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So selling is understandably a big and emotional decision.
You only get one chance to get it right (when selling your company). There are no mulligans or do-overs.
Yet, far too many principals do not invest adequate strategic resources, thought or planning into preparing their business for sale… which costs them real money.
This is not done intentionally. You are busy running your business. You are responding to customers. There seemingly is not enough time, energy, or knowledge to apply to the process. Principals may not know where to begin, who to talk to, or how to increase their exit value.
As such, to avoid making the costly mistake of not preparing your company for sale, ask yourself a few key questions 3-5 years before you want to sell. This list is not all-inclusive, but it’s a good starting place — Questions to consider when selling a business:
1. How Does My Business Look From The Outside In? What Would Potential Suitors Like / Not Like?
What would the buyer want to see when purchasing a company? What items will decrease the value of the business and can I change those items over the next 3-5 years to increase my company’s value when I sell? Have I made the necessary investments into infrastructure, technology and equipment? Ask your advisors to poke holes and identify items as well.
i. By simply stepping into the buyer’s shoes, you and your advisors might identify some issues that need fixed or some opportunities that need to be developed. Even though this process is honest and painful, selling your company for an enhanced value someday will ease that pain!
2. Do I Have Concentration Risk? This could be significant customer, industry, product, or contributing margin concentration?
i. Diversifying revenues over the next several years will decrease risk for the buyer and his/her financial partners (banks, investment funds) therefore allowing for a higher purchase price. Most financial buyers want to finance some of the purchase price with debt. Diversification provides for a more financeable deal because it decreases risk. A more financeable transaction will result in relatively more bank financing (the buyer can put more leverage on the company) which often results in a higher sales price.
ii. Also, diversification makes your company a more attractive acquisition target to a private equity buyer because it affords a stable base from which to grow from .
3. How Reliant Is The Business On Me?
Have I built a management team strong enough that I can walk away from the business? Do I want to be active in some way post-sale? Are key management positions filled with qualified individuals?
i. Having addressed this big issue removes risk for the buyer and makes your life easier as well. Having already addressed these questions and concerns (that definitely will come up at the negotiating table) allows you to have an exit plan. This enables the buyer to focus on other important tasks and affords them the ability to leverage the experience / and legacy knowledge of this team upon your departure. If you know that continuity of a competent management team is a key risk you can remove for the buyer, why not address it now so you can attract more buyers and sell your business for more money?
4. Who Will The Likely Buyer Be?
It makes a difference if it is a strategic or a financial buyer and even more of a difference if you want to consider your management team as buyers. By thinking of who are the likely buyers well in advance of a sale, you can begin to position the business to the prospective buyer audience through personal contacts and by the intentional marketing of your business’s strengths.
5. Have You Found The Right Team Of Advisors?
It is extremely important that you assemble a competent team of legal, financial planning, tax, valuation, investor, and banker/broker professionals. Some entrepreneurs look at this as an added expense. However, when you are planning an exit, this might be the best thing you can do.
Asking these questions and others will help you address items that otherwise erode the actual or perceived value of your business, therefore helping maximize value when you sell. Often times it makes sense to hire a certified exit planner and/or investment bank to help you prepare your business for sale, or work with a trusted capital provider. Seek advice from your attorney and accountant as there may be tax / legal considerations that affect how much money you walk away with and your legal risk post-transaction. Also, bankers and investors are good sources of advice.
Most of these key questions are simple concepts that just need some strategic focus, and remember, this is something you want to begin doing 3-5 years before you actually want to sell your company.