Maximize the Value of Your Business Upon Exit
Planning with the end in mind
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The Global Financial Crisis (GFC) delayed the exit plans of a few of our clients; still, their need to exit at some point in the future has not gone away. Thankfully, most of our clients are delaying their sales decisions for the right reasons. Their businesses are beginning to improve, but the value is not where it was just a few years ago, when looking at the last three years trailing earnings.
For a variety of reasons, not all business owners are seeing the value of their businesses begin to improve. We have met many whose businesses have been structured and operated with tax legislation in mind. The profits have been kept low to minimize taxes. Letting the “tax tail” wag the dog is not a strategy we would recommend.
For others, removing waste and investing in growth have not been a priority, thus reducing the value for a potential sale. There may be a reluctance to invest in leadership training or consulting services to develop growth capacity. For all of these scenarios, there is still a chance to capitalize on the owners’ hard work and investment of time and energy.
We have outlined 10 steps, grouped into three distinct phases, which are designed to help maximize a company’s value.
Phase 1 – Optimum Performance (Steps 1 & 2)
Step 1: Improve the profitability of your business by removing waste. There is no point in putting more business through an incapable process. One of the key performance measurements of a company is how efficiently sales are converted into profits for the business.
As one of the most efficient global industries, the lessons on how the automotive component manufacturing companies effectively remove waste can be applied to any industry. As illustrated in the May and June 2009 Route to Profits®, the seven wastes program is used as a framework for a series of eight-week team cycles. These cycles enable employees to identify and remove waste from their companies’ processes.
Step 2: Grow the business on a positive trend line. Sales growth can provide confidence that the sales process is working well. Accordingly, to grow sales, the business must have a sales process that works. A plan to improve the sales process involves:
- reviewing the product and market segments
- reviewing the price points
- training the sales force
- developing a contact program
- creating a detailed competitor analysis
At the end of phase one, the business performance is optimized, cash is created to fund phase two of the process, and the sales and profit trend lines show a continuous and predictable improvement.
Phase 2 – Polishing the Business (Steps 3-6)
The steps in this phase ensure all of the elements of a great business are in place.
Step 3: Make sure, wherever possible, the future revenue of the business is locked in. Preferably, this is through long-term contracts. A buyer of your business needs a degree of certainty with a five year revenue outlook. Therefore, contracts with customers need to be robust.
Step 4: Establish a management infrastructure that removes reliance on the owner. The management skills, experience and process to lead the business, in the absence of the owner, need to be in place.
Step 5: Protect the brand of the business. Mechanisms for this include a strong web-presence, social media, patents, and other intellectual property protection.
Step 6: Reduce the debt levels of your business in order to clean up the balance sheet. The cash created in Step 1 can be used to retire debt and remove loan balances.
Phase 3 – Creation of the Sale (Steps 7-10)
Now that your 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 the key success factor in maximizing the sales price. Ideally, at this point, several potential buyers have been identified and an analysis of why the business is essential for each potential buyer is carried out. This analysis often requires changes to the look and feel of the business. The information gained from the analysis enables a specific sales process for each potential buyer to be developed and implemented.
Step 8: Make sure the negotiation process goes well. Often, the business owner needs to be coached on their role in the sale. The psychology of the sales process must 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 all possible objections to be raised by the buyer and any value-reducing tactics in the sales process. This is a part of the sales process planning.
Step 10: Manage the risk in the sales process. You can use a Failure Mode and Effect Analysis (FMEA) process to control all identified risks. Stay tuned for a future issue on this topic.
Following these 10 steps can help maximize the probability of getting a higher price for your business. The timing of the exit is up to the owner, but a three to five year time frame allows for applying the ten steps in a way that ensures the best outcome. The initial sales strategy meeting allows an advisor to determine the potential value of the business. Having a clean set of books and records is critical to determining the true value of your business.
Let PKF Texas is available to assist your business on the route to success.