Toes up. Is this your exit strategy? It is for some but even if it is, you need to consider maximizing the value of your business for retirement and/or heirs.
What is your business worth? Do you know how to calculate a value? Some buyers consider profits, others free cash flow (maybe you have heard the term EBITDA – earnings before interest, taxes, depreciation and amortization), others revenue, others intangibles (such as patents). You need to have an idea of what the business is realistically worth, not unlike selling your personal residence. Comparing your perceived value to other comparable business sales is very helpful but it involves more than that.
To establish the potential sale price and to navigate through the process, think in terms of competent professional advice. Your accountant, your attorney, a consultant, or a reputable business broker can play an integral part in this endeavor.
Some think that they have a business to sell, but in reality all they have is a job. Please keep that in mind when analyzing the worth of your business.
Each company has its strengths and weaknesses which contribute towards the ultimate value. Are there any unique patents or business relationships that can enhance future profitability? How about other intangibles? What about customer concentrations which may be a detriment to the value? Supply chain strengths and weaknesses? Accounts receivable performance? Inventory data, if applicable. Stability of your workforce?
If you are contemplating a sale, it's likely some house cleaning is in order.
Regardless of the buyer, you need to show maximum profitability to maximize the sale price. Keeping accurate records of personal expenses that you pay through the business should be noted.Watch incidental expenses that may not be necessary. (It is not uncommon for companies getting ready for a sale to delay fixed asset expenditures or repairs.Document your company’s standard operating procedures. A buyer should be able to step into your shoes almost immediately. Make it easy for him or her. You would hope that post the closing of the sale the company operates as well as it did under your tutelage. Can the company function in your absence? Do not downplay (in your mind) the significance of your business involvement. There can be a fall off, whether it is with customers, suppliers or employees.
Take a look at your website. Do you need to freshen it up? Do so before you allow potential buyers to examine your company.
Give some thought to potential suitors. Are there any industry “buyers?” It is worth it to explore these options early. With regard to the industry, what about current employees? Is anyone in house currently capable of running the business? An ESOP can be a rewarding way to proceed, but the transactional costs are much higher than a third party sale, and most likely it will yield a smaller financial price to the seller. Are there family members who may be able to belly up to the bar? If not, be prepared for a lot of people to do their analysis. If your professional team (accountant, attorney, consultant and/or business broker) are doing their jobs, you should see plenty of buyers.
Keep your employees in the loop. At some point the cat will get out of the bag. You should determine how and when the team is advised of your plans. It is always better for them to hear it from you; the rumor mill has a way of hurting you. What will happen to them after a sale? As loyal as they may be, ultimately they are interested in their personal welfare.
Structuring the Sale
Your professional team definitely assists here. Are you selling the company stock or assets? There are different tax and legal implications. Are you providing terms along with the sale? Rarely does a buyer pay 100 percent cash (even venture capitalists sometimes have you holding some stock, keeping you at risk). What is your appetite for the seller take-back? What is your recourse if the buyer defaults? If the sale has you thinking retirement, are you prepared to go back to work in the event of a default?
If you do take back paper, you have every right to make certain that the buyer has the financial ability and business savvy to pay you back. Make sure they have the available finances to operate successfully. Your vendors may be more cautious with a new owner, and you don’t need them upsetting the apple cart with more stringent requirements.
More than likely, you will be asked to enter into some sort of consulting agreement over a period of time. In some instances it is nothing more than a structuring of the purchase and in other situations it is a real consulting arrangement. Understand your role post closing role and options.
Did I mention the significance of professionals to guide you through this process?
Besides the valuation, selling terms, and evaluating buyers, there is a lengthy due diligence process. Be prepared for a lot of information requests and hand holding. The prospective buyer is entitled to a lot of information.
After graduating from the Wharton School at the University of Pennsylvania, Harvey Mackler enjoyed a 20-plus year career in commercial banking, exercising his “golden parachute” in 1996. He was executive vice president and COO of a commercial finance subsidiary in Manhattan and chairman of the Small Business Banking Unit of the American Banker’s Association. He has served on the board of the acclaimed George Street Playhouse in New Jersey and chair of the Easter Seal Society of New Jersey for two years, as well as a captain on his local emergency rescue squad. He acquired GWI Corp in February, 1997 and transformed it to focus on the supplier/distributor/end-user model, growing the company's sales by 500 percent. He is past chair of the SAAGNY Foundation, current Co-Chair of the PPAF EXPO and past Chair of the Supplier Committee of PPAI.