March 10, 2023
Strategic Planning – Start Now If You Want to Sell Your Business
As a business owner, there will come a time when you will want to either sell your business or transition your business to the next generation.
Whether your time frame is a few years away or possibly many years out, it is important to always think about the “end in mind” for the future ownership of your business. This forward-thinking will help you prepare and position the business to maximize the value you will receive when that day arrives.
Let’s consider some key areas for you to address as you prepare to eventually transition or sell your business including:
- Who May Be a Potential Buyer
- What Business Assets Do You Have for Sale
- Identifying Potential Buyers
- The Business Transition Process
Have You Considered Who May Be a Potential Buyer for Your Business?
As you look forward to the time when you will sell your business, start by considering who the buyer might be.
Ultimately, who buys your business will depend on what you have to sell. There are many ways to sell your business as a going concern either through a sale of the shares or assets of the business or a hybrid of the two.
However, not all sales of a business entail a sale as a going concern.
Perhaps you are the owner of a business with significant investment in assets (inventory, accounts receivable, capital assets). If so, you may realize more end value by simply selling the underlying assets to a potential buyer who will incorporate these into their business.
This may be the case if you were looking to sell your asset base to a competitor looking to purchase your specific business assets. You might well be looking at a nice, clean trade sale of everything – lock, stock, and barrel.
What Business Assets Do You Have for Sale?
There are many parts of a business that can be sold including:
- Intellectual Property
- Unique Customer Base
- Established Distribution Channels
In some cases, the business assets may fetch a better price and be easier to sell without the liabilities that come with selling your business.
Selling Intellectual Property
Have you developed value around intellectual property in your business?
Intellectual property, or IP, can be an idea, invention, or creative expression that may be protected by patent, trade secret, trademark, or copyright.
In our experience, privately owned businesses often grossly under-value their IP assets. You don’t want to do that when you sell your business.
A valuable IP need not be a long-standing trade secret or a cutting-edge software application to be a valuable business asset. It could simply be your manufacturing processes – the unique way your business makes its products.
Selling Your Customer Base
Have you considered how your Unique Customer Base could also be a valuable asset when selling your business?
The size of your market share could present significant value to a competitor or complimentary business.
If your business is a market leader or is well positioned in your market, your customer base could very well be a highly negotiable asset. Potential buyers could be looking to access your current customer contacts to expand sales opportunities for their business.
Selling Your Established Distribution Channels
Does your business have Established Distribution Channels with solid agreements in place?
This positioning could be very attractive to a supplier when you are selling your business.
Value to a supplier is often based on their potential to access your distribution channels and to increase their sales, profit margins, and overall market share. A supplier may pay a premium to gain access to your distribution network.
Identifying Potential Buyers for Your Business
When you sell your business, there could be many potential buyers including:
- Private Equity Funds or Angel Investors
- Management Buyout
- Passive Investor
- Transitioning the Family Business to the Next Generation
Private Equity Funds or Angel Investor Buyers
A potential buyer source for your business may be Private Equity Funds or Angel Investors.
This class of buyers is looking for investment opportunities that can provide a high level of return. Their primary objective will be to enhance profits and build business value for a future sale. These buyers can be a great option, especially if they are able to bring experience as well as cash to the table.
In return, private equity funds or angel investor buyers will likely want to have some control over their investment, usually through a seat on the board. Often these types of buyers will stage their purchase of your business and structure the purchase to have you stay on in a reduced ownership position to help build the value of the business overall.
This may allow you to realize a larger return on the final exit. However, you’ll need to exercise caution in partnering with private equity funds and angel investors – especially if most of your wealth is locked up in your business.
If you decide to not sell your business interest entirely at the outset you will want to ensure you have addressed the terms and future timing of your final exit strategy.
Management Buyout
Another potential option when selling your business is to consider a Management Buyout (MBO) scenario.
An MBO is the purchase of a company by its managers, often with backing from a venture capitalist or, in many situations, the current business owner.
A successful MBO will depend on the capability of the current management team and their ability to raise the necessary capital. Often, the owner will be looked upon to provide vendor financing to close the deal.
In an MBO scenario, it is also common to see the owner staying on after the transition date as a consultant for a period of time to transition leadership. The price you will ultimately receive may also be tied to the performance of the business for a period of time after the sale. In a typical business sale agreement, this is often referred to as an earn-out provision.
Passive Investor
Or, you may consider selling to a Passive Investor, that is, someone who will likely not be involved in the active operations of the business.
Passive investors present an opportunity for you to sell some of your shareholdings – but to still retain control over the management and future direction of the business.
You will need, however, to convince your passive investor that your business is secure, has the potential to grow in value, and can pay a regular rate of return each year in the form of dividends.
Transitioning the Family Business to the Next Generation
If you don’t want to sell your business to outsiders, you may want to consider the option of Transitioning the Family Business to the Next Generation.
Keep in mind that you will most likely not achieve the same value for the business as you would in selling to an outside party. To offset this difference, you could factor in future performance bonuses where the business pays you additional amounts upon achieving predetermined milestones.
All of these potential buyers for your business have one thing in common.
They and their advisors are not only looking for current business value but also potential business value to be obtained post-acquisition.
