When it was published in October 2005, the Ewing Marion Kauffman Foundation’s first-ever Index of Entrepreneurial Activity revealed that more than 500,000 new businesses are launched in the United States every month. When these entrepreneurs open the doors of their new enterprises, many don’t look far enough forward, says a leading financial consultant.
“Some people say owners should be thinking about selling their businesses the day they start them,” says Carol McNerney, CPA and director of SS&G Services Inc., a Cleveland/Northeast Ohio-based regional tax, audit, accounting and consulting firm. “That may be unrealistic. However, the truth is that people don’t do enough to position their businesses for an eventual sale. The better a business owner is prepared at any point in time, the better the financial rewards that will be reaped from the sale.”
Smart Business spoke with McNerney about what business owners can do to maximize the financial return when the time comes.
How soon before a prospective sale should acquisition positioning take place?
Owners should begin creating a good financial track record well before the time they want to sell. For example, an owner may be 55 years old and want to be divested of the business by age 62. In many deals, the buyer wants management to remain on board for a year or two after the sale. So the exit strategy may be for owners to be divested two years before they actually want to move on. That could mean strategizing to have the business positioned to sell as early as seven years before the owner wants to retire.
Also, don’t ignore the economy. Many buyers will have to finance the acquisition. If interest rates are high, there may be fewer potential buyers because cash availability may be down. Being well prepared allows sellers to take advantage of favorable conditions in the overall economy.
How should owners begin to position a company for sale?
Many deals are based on EBITDA (earnings before interest, income taxes, depreciation and amortization). So it’s a good idea to present a good financial track record and realistic projections for future growth. Owners can create a good track record by cutting unnecessary costs; making sure a capable and appropriate management group is in place; and cleaning up any pending litigation, pension liabilities or environmental issues before offering the company for sale.
How should sellers price their businesses?
Sellers often value their companies much higher than the market. A seller would be wise to call on a consultant to get a realistic idea of what the company is worth. This needn’t be a detailed assessment such as one used to seek financing, but one that fairly portrays the company’s value in the marketplace.
Also, buyers will base offers on a normalizing process that calculates EBITDA assuming the current owner has left and that reflects “normal” operations recurring. For example, that figure might reflect the absence of relatives who will no longer be drawing a salary, or that income realized from a recent real estate sale represent a one-time source in the revenue stream. Realistic pricing takes into account this normalizing process.
How can sellers anticipate so-called “deal breakers?”
Identify deal breakers before the company becomes available for sale. Review potential financial issues by transitioning defined pension plans to defined contribution plans and making sure growth projections are realistic. Make necessary investments in equipment, technology, staffing and product improvement. Also, be sure to satisfy all tax obligations.
How can sellers get help with the positioning process?
Putting together a group of advisers helps sellers through the process. For instance, a CPA helps a seller understand the tax consequences of the sale and actual cash he will realize from it. Legal counsel makes sure the seller has no legal exposure before, during and after the sale. Brokers help sellers get the company into the marketplace by identifying serious, qualified buyers.
Should sellers inform staff of a possible acquisition?
Most sellers make an effort to keep the fact that the company is available for sale under wraps to avoid loss of key employees or a downturn in productivity. The seller often will explain the presence of buyer representatives or owner advisers as individuals who may be involved in bringing working capital to the company.
How can owners prepare themselves for a sale?
Sellers need to understand that they are really letting go of the business, and consider how they’re going to feel about someone else running the company — especially if the buyer wants them to stay with the business for a year or two.
Selling a business is a complex, time-consuming process. In the end, sellers will be able to realize their retirement dreams, or have the opportunity to go on to another business.
CAROL McNERNEY is a CPA and a director (partner) of SS&G Financial Services Inc. Reach her at (800) 869-1835 or [email protected].
