transaction in a private business owner’s life is likely the sale of his or her business. Although many sales are premeditated, others result from unplanned events, which is why owners need to have an exit strategy. Valuators can help entrepreneurs plan their exit strategy, whether sale is imminent, unexpected — or a long-term goal.

Operate to Sell

Most owners assume they’ll operate their business until retirement. But their priorities or interests could eventually change — or be forced to change due to unforeseen circumstances such as illness or disability.

So even owners who have no intention of selling anytime soon should operate their business to maximize its value. This means understanding key value drivers, such as management quality, expected cash flow and perceived risks, and activities that diminish value.

On the other hand, owners who intentionally minimize taxable income, run personal expenses through the business or overpay related parties will likely report lower profits and adversely affect their business’s value. Buyers usually base offers on multiples of historic net income, earnings before interest, taxes, depreciation and amortization (EBITDA), and cash flow. A valuator can help an owner adjust these financials to show the company’s value in the best, most accurate, light.

Timing is Everything

If an owner is contemplating a sale in the next five years, a valuator can work with other professional advisors to shed light on factors that affect the company’s value in the current marketplace, including:

  • Market conditions. The supply and demand of businesses vary over time and across industries. A valuator can inform the client about current and anticipated market trends and tax policies, which may suggest the optimal times to sell.
  • Comparable transactions. Evaluating comparable transactions helps establish a business’s asking price. Valuators can access transaction databases, which provide details of private asset and stock sales in a variety of industries.

Prepare for Sale

It’s important for sellers to look at the business through the eyes of a prospective buyer and identify its strengths, weaknesses, opportunities and threats (SWOT). A SWOT analysis tells owners which characteristics to emphasize and which elements require corrective action. Selling owners for example, might decide to:

Sell nonessentials. Buyers are interested in core operations. Nonessential balance sheet items, such as idle or nonoperating assets, are hard for buyers — especially C corporations with built-in capital gains tax issues — to unload. It’s also important to write off uncollectible receivables and obsolete inventory.

Clean up records. Buyers prefer financial information that has been audited by an independent CPA. And many distrust sellers’ claims regarding discretionary income adjustments.

Address risk. Excessive risk lowers the market value of a business. Effective planning can avoid, minimize or share risk. For instance, a business can verify that human resource records include signed employment and noncompete agreements, which minimize the risk of key employees defecting to competitors.

In addition, sellers should secure intangible assets by applying for patents, copyrights or licenses; extend long-term contracts near expiration, such as union deals, leases and exclusivity agreements; implement safety-training programs and purchase insurance policies to minimize the risk of workers’ compensation claims; and diversify the company’s customer base to minimize concentration risks.

Assemble an offering package. Owners can expedite the buyer’s due diligence by preparing a packet of relevant information to distribute to prospective buyers. Packages should include:

  • Three to five years of financial statements and tax returns,
  • Property, plant and equipment listings and appraisals,
  • Copies of key contracts,
  • Forecasts and budgets, and
  • Schedules of discretionary adjustments (for example, excess owners’ compensation, perks and quasi-business expenses).

But before disclosing this proprietary information, the seller must require recipients to sign confidentiality agreements.

Look at deal structure. Creative deal terms — including installment sales, seller financing, ongoing consulting agreements, noncompete agreements and earnouts — can benefit both buyers and sellers. A valuator can work with a seller’s transaction team to determine the best structure.

Consider other goals. A valuator can help sellers minimize tax and achieve other personal objectives, such as ongoing participation in day-to-day operations and continued employment for loyal workers. And he or she is qualified to assist the buyer with postdeal tax and accounting issues, including purchase price allocations.

Planning pays

Selling a business is both exciting and stressful. Valuation professionals who specialize in mergers and acquisitions can facilitate this process. In fact, their early and ongoing involvement may dramatically increase sales proceeds.

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