Motivations behind the sale of a business are many and often complex. While portfolio liquidity for retirement years may be one, reducing risks concerning the future capabilities of the company, industry and employees may be another.
Risks inherent in business ownership also take on greater alarm as a client approaches an age when he or she would like to avoid the possibility of business retrenchment or other risks of financial liability. Recognizing these economic and life cycles and acting on them in the years before they happen are among the most important determinants of how successful a sale may be.
Planning for a business transition to provide liquidity requires addressing other objectives for the business owner. Considering the needs and abilities of children who may be in the business is of critical and emotional concern and provides planning opportunities. The security of loyal and capable employees is also a factor that may affect the process. Recognizing these factors at the outset will build conviction of the owner to a considered strategy to sell.
And that’s the shift in perspective that a business owner must have in this stage of wealth management—a strategic plan for the sale of the business. There are many steps to execute, and many involve strengthening the business and addressing issues, possibly deficiencies, that have been allowed to exist for years. Maximizing and achieving success when selling a business is best assured when done out of strength—a process that starts well before the sale date.
A three-year window for accomplishing the sale of a business is ideal. Again, this is done out of strength, where there is no compulsion for the sale, but rather a desire to transition to a next stage of life. Let’s examine some of the most impactful actions that a business owner can take to realize this goal.
1. Are there any threshold constraints?
Consider constraints for a sale.This usually involves restrictions placed upon the business by contract or relationship. For example, are there important members of the family involved who would need to agree to the sale or would want to be a purchaser? Are they viable? Are there contracts in place from vendors or customers that would inhibit the sale?
2. What will the buyer see?
Looking from the inside out and then back into your business is a very difficult perspective for the seller to take. While you know many of the weaknesses of your company, our own sense of self sometimes prevents as honest an introspection as is necessary. The buyer will have no such difficulty. While your problems and issues may not be many, recognizing issues in your business or industry is a critical advantage in a sale. You will have far more credibility in addressing the issues, showing a plan for accomplishing a change—maybe a technology buy or a marketing change, for example.
3. What is the culture of your company?
The culture of a company is of critical concern to a buyer. How he or she perceives the company will adopt new owners, whether the company is to continue to run as an independent unit or incorporate into another business, impacts the valuation and practicality of a purchase. The culture of your company may be best defined by what your employees are doing when you are no longer around. Are they all clear about, and do they embrace, ethics and business policies? Are they aligned with the mission of the company? Is there a loyalty to and camaraderie in the company?
4. What do your financials looks like?
Are the financials well prepared on a timely basis by competent staff? Are they audited? (If not, begin so immediately.) Many buyers will either not accept unaudited statements or discount the financials and hence the valuation. A favorite saying among investment bankers is, “In God we trust; all else bring data.” If you have a bank financing relationship in your business, you are probably used to discipline around audited financial statements, quarterly P&L projections, cash-flow statements, etc. If you do not have such a discipline, it should be a central part of your sales preparation to engage an accountant to build such a discipline for you.
5. Do you have a business plan?
After the examination of the quality of your financials, product lines or services, a buyer is going to be very interested in your business plan. It will tell a lot about how the business has been managed, how engaged management employees are, what future expansion and growth might look like and from where it might come. Reasonable capital investment with large returns on investment excites buyers, who will pay a premium for such future growth. Help the buyer envision how the business can be more than stable cash flow by providing a substantial growth opportunity. For example, look for opportunities to add shifts for manufacturing, cross-sell products to customers, negotiate investment or better terms from vendors, etc. These are all actions that perhaps you should or did consider bringing to your business but have not yet accomplished. Realize some benefit now by blueprinting the opportunity.
There are a slew of other considerations in positioning a company for sale. Most importantly, it takes a team. A wealth manager can help be the catalyst and define the parameters for sale and its impact on the objectives and goals of ownership. A lawyer provides invaluable advantage and protection in planning and transactional risks. An investment banker may be crucial in helping to assess, improve and market the business most successfully. An accountant will help guide its tax impact.
Someone who has taken his or her efforts, sacrifices and risks to build a business looks for an endgame that is more than the business’s cash flow over the years. Rather, it is the cash flow times a multiple that turns that illiquid asset into a passive pool of security. How that last opportunity is maximized will be proportionate to the efforts of the owner and his or her advisors.