Setting the stage several years before you plan to sell your business is the best way to ensure a smooth and profitable processs. . . .and to take advantage of opportunities along the way.
by Karin O’Connor
One of our clients recently surprised us with an exciting announcement: He and his wife had just returned from a trip to Tanzania, where they had visited a school for orphans that was doing great work. On the flight home, they decided to make starting a second school their next adventure—and are planning to sell their business in three years to make it happen! Another recent client conversation was equally intriguing: Jack had received an unsolicited offer for his company with a $12 MM price tag! Though not interested in selling right now (he’s having too much fun), he wanted to talk about what to do if this happens again—how would he know whether the deal. . .and price. . .make sense?
At Perimeter Advisors, we’re big fans of thinking, and planning, ahead. And when it comes to what, for most business owners, will be the biggest financial transaction of their lives, it can be critical. While three years (or even more) sounds like a long time, the process of hiring a banker and taking the company through an auction can take up to a year to execute, and market conditions change swiftly and are outside of anyone’s control. The more prep work you do up-front, the better positioned you are to move quickly when you decide that the time is right.
So, what can you start doing now to ensure a successful transaction down the road? Here are a few ideas from our client project playbook:
- Get acquainted with investment bankers in your space. It’s amazing how much you can learn (for free!) from folks in the deal world—Who are your industry’s most active buyers? What are they looking for? Who has gaps in their business model that your company could fill? What prices are they paying? Keep in mind that an intro meeting is an intro meeting—you are not committing to put your company on the market now (or ever)—and that you can control the amount of information you give out. If the banker can get to know a business and see how it performs over time, he/she will be in a much better position to tell its story later on. And if you do receive an unsolicited offer, you will be in a much better position to respond.
- Start getting your financial and legal house in order. Prospective buyers will eventually conduct extensive diligence on your financial statements, contracts, and books and records, and savvy ones will use any weakness in these as a way to extract better pricing and terms, usually at a point when your negotiating leverage is at a low. Head this possibility off at the pass. If necessary, upgrade your team of advisors now. Stop running personal expenses through the business, and start documenting items (e.g. compensation for inactive owners) that should be added back to cash flow. Make sure that your accounting policies are rock solid, and consider stepping up to an audit (or at least a review). Have your attorney review contracts with customers, vendors, and partners and renegotiate now if there are provisions that could hang up a deal. Consider having key employees sign non-disclosure/non-solicitation agreements, and make sure that your intellectual property is properly protected.
- Make the business less dependent on you. Over and over, we’ve seen this issue become a key stumbling block to a transaction. One of the savviest moves we’ve heard recently was by two company founders (brothers) who hired an experienced outside CEO three years before they planned to market the company, charged (and incented) him with getting it ready for sale, and then spent progressively less time in the day to day. By the time prospective buyers came around, the business was being run by a professional management team with no question around founder dependency, and the resulting auction produced top dollar.
- Document those growth and profitability plans. . . and start executing now. It seems obvious—a company with a nicely-growing top line and increasing margins is worth more than one without. If you have a few years to work with, start crafting all of those ideas into a real game plan and get going. Need additional expertise around the execution? Outsourced resources, consultants, and interim executives are available, generally with more flexibility and at lower cost than adding full-time staff.
At Perimeter Advisors, our only focus is on assisting business owners in maximizing the value of their vision and hard work. We can help you get your biggest asset ready for its big day. . . .from documenting and implementing growth and profitability plans (using our curated network of functional experts and resources) to vetting and managing your team of advisors and pulling together information in a way that buyers understand. We’ve been through the process and know the ins and out, and we can put that knowledge to work for you. Let’s get started!