Are you one of the 70% of business owners who will eventually sell their business to a third party buyer? Do you plan to sell within the next 10 years?
The statistics are startling. Approximately 75% of owners who sell their business to a third party buyer are dissatisfied with the results. They believe they left money on the table, paid too much in taxes, or failed to accomplish their personal and financial goals. The number one reason that private business sales fail or only partly succeed is lack of planning on the seller’s part. Fewer than 3 out of 10 owners have a plan to maximize growth and third party sale value.
Consider the following key questions that your business growth and value plan needs to answer.
1. What is the realistic value of your company? Although market and industry conditions and the effectiveness of your sale process will affect the value of your business, the most important factor will be a track record with a history of generating a consistent or growing cash flow.
As a starting point, we apply a sophisticated capital structure optimization model to estimate the selling price and financial structure that will support bank financing within a reasonable range, a buyer’s required equity contribution, and potential needs for seller financing. Then, based on unique business and current market conditions, we help evaluate the marketability of your company. Beyond this strategic modeling, there may also be good business or estate planning reasons to have our valuation professionals do a more formal valuation.
2. What will you actually realize upon sale, and will the proceeds meet your needs? Your sale proceeds will be reduced by certain liabilities that the business will need to repay and of course, by taxes. It will be very important to carefully analyze and consider tax planning and
deal structure with a CPA to determine your net proceeds.
Once you know the net after-tax proceeds, consult a qualified financial advisor like our professionals at Schenck Investment Solutions to help make sure you will be able to meet your anticipated lifestyle needs and your desire to leave a financial legacy to your family or community.
3. How can you improve your business value? Improving your business value is especially important if you need to improve your target sale price. Examine your strengths and weaknesses. Identify how you can improve earnings (look at internal or acquisitive growth, or process improvements), and evaluate other value-drivers and salability. We look at your company as a buyer would, and improve salability by identifying potential problems before you go to market. Based on a cost-benefit analysis, you may fix the problems or be prepared to disclose them to buyers to avoid surprises that could derail a sale. Building early trust with a potential buyer is one of the keys to success.
4. How will you protect the value you receive? Work with a wealth-management professional (such as Schenck Investment Solutions) in advance of the sale to determine how to invest and manage your money to achieve your goals. Update your estate plan to reflect the expected sale proceeds, minimize taxes, and maximize your objectives. Include plans for gifts and transfers.
Consider these questions throughout the life of your business and at least three years before contemplating the sale. You can then leave your business when you want, with financial security and capable successors. For better exit value, plan additional time to implement growth and improvement projects. It’s important to show consistent, profitable results. Beyond business planning and improvement, allow us at least a year to prepare market strategy and marketing materials, identify and contact qualified buyers, and help you negotiate and close the sale.
The most important statistic is that business owners with growth and value plans achieve better value and satisfaction. Most do not plan far enough ahead. It is never too early to start. Develop a roadmap that will meet your personal and financial goals within your timeframe.