How to Rake It in When Selling Your Business
- Published: Wednesday, 13 June 2012 17:25
- Written by CP Staff
For many business owners or entrepreneurs, the long-term goal is to sell your company and monetize all the value you have created. So, what can you begin working on today to ensure that you rake it in from the eventual sale of your business?
Prepare for a Sale
Is your company in shape to be sold? For too many companies, the answer is “No.” For them, it’s time to clean up and begin to operate like a business rather than a personal fiefdom.
Get the books audited (buyers rarely trust unaudited statements). Clean up legal issues, especially ensuring that you have title to the shares of the business and all assets (including patents and copyrights). To do this, bring in a good lawyer to assess the legal state of the business and all the contracts. And if you have any outstanding legal issues, get them resolved.
Make sure that your tax structure is correct, so you can retain as much of the sales price as possible. If you have multiple shareholders, get all the significant owners on the same page and in agreement about the long-term exit plan. Get all the processes and facilities in shape. Make sure the business and operations look spic and span. Would you buy a beautiful house if the front door knob came off in your hand? The impressions of your business matters to prospective buyers a lot.
Develop Relationships with Potential Buyers
Reach out and network with larger players in your industry, as well as potential business brokers or private equity players. What interests them about your business? What do they value most highly, and why? At this stage, your business is not officially for sale, so you’re on more equal footing with them and will better be able to pick their brains and learn what you can do to drive value in your business. Further, these will be the people you can reach out to directly when you are ready to sell the business.
Build Value in Your Business
The vast majority of buyers will care about one thing—EBITDA (earnings before interest, taxes, depreciation and amortization). It represents the earning capacity of the business. For buyers, EBITDA thus determines how much debt, which the buyer will take on to fund the acquisition, can be paid off yearly. Most buyer valuations start out with some multiple of EBITDA. So, to increase your sale price, you must first build your EBITDA. Growth in revenue is good only if that means growth in EBITDA.
Second, get yourself out of the business. If you’re still “a genius with a thousand helpers” running the business as a one-man or one-woman show, then you’re not creating sustainable value for your business. Buyers hate to be dependent on any one person (you) after they’ve bought a business. So, start to delegate and build successors.
Finally, continue to conduct your business ethically. Good buyers are going to perform extensive examination and assessment of your business (due diligence), and they’ll find out how you run it and how you treat your customers. Thus, continue to have good, solid customer relations, and continue to have a good reputation in the marketplace.
Consider the Timing of Any Deal
Most businesses are sold at multiples of EBITDA. But, the multiples that companies are sold at change depending upon the economy and how “in” or “sexy” a business is. So, think about when you are going to put the business up for sale.
You’ll need to think ahead since the sales process will generally take six to 12 months. Realize that potential buyers will walk away from a deal at the last moment if your business begins to deteriorate during the sale process. A general rule of thumb is to sell moderately early in a growth upswing for your business. That way, you’ll have time to show EBITDA growth, and that growth will be more likely to keep going for another year or so. Deciding to sell too late or insisting on too high of a price will inevitably lead to “no deal.” Remember: Pigs get fat, but hogs get slaughtered.
Get the Deal Closed
Before you put your business up for sale, have everything ready. You must be aware that the “kimono will be fully open.” In the due diligence process, the buyer will want to know everything, so be ready with accurate details and supply them when asked.
Back to point number one, ensure that you do not have any hidden time bombs that will crash the deal. Two further points to consider. First, negotiate from a term sheet or formal letter of intent that spells out and addresses all the potential issues (payment holdbacks, indemnification, limitations of liabilities, caps and baskets, etc.). If you don’t know what I am talking about, then it’s time to speak with an experienced deal attorney (note: your local attorney who may have only done real estate deals or one or two small deals is the wrong person).
Second, move fast and respond promptly. The longer the deal takes, the more the power shifts to the buyer. Nearly all sellers will go down a slippery mental slope and develop a condition known as the “psychological pre-sale.” As the seller, you’ll begin to dream of the money and life after the sale, and you’re likely to become committed to completing the deal even if it no longer meets your original objectives.
For most business owners and entrepreneurs, selling your business is the biggest financial decision you’ll ever make. As such, it takes careful planning and consideration and the advice of others (especially a respected merger & acquisition lawyer and a tax expert) to ensure that you get the most money in your pocket when you sell.
The Oz Principle
Be Accountable, Be Responsible, Be Answerable
In their book, The Oz Principle – Getting Results Through Individual and Organizational Accountability, Roger Connors, Tom Smith and Craig Hickman discuss the pervasive lack of accountability in the corporate world.
Dirty Little Secret. The dirty little secret is that most companies lack accountability and responsibility at all levels from the leader to the top executives to front-line managers to individual employees. As a result, companies do not execute and achieve what they set out to achieve. As the authors point out, most companies fail because of managerial error, but not many senior executives involved will admit that. Most companies explain away the brutal facts rather than confront them head-on.
By contrast Andy Grove at Intel was famous for always being paranoid. But, this paranoia led to him being responsible and answerable for the success of Intel. His famous question was: If we got kicked out and the board brought in a new CEO, what do you think he would do?
Keys to Accountability. The key to accountability is the willingness of an organization’s people to embrace full responsibility for the results they seek. Many organizations move from one illusion of what it takes to achieve organizational effectiveness to another without ever stopping long enough to discover the truth: The results you seek depend on shouldering greater accountability for those results. The success or failure depends, first and foremost, upon the leadership and the people and their decisions and actions, all of which are under their own control.
The essence is to get people to rise above their circumstances and do whatever it takes (within ethical boundaries) to get the results they want. Even in the worst of circumstances, people cannot move forward if they just sit around feeling powerless and blaming others for their misery. Instead, as management guru Peter Drucker famously said, the key question for every employee in an organization is: What can I contribute that will significantly affect the performance and the results of the institution I serve?
The Oz Principle
Above the Line — Steps to Accountability
See It • Own It • Solve It • Do It
Below the Line — The Blame Game
Wait and See • Confusion/Tell Me What to Do • It is Not My Job
Ignore/Deny • Finger Pointing • Cover Your Tail
Accountable employees, leaders and organizations operate above the line.