Co-Authored by Herbert R. Fineburg and Sheldon H. Eveloff Every informed business owner or investor should have an “exit strategy” under consideration at all times. Although the global financial crisis has delayed the exit plans of many business owners, their need to exit at some point in the future has not gone away. Thankfully, most business owners had delayed their sales decisions for the right reasons. Even though many businesses are beginning to improve, business values are not where they were just a few years ago, when looking at the pre-crisis trailing earnings. Now many boomer-aged business owners are once again contemplating the sale of their businesses as an exit strategy. There are, however, new concerns regarding Congress and pending legislation affecting the sale of a business and estate planning. For a variety of reasons, not all business owners are seeing the value of their businesses improving. Some owners whose businesses are structured to operate with short term income tax considerations in mind have kept profits low to minimize taxes. However, when it is time to sell the business, letting the “tax tail” wag the dog is not a good strategy. Removing waste and investing in growth should take a priority, thus increasing the value for a potential sale. Buyers typically value a business based upon its earnings, often using a multiple of EBITDA (earnings before interest, taxes, depreciation, amortization). For all of these scenarios, there is still an opportunity to capitalize on the owner’s hard work and investment of money, time and energy. The following 10 Steps, grouped into three distinct phases, are designed to help maximize the sale value of a company.
Optimize Performance – Phase 1
Step 1: Improve profitability by removing waste. The lessons learned from how large manufacturing/distributing/service companies effectively remove waste can be applied to many smaller companies as well. Increasing sales alone does not necessarily make a company more profitable, especially if inefficiencies continue to increase with more volume. Step 2: Grow the business on a positive trend line. Businesses must have a viable sales process. Sales growth trends provide confidence that the sales processes are working well. Buyers are looking for positive sales trends upon which they can capitalize. A plan to improve the sales process involves:
- reviewing product and market segments;
- reviewing price points;
- training and re-training the sales force;
- developing a customer contact program; and
- creating a competitor analysis.
Polish the Business – Phase 2
Step 3: Make sure, wherever possible, that future revenue of the business is locked in; preferably, through long-term contracts. A buyer of the business values the degree of certainty that comes with a multi-year revenue outlook. Step 4: Update the company’s organization chart. Establish a management infrastructure that removes reliance solely on the owner. The management skills, experience and process to lead the business, in the absence of the owner, should be in place. However, there may be a transition period with the selling owner’s participation, which can vary depending on the amount of time required. Step 5: Promote and protect the brand of the business. Mechanisms for this include a strong web-presence, employment agreements (including confidentiality and non-compete/non-solicitation provisions) and patent, trademark and other intellectual property protection, including preserving and protecting the company’s website domain. Step 6: Present the best face of the business. Reduce the debt levels of the business in order to clean up the balance sheet. Utilize key ratios to present financial benchmarks. Eliminate any fuzzy math. Having a clean set of books and records is critical to determining the value of the business, and creating comfort with a buyer who must rely upon those financials in forecasting the potential of the business.
Creation of the Sale – Phase 3
. . . Whenever the business looks as good as it can, it is time to begin the process of selling the business. Step 7: Find a buyer who “needs” to buy the business. This is a key success factor in maximizing the sales price. Accordingly, using the expertise of a specialized merger and acquisition firm should be considered, even if the Seller believes they already identified the best potential buyer. Interview several firms and negotiate an acceptable fee arrangement. Ideally, several potential buyers such as strategic buyers, venture equity firms and/or private equity buyers will be identified and, an analysis of why the business is “essential” for each potential buyer can be carried out. Also, multiple competing buyers create the opportunity for a higher sales price. Step 8: Take steps to ensure that the negotiation process goes well and manage the risk in the sale process. Establish a “sales team” who meet regularly with the owner to review sale strategies. Using the services of professionals can be effective. Often times, even the most successful business owners need to be coached on their role in the sale. The psychology of the sale process should be clearly defined and followed. There is no point in having built a valuable business just to poorly handle the negotiation of the sale. Step 9: Anticipate possible buyer’s objections. Buyers will likely use value-reducing tactics during the sale process. It is essential to know what to concede and give-in, as well as what not to give-in. The sale team should help you identify potential responses and devise the best tactics. Step 10: Evaluate tax and legal consequences. Understand the tax effects of the sale and plan for federal, state and local tax savings and also evaluate estate and inheritance tax planning options. In the agreement of sale, sellers are typically asked to make all types of representations and warranties to the buyer about the company.
Following these 10 Steps can help maximize the probability of getting a higher price for the business, reduce risk to the seller, and reduce taxes to them and their heirs. The timing of the exit is up to the seller, but a 2-3 year time frame allows for an adequate opportunity to apply the 10 steps in a way that may ensure the best possible outcome. CPAs and lawyers are excellent business advisors and can be a vital part of the sale team. An initial strategy meeting with the sale team allows for guidance to business owners on the possible structure of the sales transaction including (a) its tax ramifications, (b) need for a business valuation and financial forecasts, (c) addressing possible shareholder litigation matters, (d) planning family wealth strategies and (e) provides for effective planning.
About Herb Fineburg
Mr. Fineburg concentrates his practice in the areas of Business Law and Transactions, Mergers and Acquisitions, Estate planning, Estates and Trusts, and Tax Consulting. He is recognized as one of Philadelphia’s most respected business lawyers whose substantial knowledge of tax law provides clients with strategic and cost-saving benefits in connection with commercial transactions, taxation and wills, trusts and estates matters. Known for his ability to resolve complicated matters effectively, Mr. Fineburg has assisted businesses and individuals with the organization of their finances, business and real estate affairs, and the structure of their assets (i.e., in LLCs, partnerships, corporations, trusts or joint ownership). He has substantial expertise in the preparation of buy-sell agreements for co-owners who are family members or are unrelated business partners. In addition, to working on bank financings, business contracts and employment matters for his business clients, Mr. Fineburg also provides advice on business acquisitions and sales, and the resolution of shareholder and partner disputes and buy-outs. Please contact Mr. Fineburg with questions or request for further information at firstname.lastname@example.org or at 267.338.1376.
ABOUT Sheldon H. Evelof
Sheldon H. Eveloff practiced as a certified public accountant, management consultant and business advisor for over 35 years. Mr. Eveloff currently is associated with The Colmen Group, a middle market investment banking firm specializing in divestiture programs and acquisition searches. Founded in 1982, Colmen has completed over 350 transactions. You can also connect with Offit Kurman via Facebook, Twitter, Google+, YouTube, and LinkedIn. WASHINGTON | BALTIMORE | FREDERICK | PHILADELPHIA | WILMINGTON | VIRGINIA