Oftentimes a business owner decides to sell their company, but finds there are many aspects of the business not ready for a sale. While it’s possible to prepare the business for sale rather quickly, it will lead to a band-aid approach to changes rather than sustainable evolutions that will maximise the value of your business and the sale price.
Constant focus on business growth and sustainability forces business owners to de-prioritise aspects of the business that just work, yet that reduce the value of the business in terms of a sale. Only when they are faced with the opportunity to engage with buyers do they begin making the necessary adjustments.
This lack of foresight unfortunately leads to 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 was not done.”
So what can be done to prepare for an exit with an uncertain time horizon?
- Executive Management: The most essential step that a founder can take is to build out a full management team that can run the business without the owner. It takes a significant investment in time and attention to prepare a competent management team, but it’s also one of the most essential ingredients for a profitable exit. Without exception, the sale process becomes more arduous and fraught with complication if a buyer doubts the ability of the company to run in the absence of the founder. These concerns are not limited to owners near retirement age either. Young owners have little incentive to remain involved. 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.”
- 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.
- Financials: It is common practice for business owners to prepare an audited set of financial statements two years before a sale, but 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.
- Customers: 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 loosing key customers that would depart with the founder, especially if those customers make up a significant portion of the revenue.
- 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.”
It is more crucial than ever for owners to plan ahead to maximise 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.