Imagine sitting at your desk and reading a registered letter from a potential buyer. The letter states that the buyer is retracting its offer to purchase your company as a result of the due-diligence review and analysis the buyer just completed.
This happened to Nathan White, owner of a small uniform manufacturer serving clients throughout the U.S. This was the second time in two years that a potential buyer had withdrawn its offer. Nathan was discouraged.
Nathan called me to see what he could do to sell his company. His story was one I have heard many times before. Nathan’s company suffered from poor exit planning, a checkered record of revenues and profits, a weak strategic business plan, inaccurate books and records, and the loss of two major clients. As a result, the potential buyer believed that the business was overpriced relative to its business value, therefore, the buyer could not justify completing the transaction.
For many owners, the last 10 years have been a difficult period for growth and profitability. Other companies, however, have done extremely well. What is the difference?
Too Little, Too Late
Owners do not plan early enough to sell their businesses. Since many owners have never sold a business before, they fail to realize that it takes time and careful planning to optimize the business value in order to maximize the sale price. As a result, they try to sell their businesses before they have maximized the enterprise value of their companies. This situation leads to a lower purchase price from a buyer, or worse, no sale at all.
The process of selling a business has become more complex as buyers today are more cautious and much more rigorous in their due diligence efforts due to the Great Recession.
Regardless of your personal goals, there are some key issues every business owner must address in order to be ready for a business transaction. The business landscape changes every three to five years, and your company’s exit plan needs to keep pace.
The key to increasing business value is to understand how a potential buyer views your business. Here’s what I recommend to my clients:
- First, obtain an independent professional valuation from an accredited valuation firm.
- Next, engage an objective business adviser to conduct a business audit and assessment revealing the strengths and weaknesses of the business.
The adviser can help you pinpoint the value drivers and ultimately increase your business’s value and sale price from 10 percent to 35 percent or more. If the assessment reveals that some of your business drivers are weak, prioritize them and begin work immediately to correct or improve them. Once you understand the current value of the business and the value drivers, you can identify tactics to increase its value.
Business Value Drivers
Key business value drivers may include sales growth trends, balanced and growing customer mix, strength of sales backlog, strength of the market niche, strong products and services brand, highly skilled, efficient and loyal workforce, solid vendor relationships, product differentiation, product innovation, strong management team that can transition to the new owner, up-to-date technology and modern work-flow systems and processes, strong management information systems, continuous growth in profitability, barriers to competitive entry, strong company culture and loyal customer base.
At least two years will be required to increase and improve the value drivers of your business. During this time, you will be able to correct minor cosmetic issues to help build incremental value.
Company culture and existing customer relationships are two critical areas that concern most buyers. Here is where you can add business value. If a business is sold, it is important to ensure that employees will embrace the culture of the buyer. Both these buyer concerns can be mitigated if the seller stays on as an employee or consultant for a reasonable period of time.
After two or three years of focusing on value optimization, your business worth should increase in the eyes of potential buyers. Understanding your company’s value and building upon it leads to a larger sale price and maximizes the wealth transfer to the business owner. If the business value process has been carefully carried out, the added value will stand up under the most rigorous buyer due diligence.
Sticking Around?
Continued owner involvement and the development of a strong management team have become even more important to buyers in today’s merger-and-acquisition environment. As earn-out requirements are commonly integrated into a sale price, performance stipulations tied to profits and revenue are frequently included in the sale contract to obtain the full purchase price.
If you are considering selling your company, act now. You must allow sufficient time to prepare for a transaction to correct any issues and build incremental value in your business. While the market is strong now, strong markets do not last forever. Time is of the essence. Remember, poor exit planning can erode the value of a lifetime of success.
Gary Miller ([email protected]) is the CEO of GEM Strategy Management Inc., an M&A consulting firm advising middle-market private business owners. Read more of Miller’s blogs here.
