The process of selling a business has become more complex today. Buyers are more cautious and much more rigorous in their due diligence efforts due to the Great Recession. A big reason why a deal fails is that owners do not plan early enough to sell their business.
Many first-time sellers fail to realize that it takes time and careful planning to optimize the business value in order to maximize the sale price. This thus leads to a lower purchase price from a buyer, or worse, no sale at all.
The business landscape changes every three to five years, and your company’s exit plan needs to keep up. Regardless of personal goals, there are some key issues every business owner must address to become transaction ready.
The key to increasing business value is to understand how a potential buyer views your business.
- Obtain an independent, professional valuation from an accredited valuation firm.
- Meet with an intermediary to determine what areas need help and what are the area of strength.
- The advisor can help you pinpoint the value drivers. This will ultimately increase your business’s value and sale price from 10% to 35% or more. If the assessment reveals that some of your business drivers are weak, prioritize them and begin correcting or improving them immediately. Once you understand the current value of the business and the value drivers, you can identify tactics to increase its value.
Key business value drivers may include:
- Sales growth trends
- Balanced and growing customer mix
- Strength of sales backlog
- Strength of the market niche
- Strong products and services brand
- Highly skilled, efficient and loyal workforce
- Solid vendor relationships
- Product differentiation
- Product innovation
- Strong management team that can transition to the new owner, up-to-date technology and modern work-flow systems and processes
- Robust management information systems, continuous growth in profitability, barriers to competitive entry
- Strong company culture and loyal customer base. Company culture and existing customer relationships are two critical areas that concern most buyers. If a business is sold, it is important to ensure that employees will embrace the culture of the buyer. Both these buyer concerns can be mitigated if the seller stays on as an employee or consultant for a reasonable period of time.
We suggest business owners to take at least one to two years to increase and improve the value drivers of a business. During this time, you will be able to correct minor cosmetic issues to help build incremental value.
After two or three years of focusing on value optimization, your business worth should increase in the eyes of potential buyers. Understanding your company’s value and building upon it leads to a larger sale price and maximizes the wealth transfer to the business owner. If the business value process has been carefully carried out, the added value will stand up under the most rigorous buyer due diligence.
Continued owner involvement and the development of a strong management team have become even more important to buyers in today’s M&A environment. As earn-out requirements are commonly integrated into a sale price, performance stipulations tied to profits and revenue are frequently included in the sale contract to obtain the full purchase price.
If you are considering selling your company, act now. You must allow sufficient time to prepare for a transaction to correct any issues and build incremental value. While the market is strong now, strong markets do not last forever. Time is of the essence.
Remember, poor exit planning can erode the value of a lifetime of success.
If you have any questions, feel free to contact Joan Young, President of Sunbelt Business Brokers, Greater Bay Area – [email protected]. Sunbelt also handles Mergers and Acquisitions.