You have worked hard your whole life, built a successful enterprise and are finally ready to let someone take over the family business.
But how do you do that? Especially when you need the funds from the sale of your business to be comfortable and fully enjoy the next phase of your life.
Unfortunately, too often there is no one to take over the family business when the owner is ready to exit. If this is true in your family business, then you need to develop a “legacy exit alternative.” In simple terms, this is a plan to sell your business to an outside party.
You need to determine the best party to transition your business to in order to accomplish your long-term goals. For example, consider your employees, management team, competitors, customers, suppliers or even a private equity group (if your company is large enough).
Getting ready to sell
The best place to start in forming a game plan is to make an honest evaluation of your business. Identify your strengths and weaknesses and, equally important, know what opportunities are available to grow and expand your business.
Understand what will drive the value of your business in your industry. Do potential buyers consider revenue a key point? What about contractual commitments or earnings?
Play up your strengths and make sure they can be passed on to the buyer. Recast your financial statements to remove expenditures a new buyer would not incur.
Examples include one-time expenses, salaries paid to family members who would not need to be replaced or business-related travel and entertainment that was not necessary. Most closely held businesses provide fringe benefits to owners that may not continue under new ownership.
Identify opportunities and be prepared to sell the buyer on them. You know better than anyone what would make your business better if you had the additional capital to implement the strategies. The more you know about your business and the opportunities, the more comfortable the potential buyer will be with your suggested plans.
For example, if you know how much capital is needed for a proposed improvement, prepare a schedule to show your buyer what is needed and the profit that can be made from the improvement.
It is best to face your weaknesses head-on and develop a plan to compensate for them. You should make the potential buyers aware of your weaknesses up front so they are not blind-sided during the transaction.
If you wait, you are vulnerable to having the price renegotiated downward when they discover your ‘warts.’ I tell my clients we will cover their ‘warts’ with makeup, but we
must first acknowledge they exist.
If you may be ready to retire or transition out of the business but you cannot stop working when you decide to sell, this is the time to push harder than ever. Buyers pay closest attention to your most recent activity.
Experiencing downturns in your revenue and/or profits will significantly hurt the selling price of your business. Prior to the sale, begin passing down responsibilities to those who will stay on. You may also need to stay on past the closing date to ensure a smooth transition. This added measure is part of getting the best price.
Put the right team in place
Put a team together, preferably three to five years ahead of the sale, and make sure to obtain outside points of view, including trusted advisors such as your CPA, attorney and banker.
It may also be beneficial to get a fresh point of view from outsiders who do not know you or your company.
Just as you are advised not to represent yourself in court, you will be better served not to be the lead negotiator in the sale process of your business. An experienced professional who is knowledgeable in negotiating tactics is more than worth the fee you will pay.
This process of selling your business can easily take 6-12 months, maybe more. You must learn to be patient and be prepared to provide a wealth of information to the potential buyer.
This can be time consuming and even frustrating. But, if there is a sophisticated buyer involved, it will be necessary to close the transaction.
When selling your business, you need to be familiar with the M&A term “EBITDA” (Earnings Before Interest, Taxes, Depreciation and Amortization). More often than not, your business will be valued as a multiple of your company’s EBITDA. The value of your business is the result of this multiple less debt, which is primarily defined as long-term interest bearing loans.
For most business owners, their company is by far the biggest asset they will ever sell and it is important to liquidate it at a beneficial price. The sooner you begin to plan your exit process, the better your chances are to complete a successful transaction.
W. Michael Grady is the director of management consulting services for WebsterRogers LLP. He focuses on mergers and acquisitions and business transition planning. He can be contacted at 843-319-9100 or mgrady@websterrogers.com.