Critical factors to consider to maximize value in a sale

Selling your company is the most important thing you will do in the course of owning a business, and whether you are considering an exit in the near future or in 10 years, the time to begin planning is now.

“As a business owner, starting to think about an exit is scary,” says Jeff Powell, who serves as managing director at Brady Ware Capital and has been providing guidance to businesses in transition for more than 20 years. “You need to reach out to someone in the M&A profession to start talking about what you’re thinking about, without feeling like you’re being pushed in one direction.”

Smart Business spoke with Powell and Stephen Ford, managing director, Mergers & Acquisitions, at Brady Ware Capital, about critical factors that can help increase the valuation of your business as you begin to plan your exit.

Why should every business owner be thinking about an exit?

You want to be in a position to make this transition when you want to, as opposed to when you have to. No matter what the timeframe, you should be considering how to position your business to maximize value and transition it in the most appropriate way.

You want to identify your business’s shortcomings through your own processes, versus someone else’s. Therefore, it’s important to evaluate and develop a plan to improve those areas as a natural course of action in business, as well as when you are ready for an exit. That will greatly help in monetizing on the back end and strengthen your business when you are still in operation mode.

What are some top drivers of valuation?

Preparation is key to achieving maximum value. Buyers look at consistency and predictability of earnings, looking to the past as an indication of the future. They look at customer concentrations. If a business is reliant on one or two customers, and they leave, you go from consistently doing well to not having a business. Diversifying is vital.

A strong, experienced management team is also critical. Buyers want to know there are capable people behind the seller. If an owner controls everything, that’s hard to replace.

In addition, you must have accurate financial data. It is imperative to have accurate and timely financial statements, because if buyers don’t have faith in the numbers, they won’t have faith in the deal.

Look at your key suppliers. Companies have learned just how important those relationships are. If you can’t obtain raw materials to manufacture your own, you are shut down, so it’s important to have multiple relationships. Developing niches within your industry and strategically diversifying enhances your market position.

Buyers in nearly all cases don’t purchase a company to keep it at the same size level and cut coupons. To get the desired return on investment, they must grow the company profitably. It it important for buyers to arrive at the beginning with some concrete thoughts and options for growth strategies that could be implemented with a new buyer based on what the seller has built and accomplished. If buyer and seller can envision a common growth strategy that accelerates growth for the buyer, the seller would have gone a long way toward increasing the value of the company at the time of sale.

How can a relationship with an experienced adviser ease the selling process?

Owners should be focused on their business, growing it and taking care of clients. A partner with expertise in maximizing value allows you to retain that focus. Working toward a sale can be extremely distracting. It’s an emotional investment that takes time, energy and due diligence, and it will bog you down. As a result, an owner takes their eyes off the company to focus on the sale, and the results can begin to go backward. A sale transaction gets deep in the weeds and is time consuming. Hiring an M&A adviser is a small price to pay to keep the owner focused on the business to ensure the owner is getting maximum value. An M&A adviser also helps you explore options regarding what you want to do and why, and what that looks like. An impartial expert can help explore your options, think about your plans and commit to a decision timeframe. You owe it to the business and yourself to be prepared and take the fear out of the process.

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