Often when you decide to sell your business, you’ll find that many aspects of the business are not ready for a sale. Whether it’s incomplete financial statements, disorganized tax history, or simply miscommunication, the sale process can quickly become complicated and difficult. While it’s possible to prepare your business for sale rather quickly, these band-aid fixes will not be overlooked by diligent buyers.
The lack of planning unfortunately leads to lower sale prices and money being left on the table. Ryan Guthrie, Director of the Private Equity Practice, BDO USA, said, “The majority of business owners who sell their business don’t plan ahead in preparation of a sale. In most cases, a lot of things that could have increased the value of the business and decreased the risk for buyers were not done.”
So what can be done to prepare for an exit with an uncertain time horizon?
1) Executive Management
The most essential step that a founder can take to prepare the business for sale is to build out a full management team that can run the business without you. While it takes significant time and attention to prepare a competent management team, it’s one of the most necessary ingredients for a profitable exit. With a strong management team, interested buyers can feel confident that the business will be prepared for most transitions, including the departure of a CEO. If a buyer doubts the ability of the company to run in the absence of the founder, it can prove an insurmountable deterrent.
These concerns are not limited to owners near retirement age either. Young owners have little incentive to remain involved once the business has been sold. Scott Humphrey, Executive Managing Director and Head of U.S. Mergers & Acquisitions of BMO Capital Markets, said, “In the case of an exiting owner, the buyer needs to come in and not only get comfortable with the business, but ensure the business will continue to grow without the owner. This increases risk greatly.”
2) Middle Management
Larger middle-market companies often prepare for a sale by bolstering management, but far fewer companies take the initiative to develop a strong set of middle management talent. Expanding the management capabilities beyond the executive level reassures buyers and ensures a seamless post-sale transition. Many buyers of businesses are looking for well-run companies that have fairly independent and strong business units that will transition nicely after the sale.
While a common best practice is to prepare an audited set of financial statements two years before a sale, there are also financial preparations that can take place much earlier that will help ready a business for an exit. Foremost among them is the process of separating out the company’s real estate holdings from the rest of the business. Robert Snape, managing director at BDO Capital Advisors, said “we’ve often seen owners carve out the real estate from the business and sell the business to one party and sell the real estate to a separate buyer.” However, if an exit is a possibility in the next five years, Guthrie at BDO advises against making dramatic changes like relocating a factory or any other business change that would appear to disrupt a growth trend. If the real estate is held separately from the business, often you can sell the business and then lease the factory or warehouse back to the business owner to retain some of the earnings even after you exit the company.
When there is a long-term horizon of sale, it is also beneficial to look at ways to add to the sustainability of earnings. Buyers want to see customer diversification and reduce the risk of losing key customers that would depart with the founder, especially if those customers make up a significant portion of the revenue. Data from Axial shows that the average amount of interest in purchasing a business is lower whenever there is significant concentration in a few larger accounts.
5) Corporate Structure
It is important to examine the corporate structure of the company. There are important tax consequences that come with selling C-Corp and S-Corp businesses. Guthrie advises company owners to keep the end in mind and to determine what the optimal corporate form would be for the business. “There’s not a lot you can do a year before the sale,” he warns. “But there’s a whole lot more you can do 10 years before the sale.” Checking with your accountant to ensure everything is set up correctly for a potential sale can have an effect on the final valuation of your business.
It is more crucial than ever for owners to plan ahead to maximize the enterprise value of their company. If the past several years have provided any lesson to sellers, it is that company valuations are at the mercy of the marketplace and business owners will want to be ready to take advantage of market timing.