As we have been discussing in the past two articles, the personal decision to sell your business is usually based upon some combination of the following:
· A desire to “take the chips off the table.” Your tolerance for risk just isn’t what it used to be.
· The joy of going to work each day is fading. Not only has the fire in your belly gone out, but it’s been replaced by the desire to do “something else,” known or unknown.
· The “successor designate” can’t and/or won’t succeed. Neither child nor employee is able and/or willing to fill your shoes.
· You realize that now is the time to sell because you can attain financial security.
· There are a lot of activities other than running a company that you still want to experience.
Along with the personal motives listed above, there are objective conditions that must be present to maximize your chances for a successful business sale. These include:
· Your company should be experiencing increasing cash flow.
· Your company should be maximizing the “value drivers” recognized by investment bankers as causing your company to be more valuable.
· The merger and acquisition (M&A) market should be vibrant and near the peak in deal activity and pricing.
On a regular basis (no less than annually), you should discuss with your “planning team” (which normally includes your CPA, attorney and personal investment advisor) current business value and how best to increase and protect it. If your business has reached a value threshold that permits a sale that allows you to realize your financial goals, you have reached a point where you may be able to sell.
If this is the case for your business, then the next step is to discuss with your team the process for selling to an outside third party. With access to an experienced “deal team” (including a transaction intermediary) who can estimate the marketability and pricing if you sold your business today, a professional legal advisor (preferably one with substantial experience with sale of business transactions) can help guide you through the process of cashing out of your business and moving on to the next stage of your life.
If your business is not ready to be sold, even though you are ready to sell it, you may need to focus on increasing cash flow. This is best achieved by employing value drivers recognized by the M&A professionals.
The following value drivers are just a few of the key value drivers which are important to selling your business for the highest price:
1. A motivated management team tied to the company by “carrots” (stay bonuses and ownership or ownership-like incentive arrangements) and “sticks” (non-competition and non-solicitation agreements)
2. Quantified operating systems
3. A diversified customer base (no one customer constitutes over 10% of your revenues)
4. Recurring revenues and multiple streams of revenue
5. Realistic growth plan and scalability
6. Financial systems and controls to withstand due diligence
7. Financial growth in all three areas at once (revenues, cash flow, and profitability)
8. Protected intellectual property
9. Owner already removed from the business
10. Relational health (engaged employees, engaged customers and engaged suppliers)
Again, meeting with your planning team is key to maintaining a focus on increasing business value and cash flow through value drivers. The planning team will help you make the decision to sell as early as practical—hopefully years before the actual sale—so that the business is ready when you are!
Remember, it usually takes years to significantly and consistently increase cash flow and business value. Once you’ve made the decision that you would like to someday sell your business, the time to begin planning and implementing begins immediately.
If you are ready to exit, and your business is saleable given the current M&A marketplace, the decision is usually straightforward. It is when you are ready to sell, but your business isn’t, that the chance for burnout increases. Be sure to choose an experienced exit planning professional so that your potential for owner burnout is minimized and you are able to exit on your terms and in your preferred time frame.
Article presented by Robert Norris, a Partner and co-chair of Shumaker, Loop & Kendrick, LLP’s Emerging and Middle-Market Practice Group. Norris is also a member of Business Enterprise Institute’s International Network of Exit Planning Professionals. 2015 Business Enterprise Institute, Inc. Reprinted with permission. Shumaker, Loop & Kendrick, LLP partners with owners of closely-held business to provide comprehensive legal services in all areas of business, tax, exit planning, succession planning, purchases and sales of businesses, estate planning, real estate, employment law, intellectual property and litigation. For more information, contact Robert Norris at 704-945-2926 or firstname.lastname@example.org or visit www.slk-law.com.