Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
1, Keeping good books is crucial. Buyers and any bank financing the transaction will want to review three years of tax returns and financial statements.
2, Businesses are often valued based on a multiple of one to four times the entity’s cash flow. Deductions are a benefit of business ownership but minimize unnecessary expenses as you get closer to exiting your business.
3, Buyers like to know they can go on vacation and the business will continue to run. Setting up your team with cross-training employees will enhance the value.
4, Likewise, create standard operating procedures, including processes, policies, and systems that enable the business to run smoothly without your involvement.
Have you ever considered exiting your business but wondered what steps you can take to maximize your proceeds? You can do several things to maximize your price, terms and tax efficiency when you are ready to sell and enter the next chapter of life.
Preparing your business for sale can be a long and complex process that requires careful planning and execution. Here are some steps you can take to prepare your business for sale:
You will want to ensure you work with a trusted adviser team. The team comprises a business adviser, an accountant, an attorney and a financial adviser.
Business advisers can be the quarterback connecting your team of advisers and bringing you the right buyer.
It is best to have accurate and updated financial statements. Balance sheets and profit-and-loss statements should correctly show the performance and potential of your business. Remember that buyers will want to tie out the financial statements to the tax returns, so keeping good books is crucial. Buyers and any bank that is financing the transaction will want to review three years of tax returns and financial statements.
Businesses are often valued based on a multiple of one to four times the entity’s cash flow. Deductions are a benefit of business ownership, but you should try to minimize unnecessary and/or personal expenses as you get closer to exiting your business.
Some of these expenses can be added back in arriving at the cash flow, but others may not. While you can save on taxes in the year you take the expense, it may cost you significantly at the time of sale. For example, if you choose to put through $10,000 of personal expenses, you may save 35 percent of that, or $3,500, on your taxes. However, you have now reduced your business cash flow by $10,000, which could mean a reduction in the sale price of $10,000 to $40,000 based on a one to four multiple.
Does the business have employees that can handle the day-to-day operations? Setting up your team and cross-training employees will enhance the value. Buyers like to know they can go on vacation and that the business will continue to run while they are gone.
Create standard operating procedures, including processes, policies and systems that enable the business to run smoothly without your involvement. This will enhance the business’s value and help you and your buyer during training and transition.
Identify and highlight your top customers. Does the business have a few clients producing a large percentage of the revenue? If so, you may want to add new clients to reduce customer concentration before the sale. In addition, customer contracts can add additional value. Reviewing contracts to ensure they are up-to-date and transferable whenever possible is essential.
If you rent, what are the terms and expiration date? Landlords often will not allow a tenant out of a personal guarantee after they sell their business. They like to keep as many guarantors on the lease as possible.
So, as you’re nearing your exit, it is wise to keep your lease term to a minimum and/or negotiate up front with the landlord to let you out of the personal guarantee in the event of a sale of the business. A landlord may keep an owner on as a second payee regardless of whether they own the business.
If you own the property, do you plan to sell the real estate? Do you know what the current market value is? Do you pay yourself fair market rent? The cash flow for the business needs to reflect a fair-market rent. Buyers may or may not want to purchase real estate; in either case, knowing the value and a fair rent is best.
A buyer will most likely want to keep the business website, phone numbers, trademarks, inventory and equipment. If you keep personal assets intermingled with business assets, you should identify them now and start removing them. For example, if you use your cell phone for business and want to keep it after the sale, you may want to get a new business line and remove the cell phone from all marketing.
Buyers are looking for profitable businesses with room for growth. What additional revenue streams can you add? Can you expand your market reach or develop new products or services to boost your revenue? Be prepared to explain to buyers various ways they can enhance the business.
Remember, do not take your foot off the gas when you have an offer! Banks and buyers will want to ensure the business continues to perform as it has in the past.
Work with your business adviser to determine your asking price and deal structure.
Your business adviser can help you determine the market value and structure for the sale of the business. There are many factors to consider, including:
Is the preparation still needed if you already have a buyer?
Yes, you will still need to have addressed all the same items. But remember, buyers closest to your business typically pay the least for it. They generally do not recognize the value as much as someone from the outside.
Competitors usually don’t value the business as highly because they are primarily interested in the customers, employees and fixed assets, putting little value on the system of operations you have developed.
Employees often don’t value the business as much as an outside party. The only way to know you have the best price and terms is to allow other potential buyers to make offers. The more potential buyers, the better opportunity you have to maximize the price and terms.
