Five Strategies to Prepare Your Business and Yourself for Exit 

 

Business owners who are considering their exit often expect to get the same price for their business that their neighbor or competitor received for theirs. But that’s not always realistic. While the experiences of similar companies within a region are taken into account, valuation is a highly individualized process that focuses on a company’s past performance, present condition and future prospects.  

Selling prices depend on many factors, including the industry a business is in, the company’s financial health, operational processes and corporate culture. In addition to these factors, it is important to consider who the prospective buyer is and what their motivations are for purchasing your company. Some buyers are willing to pay more if they are acquiring a competitor or entering a new market.  

Moreover, there are additional external factors that can’t be controlled by the business owner, but which must be taken into account when performing a valuation. These might include the overall economy, competitive and economic conditions in the company’s industry and disruptive technologies that can change a company’s prospects almost overnight. 

While many factors come into play, the following five strategies are key to maximizing your company’s value before selling: 

  1. Minimizing legal risk in your business — Prior to having a valuation performed, make sure you have all the legal documents in place that are needed during a transaction. These would include buy/sell agreements between partners, the operating agreement or articles and bylaws and amended agreements, documents related to any ongoing or past litigation your company has been involved with, and any legal agreements you may have with vendors or customers, among other documents. If you or your company is currently named in any litigation, that should be disclosed or (preferably) concluded by the time the valuation is performed. Most importantly, work with a lawyer who is experienced in business transactions to make sure you have the proper documentation. De-risking your business is critical to attracting qualified buyers. 
  2. Document your company’s policies and processes — From prospecting for new business to customer acquisition and retention, your company should have documented procedures that spell out how many touch points there are with customers and how vital customer relationships are managed. Providing written documentation of these procedures can help build a business valuation that provides a well-rounded evaluation of your company, and can smooth the transition of your long-time customers to the new owners of your business. Additionally, financial processes and human resources procedures such as recruiting, hiring and retention practices should be documented, as well.  
  3. Put your financial house in order — This means removing non-operating assets from the balance sheet, such as the owners’ personal cars, boats and aircraft. These inflate the company’s fixed assets and if there is debt on these assets could potentially depress the valuation. 
  4. Shore up any holes in your corporate culture — Have you put strong retention strategies in place to ensure your key employees stay with the company after your exit? Your key employees are a vital asset to the company, and a buyer will want to know if they plan to remain and at least help with the transition, if not stay on for several years to help the company grow. This is especially true in service-based businesses. 
  5. Consider your ownership mentality — It’s difficult for many business owners to recognize that they are no longer needed by the companies they may have founded. But if you have done your job right and prepared the company for the transition to new ownership, that is precisely the case. The buyer may want to retain you for a period of two or three years, but you should still not be considered a key person upon whom the business depends. Your job is to mentor the next group of key managers and make sure they’re ready when the transition takes place. This takes some mental preparation. Don’t ignore this. Buyers don’t want to deal with an owner who can’t let go. Give yourself an adequate runway — say, three to five years — before the sale, to prepare yourself mentally and to prepare your management group. 
Questions? 

Selling your business and moving on takes preparation — both of the business and of your mental state. By putting the right processes in place, you can help ensure a stronger business valuation, possibly a better price for your business and a smoother negotiation and sale phase. If you would like to discuss preparation for your exit from your company, contact an Adams Brown advisor.