Planning to Sell Your Business in the Next Several Years? Plan Ahead for Business Growth and Value

These statistics are startling!  Approximately 70% of business owners will eventually sell their business to a third party buyer, many within the next 10 years.  Less than 3 out of 10 business owners have a plan to maximize business growth and third party sale value.  The direct result is that three-quarters of business sellers are dissatisfied with the results of their sale and believe that they left money on the table, paid too much in taxes, or failed to accomplish their personal and financial goals. The number one reason private business sales fail or only partially succeed is lack of planning on the seller’s part. 

The key questions that your business growth and value plan needs to answer are:

What is the realistic value of your company? The value of your business will be affected by market and industry conditions, how effective the sale process is in creating a private capital market (auction) for your company and, most important, the ability of the business to generate consistent or growing cash flow.  As a starting point, Schenck M&A Solutions applies a sophisticated capital structure optimization  model to estimate the selling price and financial structure that a business will support with its cash flow given bank financing in a reasonable range, a buyer’s required equity contribution, and potential needs for seller financing.  Then Schenck helps evaluate how marketable your company is based on unique business strengths and current market conditions.  Beyond this strategic modeling, there may also be good business or estate planning reasons for your business to have a more formal valuation by Schenck’s valuation professionals.

What will you actually realize upon sale, and will the proceeds meet your needs?  As a seller, your sale proceeds will be reduced by certain liabilities the business needs to repay and, of course, by taxes.  It is very important to carefully analyze and consider tax planning and deal structure with a CPA to determine net proceeds.  Once you know the net after tax proceeds, advanced planning with a qualified financial advisor like Schenck Investment Solutions can help you be sure you can meet your anticipated lifestyle needs as well as your desires to leave a financial legacy to your family or community.

How can you improve your business value?  This is an especially important question if your company has a ways to go to reach your target value.  The first step is examining your company’s strengths and weaknesses. Identify how you can improve earnings (often through internal or acquisitive growth or process improvements), other value-drivers and salability.  Salability is often improved through pre-marketing diligence by Schenck diligence professionals who look at your company as they would for a buyer to identify potential issues before the company goes to market.  Based on a cost-benefit analysis, you may either fix any 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 key.

How will you protect the value you receive?  It is important to work with a wealth-management professional, such as Schenck Investment Solutions, in advance of sale to determine how your money will be invested and managed to achieve your goals.  Similarly, your estate planning needs to reflect the expected sale proceeds, and plans for gifts and transfers to minimize taxes and maximize your objectives.

It makes sense to consider these questions throughout the life of your business and at least three years before contemplating sale of the business.  Planning prepares you to leave your business when you want, with financial security and capable successors.  For better exit value, plan additional time to implement business growth and improvement projects. It’s important to show consistent, profitable results.  Beyond business planning and improvement, it is prudent to also allow at least a year for Schenck M&A Solutions to prepare market strategy and marketing materials, identify and contact qualified buyers, and help you negotiate and close the sale.

Most business owners do not plan far enough ahead to improve business value because they are too busy running day-to-day operations, they are not sure where to start, or they believe it is too early to start the process.  It is never too early!  The most important statistic is that business owners with growth and value plans achieve better value and satisfaction.  They have a roadmap to ensure that their important personal and financial goals are met within their timeframe.

Jim Gettel and Lou Banach are Managing Directors of Schenck M&A Solutions and each have over 20 years of experience in helping businesses with strategic growth. Schenck M&A Solutions is an advisor to privately-held middle market companies in strategic acquisitions, divestitures, recapitalizations, turnarounds and planning.

March 2010