Proactive Planning Can Increase Value
Updated: Jan 8, 2019
Are you as the business owner proactively positioning your business for sale, or are you reacting to competition, financial difficulties, lack of management readiness to take control of the business, and/or an urgency for liquidity?
The market continues to be a seller's market. Multiples continue to be strong and baby boomers are exiting their businesses as there are positive market dynamics, availability of cash to invest either through traditional financing or equity investment, and a strong interest from buyers.
The key to any business exit is proactively planning for 2-5 years in advance. Why so long?
Most business owners have built their business over many years. By planning for an exit, early and thorough planning will optimize value. It allows you to invest in building the strategy, the team, and manage the process. It also allows sufficient time to understand the strengths of your business and to not only identify, but shore up your weaknesses. Lastly, it provides time to understand how buyers perceive value and allows you, the owner, to embed value in the organization and move it away from dependence on you. This is a business you have built with your blood, sweat and tears, so making sure that you get the value out, you must plan for the outcome you wish to achieve.
As I tell my clients, even if a sale is contemplated in the near-term, effective planning will allow you to run the business as if you're not going to sell it. Because positioning a business for sale requires the same focus and diligence to achieve value in a sale as it does to achieve value for the stakeholders. When would your business not benefit from improved cash flow and profitability, quality management, people, and intellectual capital, customer relationships, growing sales trend for key products and services, quality, reputation in the industry, technology, etc.?
One of the key aspects that increases the value of a business in a sale is the quality of the management team and their track record over time. Therefore, as part of the business succession planning process, take a fresh look at the strategic direction of the company, establish the goals, identify the missing talent, and take action steps to secure the appropriate outside talent. One of the most difficult things for an owner to do is make management changes. The people who helped your business get to the current level of sales/profitability, may not be the same people that you need to grow the business, and ultimately the team that will be of value when it comes time to sell.
In addition to the people, look at your internal systems. Do they need to be upgraded to support growth? Are there other options such as outsourcing in order to minimize the capital investment while achieving the desired growth? What costs should be cut and/or debt restructured to improve the balance sheet and cash flow? These are questions you, as an owner, should be incorporating into your planning process, whether you intend to hold on to the business or sell.
In order to make this assessment, it is often prudent to consult with a trusted third party advisor. Many times there are emotional ties to the business that can make it very difficult for an owner to be completely objective in this assessment and, therefore, limit his/her ability to make the tough decisions that will ultimately impact the value of the business to potential buyers. Remember, most people sell a business only once. Don't you want to do everything you can to make it a successful sale?
Probably ahead of all other business issues, the primary planning decision that must be addressed is who are you looking to sell the business? If it's a family business and family succession is in the plan, addressing the sensitive topics associated with this decision are critical. Are the family successors of age to take over the business, do they have the desire, skill sets, and management experience? What potential conflicts exist such as sibling rivalries, capitalization of the business, and reactions of non-family employees?
Nothing can derail an exit strategy faster than internal family conflict that hasn't been resolved regarding the intended exit plan. Therefore, involving a trusted advisor to work through these issues is critical before formulating an action plan and objectives.
The market continues to be a seller's market. Plan, prepare, and profit!
Jayne McQuillan, CPA, MBA, CEPA is a strategic management consultant, and the owner of Journey Consulting, LLC, in Green Bay