FOR PROFIT TIPS
- Today's Times
- Angel Investors
- The Elevator Pitch
- Investor Presentation
- Business Plan
- Challenging Times
- Competitive Barriers
- Measuring Performance
- Strategic Alliances
- Strategic Planning
- Sustainable Growth
Sales & Marketing
- Better Branding
- Developing E-newsletters
- Online Feedback
- The Plan
The Human Element
- Advisory Boards
- Corporate Board
- Selling Your Business
If you’re seriously evaluating your exit
strategy, managing the process through a professional may help. Having a
third party involved to represent your firm often lends credence by
serving as an indication that you're serious about selling.
Depending on your size, you may choose
a business brokerage or an investment bank. Both help you accurately gauge
market interest, bring potential buyers to the table and create a bidding
process to get you the best offer. In addition, such an intermediary will
be able to guide you through the process – from signing a nondisclosure
agreement (NDA) with a prospective buyer to help in structuring a
Or, you can sell the business yourself. Whether
or not you use an intermediary, arm yourself with a business valuation and
good advisors. Here are 10 ways to better prepare for the sale.
Get Your Books in Order:
Financial statements are the best indicator of the future performance
of a business. Buyers evaluating your company will generally require
at least three years' worth of financial information. The more formal
your statements (accountant-reviewed or -prepared vs. internally
generated), the better the impression you'll make and the easier the
due diligence for a buyer. Audited financial statements are ideal.
Having a top notch business plan to accompany your financials will
increase your credibility with potential buyers.
||Grow Your Business to Sell It:
It is always easier to sell a business whose sales are growing than
one in a downward trend or even flat. Buyers generally want to invest
in a company that will provide them with a good return, so they’re
willing to pay more for a business that has a positive trend and
outlook. If the company's future success appears to be threatened (a
competitor entering the market, technological advances outdating
company products, etc.), the value of the business will be affected.
The marketability of the firm may decline as well.
||Evaluate the Impact of External
The climate in which a business operates can also affect its valuation
and marketability. An overall economic downturn can result in the
tightening of corporate belts and a reduction in acquisition activity.
In the same manner, a decline within a specific industry or geographic
region can also prompt a diminished appetite for private-company
acquisitions in those areas. Additionally, a decrease in a public
company’s price/earnings ratios tends to produce a corresponding
"trickle down" effect for the multiples paid for private
||Valuing Your Business – Using
is an abundance of available data on common industry
"multiples" that can be used to estimate a business's value.
Over time, valuation experts and investment bankers have observed
trends in the selling price of businesses. Multiples are simply a
summary version of these trends. They are industry-specific and
generally used for smaller businesses. However, while multiples may be
useful in providing an immediate ballpark of a business's value, they
do not substitute for a comprehensive valuation analysis.
||Valuing Your Business – Taking
Intangible Assets Into Account:
When pricing your business for sale, intangible assets – such as
people, knowledge and market position – can be even more important
than tangible property. Customer awareness that underpins a prominent
position within the market is a key ingredient in many companies’
success. A strong brand and a loyal customer base can be distinct
assets. Other distinct intangible assets include copyrights or
trademarks that let a business sell its products for a higher price or
in greater quantity than its competition; proprietary mailing lists of
customers or prospects; long-term contracts; and franchises with long
track records and well-recognized names.
||Get a Business Valuation:: A professional valuation will give you a basis
for gauging offers. It will give you an idea of what you can expect to
net from the sale. It will also tell you your company's market
position, financial situation, strengths and weaknesses (which you can
address prior to putting it on the market). Valuations can be obtained
from a number of sources, ranging from local accounting firms to
business brokers and investment banking firms. As a rule, you should
make sure the company performing your valuation has access to the most
current national data regarding privately held transactions in your
industry. Experience in selling firms of your type is obviously
helpful as well.
on Core Competency: A
company with a strong focus around a core business generally tends
to be more appealing to a buyer than a company going many
different directions. Make sure that the focus of all members of
the management team is aligned in this direction and that your
firm’s products and services add to the value of your core
Many small businesses can't help
but have a handful of customers who generate a large percentage of
the company's revenues. In general, a buyer will carefully review
any client relationship that comprises more than 10% of revenues.
Any efforts to reduce the level of customer concentration prior to
a sale will be helpful in increasing the reliability of the firm's
future revenue stream and will help to augment the firm's value.
Concentration: Specialization can give a company a
competitive advantage in winning contracts through industry
expertise; it can also force companies to take on risk due to lack
of diversity. If an industry suffers a cyclical downturn, a
company that has the preponderance of its customer base within
that industry may be affected as well. There are exceptions, but
industry concentration is usually viewed as undesirable.
Know Your Buyer:
Financial buyers make up an enormous segment of the market. They look
for businesses they can buy using debt financing for 50% to 75% of the
price. They’re also looking for sufficient cash flow to service that
debt. With few exceptions, they value a business by using a multiple
of four to six times earnings before interest and taxes (after making
adjustments for expenses that would not continue for a new owner).
They deduct from the price any interest-bearing debt they will assume.
There are disadvantages to selling to a financial buyer: There are no
synergies such as access to a larger sales force, or complementary
activities in production, engineering, or any other part of the
business. Furthermore, there are pressures to increase the cash flow
because of the added debt. Financial buyers are in business to make
deals, so they often leave day-to-day operations unchanged. But they
buy with a view to selling, which could disrupt your business life a
Strategic buyers expect synergies with their other holdings. They can
afford to pay a premium, but they may not need to because they know
the market. Buyers offering premium prices are in short supply. The
best match sometimes comes about when they seek you out after having
determined that your business fits their plans. Strategic buyers may
diminish your role, however, and their goals may differ from yours.
||Plan for Management Succession:
If you're absolutely vital to your business, who will a buyer be able
to turn to for help running things after you leave? Efforts should be
made to gradually delegate key responsibilities (primarily those
related to customer relationships and other direct ties to revenue
generation) to various members of the senior management team. A
buyer's primary concern is that the business can operate successfully
in the absence of the current executive.
||Get Your Ducks in Row: Get an advisory team in place that includes an attorney
and accountant who are proficient in mergers and acquisitions.
Organize your legal paperwork. Many privately held companies conduct
business on an informal, or "handshake," basis with
customers and vendors. Informal agreements, however, can result in a
discount to value – particularly when they are key to the company's
success. Formal agreements can ensure the continuity of key
relationships, giving a buyer peace of mind that the company's
customer and supplier relationships (and therefore cash flow) are
In addition, review your incorporation papers, permits, licensing
agreements and leases. Make sure you have them readily available,
current and in order. Make a good first impression. Insure that when
prospective buyers visit, they see an orderly operation instead of one
that is chaotic. And no matter what, keep your eye on the ball. Don't
let your business performance decline because you're too focused on
the sale. This will only give buyers additional negotiating power to
lower their offers.