Most business owners see the true “pay day” for their work when they sell their business. Other entrepreneurs decide to sell because of changes in circumstances. Regardless of the reason, one of your top goals is to maximize the value you receive in exchange for the years of hard work you have given your business.
Yet many entrepreneurs don’t plan for their exit, which can cause you to leave money or other assets on the table when you sell your business.
Below is the first part of this three-part series designed to help you prepare to sell your business and maximize the value you receive.
List and Prioritize Shareholder Objectives
Maximizing value in a sale is not always about getting the highest sale price – there are often other drivers of value for entrepreneurs – including a variety of non-financial priorities. These can range from ensuring that long-term employees have a job post-sale to keeping brand names intact. To maximize value, it is critical for you and your other shareholders to establish and rank your priorities. This can be a tedious task, as purely financial investors may want to maximize dollars, where entrepreneurs with more of an emotional tie to the business may prioritize non-financial aspects of a deal.
While priorities may change as the company grows and evolves, this exercise will provide a roadmap for decision making about the business – while also positioning the company for sale and assisting in assessing potential offers.
Create a Dream Team for Your Sale—and Do So Early
While some entrepreneurs try to sell their business themselves, doing so almost always is a penny-wise, pound-foolish endeavor. Strong service providers should help you prepare for the sale, as well as add substantial value during a sale process. In fact, if you pick the right providers, they should more than pay for themselves.
Your team should have at least the following three “players.”
- First, hire an accountant that has substantial audit experience (most buyers will want to see audited financial statements, so your cousin who is an accountant won’t cut it).
- Second, you should hire a lawyer that specializes in mergers and acquisitions (or “M&A”) transactions. Preferably, he or she will have experience representing both buyers and sellers (again, your uncle Ira the lawyer doesn’t cut it here).
- Third, hire an investment banker that works with companies of a similar size and, potentially, one who has an industry specialization as well. The investment banker will help to prepare key materials, help run an orderly and competitive process and help to maximize those shareholder objectives that you laid out above.
Too many entrepreneurs wait until the day they are ready to sell the business to establish these relationships, but truly, they should be established early on, ideally years before a transaction is contemplated. This allows these providers not only to give you guidance on strategic decisions that can ultimately impact a sale, but also to get to know your business, which can add value during a sale.
You may also need to change service providers if you have outgrown your existing relationships, so don’t be shy to find new providers if the old ones are no longer a fit.
By building a strong advisory team, the company will be prepared with all of the tools and resources necessary to maximize the transaction value and structure, as well as prevent any deterioration in value during negotiations.
Develop a Succession or Transition Plan
Selling a business at the time the owner wants to retire – especially when that owner also runs the business – creates one of the largest impacts on valuation. First, perception plays a meaningful role in valuing businesses and if a buyer perceives that a company needs to sell, the seller will be penalized through a lower valuation. Additionally, many buyers want the management to stay on for a transitional period. In the case of financial buyers, this could be upwards of three to five years.
Developing a succession or transition plan – whereby the business is sold at least one or two years before you want to retire and where there is capable management in place to take over your responsibilities – will create the most options and the most value when the business is sold.
Incentivize Non-Owner Management
For companies where key managers are not shareholders, there can be a major conflict of interest during a sale. Management plays a critical role during a sale and may even be desired by new owners to stay with the business. However, managers that don’t have a stake in the sale through equity ownership can be at odds with the shareholders during the process.
Whether your management team has concerns over losing their jobs or autonomy, or simply realizes that they have leverage to disrupt a process, non-incentivized management can cost the shareholders significantly –even completely derail a transaction.
Put incentives in place for these key managers prior to beginning a sale process. This could include stock options or a sale bonus that help align the interests of the managers and shareholders (i.e., they both get a payday from the sale) and, ultimately, ensures that there isn’t an eleventh-hour power play.
Start working on the above immediately and stay tuned for Part 2 of this series, coming soon.
About Carol Roth
Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including
of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.
Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.