This is part I of our III-part series in profitable business exits. Part I focuses on the aspects of what you need to do before you sell your business.
“I’m Feeling Ready to Sell My Business”
You’ve reached that point.
After years of long hours, hard work, and sacrifice, the business you’ve built from the ground up is mature, resilient and profitable through the ups and downs. There are people you trust throughout the organization. The culture of excellence you’ve worked tirelessly to instill has taken root. In many ways, the business runs itself.
It’s time to maximize your investment.
Now is a great time to consider selling your business.
Interest rates are expected to be very low for some time, making it easier for potential buyers to raise capital. Low-interest rates also provide scant income for lenders. As a result, demand is high for private, cash-flowing businesses like yours.
Before you step into the mergers and acquisition ring, it helps to set clear objectives.
In our experience, most business owners share three common goals:
1. Maximize equity
You took the risk to start a business. You are entitled to the reward. Negotiation will be critical to ensure an equitable – and profitable – exit.
2. Minimize tax obligations
Taxes are part of the equation. Solutions exist that may ameliorate your total obligations. Work with a partner to identify the potential strategies that may fit your circumstances.
3. Find a highly aligned buyer
Your business is your legacy. Your buyer should be highly aligned with the organization you built to ensure business continuity as well as protection of your reputation.
How do I maximize my equity?
Maximizing the equity in your business is a lot like selling your home. You want to make sure it is in saleable condition before putting it on the market, have an acceptable price in mind, and use a professional.
Increase business value before putting it up for sale
Diversifying revenue, streamlining operations, and increasing profitability are just three ways to impact future valuation on the open market.
Pick an exit strategy
The exit strategy is your guide as you determine how to exit your business, as well as how profitable your exit will be.
Use a professional
A professional can help facilitate the sale. Use a professional that aligns with your business’s annual profitability as well as your comfort level.
Increase business value before you sell
Every business owner wants top dollar for the business they’ve built. But staging your business for a top-dollar sale doesn’t happen overnight. Consider these steps to potentially maximize your equity:
A buyer wants to see a track record of predictable revenue. Buyers view a business that features a diversified customer base operating a recurring revenue model more favorably than relying on a few big customers. From the buyer’s point of view, they’re interested in making sure they have a low-risk revenue source from day one. Your business may be top-heavy if 80% or more of your revenue comes from the top-20% of customers. Seek ways to diversify.
Expand EBITDA Margin
Buyers view EBITDA margin as a barometer of the business’ pricing model and differentiation. It doesn’t matter what your narrative is if your EBITDA margin falls below a certain level (specific to each industry). Diversifying your revenue mix or trimming costs to generate even modestly higher margins could yield an 0.5 to 1.0x boost to the exit multiple.
Streamline Your Operations
Businesses with messy books and jumbled operating procedures will never earn the exact multiple as those with clean financial statements and strict procedures. When you’re ready to move ahead with a buyer, the bulk of the work (and cost) comes by pouring through these business records. Deals close faster at higher multiples if these documents are in good order.
Selling a business is time-consuming. Often, it’s wise to use professionals to streamline the process, even if they incur costs. Accountants, lawyers, and investment brokers all play a role in helping a business change hands in an orderly and equitable fashion. Hopefully, the final payout and freedom to make decisions independent of your business make the process worthwhile.
Pick an Exit Strategy
Define an exit strategy that aligns with your objectives before you sell, regardless of your business’s size or profitability. You took the risk to start the business. You are entitled to the reward.
Your exit strategy should answer two questions:
- How are you going to get money out of your business?
- How much are you going to get?
There are a few common exit strategies to consider. Broadly, they fit along a spectrum of profitability and your involvement as the business owner. They may include:
Lower profitability, higher involvement
Your actions drive profitability, and profits don’t happen if you don’t act. Here, liquidation or a liquidation over time may be the best fit rather than invest any additional assets to try expanding business operations. Liquidation over time can maximize your cash withdrawal for personal use rather than waiting for the eventual payout following the sale.
Higher profitability, higher involvement
You and a small team of close-knit employees drive profitability. Your team could be mostly family members or a team of people you think of as family. In many cases, your clients think of you and your team the same way. Your exit strategy may be to transfer your interests to a family member or trusted employee. Either way, be sure to survey your client’s sensitivity to your departure.
Lower profitability, lower involvement
Your interests here could be as a passive partner in a small business. Maybe they projected profitability to go parabolic at some point, but that day never materialized. If you’re ready to call it quits, dig up the terms of the original agreement, call your lawyer, and begin the process of exiting the business.
You could also consider selling the business to a competitor. Suppose your involvement features a streamlined and efficient operation that simply isn’t generating the profits you expected. In that case, it may be time to seek out a competitor. There’s something valuable in your business that keeps the lights on other than you – your competition may be willing to pay to acquire it, whatever it is.
Higher profitability, lower involvement
Profits are predictable and steady with minimal involvement from you, thanks to a loyal and growing number of customers. Your operations are streamlined and efficient, and your financials are in good order. In other words, your business is ready for sale on the open market. A private market sale or an initial public offering may be a good fit for your exit strategy, depending on your business’s size and your preferred exit time horizon.
We’re supposed to be rational and objective in business, but that’s not often the reality. Ultimately, the best exit strategy is the one that feels right for you. The characteristics that serve you best in business will often help you exit.
Use a professional
Finding the right buyer can be a painstaking process. It’s not uncommon to have multiple offers. Sometimes, the best buyer is the person you feel most comfortable with rather than the highest bid.
There are three types of professionals that may make sense to help you sell your business. The most suitable professional depends on the complexity of the sale and your business objectives.
Investment bankers serve in a similar capacity to M&A advisors but tend to focus on complex transactions where deal size exceeds $250 million.
M&A advisors bridge the gap between brokers and IB. They take a more active role in the deal than brokers, typically by providing consulting work in addition to connecting you with prospective buyers. M&A advisors help facilitate transactions on behalf of other companies or institutional investors, like private equity funds.
Brokers typically focus on deals of less than $10 million. They help sell companies to generate income replacement for the owner/operator. Valuation is commonly based on “sellers discretionary earnings” (cash flow to the owner/operator).
Here are some suggestions to find brokers that could help you market your business:
bizbuysell.com – Best for small business owners under $300,000 in yearly profit
businessexits.com – Best for businesses making $300,000 to $10 million in yearly profit (Usually $2m – $100m in revenue)
hl.com – Best for businesses over $10 million in yearly profit (usually over $100m in revenue)
Prospective business buyers will review tax returns, financial statements, and other operational data. If they’re interested, they’ll submit an LOI (“letter of intent”) and may include a down payment. If you accept, you then negotiate the purchase agreement with your prospective buyer. It’s common for the negotiation process to last anywhere from three to six months after the deal closes.
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 “M&A Advisor vs Investment Banker vs Business Broker: What’s the Difference?” Marks, Kenneth. High Rock Partners. https://www.highrockpartners.com/business-broker-vs-ma-advisor-vs-investment-banker/