For many business owners, their wealth is tied up in the businesses they own, which can become a liquidity problem when it comes time to sell and/or retire. As an investment banker, I have observed too many owners who aren’t prepared for the day when they’ll need to cash out. Some haven’t done their homework regarding the current market value of their business, while others haven’t properly prepared their business to switch hands.
Selling a business isn’t simple, but most business owners have more liquidity and monetization options than they realize. Not properly timing and preparing your business for sale could mean serious financial consequences for both the entrepreneur and the company. So, it is helpful to understand the pros and cons of timing the sale of your business and how to prepare a company for sale.
Whatever brings an entrepreneur to the point of selling a business, the sale will be one of the most significant business actions one will take. Unlike the decisions made while running a business, selling it is an action you will take only once. You get a single chance to put a price tag on years of effort — and once you sign the sales documents, it’s over. Before moving forward with a sale, it is important to understand the steps involved and preparation needed.
Now is a great time to determine what you want from the sale, planning carefully, obtaining professional advice and negotiating a satisfactory price and acceptable terms will help make the sale a success.
When is the right time to sell my company?
The question I am most frequently asked is, “is now the right time to sell my company?” Obviously, there is no simple answer to this question. What surprises many business owners is that a successful sale of a business has less to do with market conditions and more to do with the current state of the business for sale. Generally speaking, businesses that show a strong track record of steady or increasing sales and profitability will always sell faster and for a better price than those that are in a decline.
If a business is up or steady, this is a better time to sell. No matter the global or macro-economic factors surrounding a company, if a business is up, the demand for it and the sales price will follow.
To this end, below are some key issues that founders and management may need to asses when deciding whether or not to sell a business.
- Market Specific Factors: First of all, you will want to assess the overall market situation and see where your business fits in. Specifically, looking at valuation trends for similar companies and the overall industry with any eye toward the “attractiveness” of your business. If sales are booming and profits are great, it might be a good time to sell. However, if your business is in the early stages and you expect to see significant growth in the near future, it may be best to hang on to your business or consider a minority recapitalization to fuel growth today without ceding control of your company or the majority of the benefit of a future sale. In addition, when you review market specific factors and think about how the future looks, you will want to consider how active the deal market is, availability of capital from strategic buyers and sponsors, appetite to enter your industry, and will your product or service be marketable in the coming years. Keep in mind that selling into a bull market is always better than selling into a downturn.
- Company Specific Factors: Analyzing a company’s growth prospects, internal resources, competitive positioning, and industry valuation metrics can help determine whether a firm’s value may be peaking. Buyers pay significant premiums for companies in industries that are perceived to have strong growth prospects. As such, it is best to monetize an investment before growth begins to slow or entry in the industry begins to wean. Lastly, it is important to consider liquidity alternatives in the pre-planning stage, as this may help in determining the type of transaction you will want to consider (e.g., sale of company, recapitalization).
- Shareholder Specific Factors: Non-valuation considerations such as liquidity needs of other investors, desire to maintain a continuing management role, and personal wealth and lifestyle issues may lead a firm to consider liquidity events independent of what valuation trends may indicate. When such non-valuation factors are driving the decision-making process, it is useful to understand that shareholder liquidity is not strictly an all-or-nothing proposition. Under the right conditions, transaction structures such as recapitalizations can be used to allow a portion of a firm’s shareholders to sell their holdings while other shareholders retain their interests.
Preparing a Business for Sale
Many times as investment bankers we see business owners who have decided to sell their companies, but find that many aspects of the business are not ready for sale. This lack of foresight leads to money being left on the table and can create risks to closing a transaction. There are many things that can be done to increase the value of a business and decrease the risk for an eventual buyer. Below are several key steps that can be taken to help ensure a successful and profitable sale:
- Get Your Advisory Team in Place: Hire a reputable investment banker to represent you and help you through the selling process. Retain attorneys and accountants who are proficient in mergers and acquisitions.
- Business Valuation: Obtain a realistic idea of how much your business is worth from an objective, outside source. A professional valuation will give you a basis for gauging buyer offers and will give you an idea of what you can expect to net from a sale.
- Get Your Books in Order: The more formal and professional your financial statements, the easier the due diligence will be for a prospective buyer. Generally, we recommend at least three years’ of financial information, with some level of review by a third party accounting firm.
- Consult Your Financial Advisor: Speak to your tax advisor for help planning your financial future. Understand your personal and corporate tax situation. Know and understand what your “actual” payout will be; post tax.
- Organize Your Legal Paperwork: Review your incorporation papers, permits, licensing agreements, leases, customer and vendor contracts, etc. Make sure you have them readily available, current and in order.
- Understand the True Profitability of Your Business: Adjust financial statements for unusual or one-time non-recurring items. Adjust financial statements for personal expenses.
- Know Your Reason for Selling: Buyers are always curious as to why a seller wants to exit a business. Be prepared to articulate your reasons.
- Keep Your eye on the Ball: Focus on the business during the sale process, as buyers always want updates to financial information.
If the past several years have provided any lesson to sellers, it is that company valuations are at the mercy of the marketplace and business owners will want to be ready to take advantage of favorable market timing, which we feel is upon us.
Eugene Urcan advises clients on merger and acquisitions, financings, strategic objectives, and valuations. He has provided valuation and advisory services to many of the largest hedge funds, private equity firms, venture capital funds, pension funds, fund of funds, and corporations on their illiquid equity and debt holdings. Before joining Cappello Capital, Urcan served in various capacities, most notably as a Managing Director and Head of Valuation and Financial Advisory at Houlihan Capital, Vice President and Director at Duff & Phelps, and as an Associate at Houlihan Lokey.
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