As the U.S. economy rebounds, many business owners are holding fast to their exit strategies and plans to sell. (See our March 13 article, “Stay the Course: Selling a Business in a Coronavirus World.“) Following are some important steps in preparing a business for a successful sale that will bring top dollar from the right buyer.
The sale of your business is potentially the most important decision you’ll ever make. If you’re like many business owners, you may have 75% or more of your net worth tied up in your company. You have sacrificed countless hours and risked your family’s financial security by starting or purchasing a company. And, chances are, you will sell a business only once in your lifetime.
According to a Small Business Administration survey, eight out of 10 sold businesses bring 20% to 50% less than full value. Conversely, business owners who truly prepare their businesses for sale often fetch a price that is at the top of the market-value range, and sometimes more than top dollar.
Here are some guidelines for getting top dollar.
Build a strong middle management team, and don’t be indispensable to your business. Buyers don’t want to purchase a business that depends on your presence or the efforts of just one or two employees who might not stay. The creation of a strong middle management team creates value for buyers by eliminating reliance on a single individual.
Before you put your company on the market, perform a Phase One Environmental Site Assessment. The worst possible time to discover an environmental problem is the week before closing. You will spend six months working with buyers, and planning your retirement – don’t force yourself to restart the process due to some contamination being identified on company property.
Recast your historic financial data. Chances are that your historic financials don’t show an accurate picture of what the buyer may expect under his management. That means removing (by footnote) from your income statements any discretionary or one-time items, such as personal life insurance, over-compensation to you or to family members, and personal expenses that passed muster with the IRS but weren’t necessary for company operations.
Have written policy and procedure manuals. Buyers will pay more for companies that are professionally organized and documented, because they perceive the risk factor to be lower. Well-written procedure manuals and policies (including employment policies) avoid confusion, prevent litigation and add value for buyers.
Sell the future, not the past. Buyers purchase your company’s future ability to produce income. The value of the business will be based on the buyer’s projections of future profits, not your own. They may have resources that are unavailable to you that could substantially change the company’s future profitability picture.
Identify and document your phantom assets, and keep the valuation current. The “book” value of some of your assets has decreased for tax purposes, but their real value may be much higher. Assets should be recast to show current fair market values. Equipment, for example, should be valued as “operating in place” and include any costs of installation and tooling.
Create a “confidential business report” – and include pictures – to educate buyers. A CBR typically includes a confidentiality disclosure, executive summary of the business, company history, operational overview and analysis, organizational chart and bios of key employees, market analysis and marketing plans, historic and recast income statement and balance sheet, and projections of future earnings along with the underlying assumptions.
Start now. None of these steps will be completed overnight. Getting top dollar for your business, and avoiding a “fire sale” situation in which selling quickly is a priority, is a process that might be several months or even years in the making. To guide you through that process, the assistance of an experienced M&A advisor, and an attorney who knows the construction industry, can be invaluable. Start now.