Preparing to Sell Your Business
By John Hart & Matt Jamison
Universal Advisor, 2005 Issue No. 3

For most owners of privately held companies, selling their business is one of the most significant transactions of their lives. For that transaction to be successful, considerable planning is required, regardless of whether the owners decide to sell now or 10 years from now. Developing and executing a sound business plan will always be essential to creating a valuable business. However, that plan should always be in synch with the owners’ objectives for a future sale. From researching the available options to understanding valuation to managing the company as if it’s for sale, there are many things owners can do now to maximize value in a future transaction.

Know the Options
Selling a business is a very complex undertaking, and business owners have numerous options. It’s very important to know and understand these options and, ultimately, identify those that are applicable to the company and the owners’ objectives. These options include sale to a strategic buyer, sale to a financial buyer (i.e., private equity group), leveraged recapitalization, management buyout, or employee stock ownership plan. Knowing and selecting the option that’s most suitable for the company will aid considerably in maximizing value, as the way an owner prepares for the sale and manages the company can be different depending on which option is selected.

Understand Valuation
Valuation is a critical component of selling a business. Owners should have an understanding of valuation and the critical drivers associated with how prospective buyers will evaluate a business. This information will significantly aid in the sale process, especially if done well in advance. Many times, owners decide to sell their business without knowing what it’s worth or how much they need from the sale to meet their objectives. Understanding valuation can help owners determine the best time to sell their company and how financial performance, market trends, and major business decisions may affect its value.

Manage the Company as if It’s for Sale
Managing a company as if it’s for sale increases the likelihood that the highest price will be received in a future transaction. This doesn’t mean that owners should operate their company solely for a future sale, but it does mean that they should understand how business decisions (i.e., major investments, personnel, new product offerings, etc.) can affect the value of their company. In addition to a solid business plan, as mentioned previously, shoring up the following areas can add significant value and marketability to a company in a sale process:

• Build a Strong Management Team: Long-term success is impossible without a strong management team. For this reason, prospective buyers place a high value on a company’s management team. Owners should be continually developing a management team that, ultimately, can operate without their involvement. Certain buyers will not consider companies without an independent management team. For owners actively involved in their company, this development and transition process can take several years but will pay dividends — even if the company isn’t sold.
• Establish a Financial Track Record: Companies that have a track record of hitting their numbers will receive premium valuations. Financial management and systems are a key focus in a buyer’s evaluation process. Companies that have a budgeting process and financial controls in place to manage costs are more likely to generate sustainable profitability. Valuations are primarily based on future cash flow, and buyers place a strong emphasis on the company’s historical track record to determine future cash flow.
• Develop Niche Product or Service Offerings: Companies with niche product or service offerings are generally more attractive to a buyer than companies with commodity offerings. For this reason, owners should be continually evaluating their product or service offering to identify and develop niche offerings that will allow for increased margins and differentiation in the marketplace. Launching a new product or service offering can be costly and take considerable time to bring to market. However, if planned correctly and properly positioned, it can have a major impact on the marketability and the valuation of a company.
• Diversify and Improve Customer Base: In general, a diversified customer base will increase the value of a company because of the lower risk profile. Certain buyers will not have risk guidelines that don’t allow them to invest in companies with high customer concentration. Additionally, prospective buyers use acquisitions to obtain access to attractive and growing customers. Owners should continually evaluate their customer base and look to align their company with customers that are industry leaders with strong growth prospects and profit margins. Prospective buyers will pay a premium for an attractive and diversified customer base.

It’s Never Too Early
Proper planning can make a significant difference in the likelihood of success and value maximization in a future transaction. Understanding the factors that will drive premium valuations and making the ultimate sale a part of strategic decision making will help owners in one of the most critical transactions of their lives. It’s never too early to begin planning and positioning for this significant event.