"I'm thinking of selling my company." These words have been uttered by business owners far and wide – and while the intention is real, it's hardly ever immediate.
In fact, among owners who intend to sell their business, nearly half plan to do so within a period of five years. However, according to a 2018 survey by UBS Investor Watch, a large majority (75 percent) believe they can sell inside of 12 months without taking necessary steps to prepare.
The truth is, a successful exit takes years of preparation. Even if a sale doesn't take place for five or even 10 years, there is much that can be done now to increase the value and attractiveness of the business, while also preparing the owner for an ultimately successful transaction. If a sale never happens – should the owner change their mind, for example – the company still comes out ahead for having become more sustainable and profitable.
Here are critical things owners contemplating a future sale of their company should consider and act on now.
1. Understand company valuation.
Even years ahead of a potential sale, it is important to have a realistic idea of your company's value. This affects planning and, ultimately, your financial well-being.
While owners can be influenced by stories about friends who sold their companies at astronomical multiples, it's important not to overestimate. Ultimately, a company is only worth what someone will actually pay. It can vary based on the condition of the business and the industry it operates in, supported by its ability to generate sales, cash flow and profits, as well as the value of assets.
2. Know the drivers of value.
If you have a realistic sense of company value, the next step is figuring out the value drivers in your company. Knowing this allows you to focus time and energy on improving value drivers that are deficient, and to nurture and protect those that are performing well. It is also important to consider what elements of the business will best motivate the buyer. A seller seeking a financial buyer might focus on increasing profitability, whereas a seller who wants to attract a strategic buyer might focus on enhancing the brand and market share.
3. Reduce owner dependence and build the team.
Building a company structure that depends less on the owner and more on the team is an important item on the to-do list for those even contemplating future sale. This is a task best started sooner rather than later, because it also provides protection in the event of unforeseen illness or even death. Having a strong management team in place can also make the business more attractive to future buyers and will help ensure a smooth transition after the sale.
4. Formalize company processes.
Many successful small businesses can get away with ad hoc, informal processes and systems, but these will detract from company value when the day comes to sell. Improved documentation, operating controls and governance go a long way in making a company look better to potential buyers. Central to this is an accurate, timely accounting of historical information and use of forecasts and budgets to guide future performance.
5. Understand quality of earnings.
Looking at your company the way a potential buyer will helps you understand how best to maximize personal wealth when it comes times to sell. Remember, offers are developed using specific formulas that take into account assets, earnings, industry, and any debt or losses. Regardless of the equation used, the 'E' (earnings) is an objective determination – so eventual money in your pocket is often a function of earnings times a multiple. The multiple is a subjective one, usually based on the potential buyer's assessment of the quality of your company's earnings. Improving that quality will help drive superior valuations, but it takes time.
6. Turn to the experts.
Exit is a reality for all business owners. Whether it's decades from now or a few years away, driven by ambition or necessity, careful planning and support from investment banks undoubtedly ensure the best results with fewer obstacles. Find a firm that can help your business identify opportunities and navigate M&A transactions to maximize value and achieve favorable outcomes.