Value is also critical to you as a seller, particularly if, like most private business owners, the majority of your wealth is tied up in your business. There are things you can do to Increase the Value of Your Business.
This is where a formal transition plan with a skilled team of advisors and a documented sales strategy can make all the difference in you attaining maximum value for your business.
The Business Transition Process
When you are ready to sell your business, it is vital that you plan the transition process with care and precision, right from your first thoughts of selling through to moving toward the sale event.
After planning this process, you must then meticulously execute it to ensure that the financial benefits and rewards of the sale are ultimately maximized.
We believe there are three essential steps in transitioning a business to new ownership:
- Strategy for Transition (SFT)
- Managing for Transition (MFT)
- Transaction Management (TM)
1. Strategy for Transition
Strategy for Transition involves the development of a plan for your transition well before it’s time for your exit.
In the STF phase, you will need to address the following key areas and formalize your overall plans. This will allow you to establish a solid platform on which to move through the business transition process.
- Develop an expected time frame for your exit.
- Determine the current estimated value range of your business under different scenarios.
- Project the desired value of the business you would like to receive at the time of exit.
- Identify and formulate the best method of transition.
- Begin to identify potential buyers of your business and assess the merits of each.
2. Managing for Transition
Once you have addressed these areas and formalized a transitioning strategy, you should be in a position to move into the Managing for Transition (MFT) phase.
The MFT phase is the crucial time period for positioning your business to maximize the return on the sale.
MFT is all about changing management in the business prior to the sale.
Your focus is on evolving the business from its current position to the desired position for a successful transition to occur. This will likely require you to make fundamental changes in a number of areas of the business and implement an integrated plan to achieve your desired outcomes.
We often refer to this process as “grooming your business for sale.”
If you owned and were planning to sell a luxury yacht, you would ensure that everything was shipshape, in perfect working order and performing to its design standards.
When you sell your business is really no different, albeit much more complicated. Given sufficient time and with the right advice, you can improve your business to the point where it will be very attractive to a buyer.
There are four distinct areas of focus during the Managing for Transition phase including:
- Performance Enhancement
- Due Diligence Preparedness
- Reducing Business Dependency on the Owner
- Post-Sale Planning
PERFORMANCE ENHANCEMENT
The goal here is to move the financial performance of the business from its current level to a point that will warrant the desired investment by the purchaser and allow the maximum realization of business value.
This will require the development of a strategic plan, with ongoing monitoring and reporting to ensure strategic performance objectives are being met during the period leading up to the sale.
DUE DILIGENCE PREPAREDNESS
The key objective here when selling your business is to make the business as attractive as possible and minimize potential risks to the buyer.
The buyer and their advisors will carry out a formal due diligence review of your business before the sale contract is signed off. After getting this far in the sale process, you don’t want a prospective purchaser walking away because they have identified a major problem or issue.
REDUCING BUSINESS DEPENDENCY ON THE OWNER
Preparing the business and the team for change is critical to the continuity of the business. Buyers will be assessing how the business will continue to generate earnings and profits into the future without being dependent on the current owner.
As an owner, your goal here is to create and maximize business goodwill while reducing your personal involvement in the day-to-day operations of the business.
POST-SALE PLANNING
In this final stage of MFT, you need to prepare a personal financial plan that covers life after the business is sold. This will include the preparation of personal investment strategies, estate planning, and expert tax planning advice.
With a properly managed plan, you can expect improved revenue benefits through the whole process of Managing for Transition – not just at the time of sale.
Managing for Transition will take time to implement and create value enhancement for the business. Depending on the current position of the business, implementing the desired changes and improving business performance results can often encompass a three to five-year time frame.
Handled well, MFT will not only reap you rewards at the time of sale but also provide benefits from the increased profitability generated by the performance improvements realized during these key transition years.
During the MFT phase, your business will encounter many organizational, people, and technical challenges that need to be addressed. This is the time when it pays to invest in the guidance of a team of experienced business transition specialists.
Once you have mapped out and executed the MFT phase, you should be well-positioned to begin the process of marketing to sell your business, and enter into the final phase of transition, Transaction Management (TM).
3. TRANSACTION MANAGEMENT
Transaction Management will involve the “marketing, deal negotiating, and final sale” phase of the business.
A well-prepared sales plan and process will instill trust and confidence in the potential buyer as they look to assess and negotiate the purchase of your business.
For your part, give careful thought to positioning and marketing your business for sale, including determining the value assessment and identification of potential buyers to market to.
You will be well advised to align yourself with a dedicated and experienced team of advisors to help negotiate and close the deal to your satisfaction.
Your Business Sale and Transition Advisors will develop a well-documented sales strategy that will ultimately allow you to maximize the value received when you sell your business – and ensure a smooth transition.
If you are thinking about or currently working on a strategy to sell your business or develop a succession plan and are in need of assistance, please contact Rick Gendemann, one of our business succession leaders. We look forward to the opportunity to connect with you to discuss your transition planning issues and address how we may be able to work with you and your family on developing and implementing your successful business transition plan.
Rick Gendemann, CPA, CA, is a Business Advisory Leader with Manning Elliott LLP. Rick can be reached at (604) 557-5760 or rickg@manningelliott.com