A crisis is looming for business owners wanting to sell their companies. Currently, 80 percent of business owners of small and middle market companies who put their businesses up for sale never close the transaction. The reasons: poor planning and over valuation.
With the impending baby boomer tsunami, more businesses will be for sale than at any other point in history creating a buyer’s market. This buyers’ market will cause significant competition. Businesses that do not plan well or over value their companies will be left out in the cold.
Many strategic and financial buyers with significant funds to invest are more cautious and reluctant to pay premiums for companies than a few years ago. Therefore, as a part of your planning process, owners should take these three steps to significantly increase their chances of selling their businesses.
Think like a buyer. Most buyers want to purchase a company that has the following characteristics:
A proven entrepreneurial management team in place who can continue rapid growth and expansion after the transaction closes. Most buyers do not want to replace current management of the company they are buying. Doing so adds a risk profile that could endanger the viability of the business going forward.
A strong and realistic growth plan to continue value creation through market penetration and expansion, defined market niche and/or acquisitions.
An ability to produce significant returns on invested capital coupled with strong positive cash flows.
A sustainable competitive advantage.
Prepare before you go after a buyer. Attracting a buyer is like preparing for a beauty contest. Companies that “show best” come in first. It takes six to 18 months to prepare your company for the buyers’ marketplace. Strong preparation could mean the difference between a much higher selling price than weak preparation. The strong preparation steps:
Quantify the business value through a third party valuation firm.
Get rid of obsolete inventory. If your financial records show a higher value than market value, take the write off now so that it doesn’t become an issue for the buyer.
Audit your financial records by an independent accounting firm.
Strengthen legal and contractual affairs.
Install and improve operating systems and processes.
Tell your management team that you plan to sell the company. Be truthful. Include them in the preparation process. To not do so could scare your key employees (the very ones you need to keep) when a buyer’s due diligence team shows up to begin their due diligence process. This could trigger your key employees to search for new careers.
Create management and key employee long term incentive plans to stay with the company
Prepare for buyer due diligence. If you were buying your company, what would you drill down on first, second and so on? Conducting your own a due diligence similar to a buyer’s due diligence process allows you to discover any skeletons before the buyer does. It allows you to correct them or to put the best possible explanation forward to the potential buyer.
Select the right team to help prepare you to go to market. Assemble a collaborative multi-disciplined team of experts is critical to help prepare you to go to market. Advising you on alternative exit strategies, tax issues, alternative deal structures, preparing you for negotiations are important before a buyer shows up to make a deal.
Five key team members are important to your success:
A management consulting firm with strong business strategy expertise and transaction experience to lead the team.
A law firm with significant transaction experience led by an attorney who is a CPA.
An investment banking firm with deep transaction experience in your industry.
An accounting firm with major transaction experience to guide you through the tax issues.
A wealth management firm to help you plan wealth preservation from the transaction.
Following these three steps will significantly help you finding the right buyer, at the right time, paying the right price to close the transaction.
Gary Miller is founder and CEO of GEM Strategy Management Inc., a management consulting firm focusing on strategic planning, growth capital for expansion, and advising owners on exit strategies for middle market companies. Reach him at firstname.lastname@example.org, www.gemstrategymanagement.com and 877-792-0972.