A strategic exit Featured

7:00pm EDT January 29, 2008

The failure to properly prepare for the sale of your business can put family members and others connected to your venture at serious risk. A well-thought-out strategy, however, can ensure that others will benefit from the wealth you have created.

“Planning for your eventual departure is the best thing that you can do for your family, the nonprofit organizations that you support and other enterprises that you care about,” says Mike Silva, senior vice president and group manager of Comerica Bank.

Smart Business spoke with Silva about exit planning, the importance of clear financial reporting and how to preserve value during the selling process.

How should business owners go about preparing for the sale of their business?

Buyers of businesses today, more than ever, are focused on purchasing a stream of cash flows. Whatever you can do to enhance and grow that stream will directly accrue value to you as the seller. Consistently working to maximize EBITDA (earnings before interest, taxes, depreciation and amortization) is important in order to show a positive growth trend.

One seemingly simple way to boost cash flows and maximize EBITDA is to increase the price of your goods or services. Oftentimes, business owners are reluctant to increase prices because they are worried that such a move will drive away customers. However, we’ve found that the market today is more open to price increases from businesses that are leaders in their field because of the perceived value that is associated with doing business with these companies. We are in an environment now where we’ve seen substantial increases in the cost of commodities and people are used to paying more.

How far in advance of an anticipated departure should exit planning occur?

I don’t know if you can start too early. A couple of years in advance of an anticipated departure would be the minimum. You should start by talking to a mergers and acquisitions attorney, your CPA and your banker. Also, it might be helpful to speak with some investment bankers about ways to enhance the value of your business.

Why is it so important for a company’s financial reporting to be clear and accurate?

When you start the process of selling your business, it is important to think about the quality of information that prospective buyers will be looking at because you will want them to write a check for five to eight (or more) times the EBITDA of your business. We see a lot of deals where valuations are substantially decreased during the due diligence process because the quality of information is subpar. Having good, clean, consistent financial reporting is crucial.

What are some common techniques for exiting a business?

There is a wide gambit of techniques available ranging from handing or selling the business to a son or a daughter to hiring an investment bank and conducting an auction. Questions to consider in identifying the appropriate method for your situation include: Do you have potential successors involved with the business? Do you have a management team to whom you would like to sell the business? Would you be OK with selling the business to an outsider?

Also, a lot depends on the size of your business. If it is a smaller business you might be able to sell it to your management team and take a payout from future cash flows over a period of time as your payment. If you have a larger business this strategy won’t work and your options would be to sell to a financial or strategic buyer.

How should owners go about determining the value of their business?

It is important to keep track of multiples of cash flow paid for businesses in your industry. This information can come from talking to competitors, others in your industry, M&A lawyers, CPAs and investment bankers. Ultimately, however, the value of your business is what the market will pay when you decide to sell it. Ideally, you would like two or more potential acquirers to fall in love with your business and then you can bid them against each other.

During the selling process, how can owners best preserve the value of their business?

Losing focus on day-to-day operations during the selling process is a common problem, especially for entrepreneurial businesses where the owner is the primary operator. The due diligence, negotiations and sales process can be all-consuming. If you’re the person responsible for making sure everything runs smoothly, it can be very hard to concentrate on both selling and running a business. It is important to have a good internal finance person to keep you on track.

Also, in order to preserve value, it is important to be extremely selective to whom you market your business. If, and when, your competitors get wind of the fact that your business is up for sale, they are certainly going to try and exploit this and try to take away your customers.

MIKE SILVA is senior vice president and group manager of Comerica Bank’s San Francisco and North Bay Middle Market Group. Reach him at (415) 477-3274 or masilva@comerica.com.