Each year, thousands of companies change ownership but the goal of the sellers remains consistent: to maximize proceeds from the sale. Too many of these owners do not realize the full financial benefit from this important liquidity event because they are unprepared for the complexities of the process. That's why Adventum Group has created the Top Ten Tips for Selling Your Business. We hope you find them useful-and we hope you'll give us the chance to get started on helping you sell your business.
Tip #1: Define the Subjective Factors that Enhance the Value of the Business
The value of a business is not a constant, nor is it determined in a consistent way. The value that an accountant places on a business can vary significantly from its value in an M&A transaction. An accountant's view is primarily based on historical financial statements. An M&A professional will consider all the many subtleties or factors that determine what buyers will ultimately pay. You need to understand that the value of the business is based on more than just past performance. It also needs to be based on the future. It is important to remember that the tangibles only establish a cost basis, while the intangible assets-which are often not recorded in the historical financial statements-can and should contribute additional significant value.
A business owner must prepare and manage the intangible assets such as customer lists, proprietary technology, brand names, organizational strengths and other subjective factors. Some business owners assume that value can be determined by a single accounting formula or a multiple of past revenues or profits. These informal or "rule-of-thumb" valuations simply apply averages and disregard the vast differences among individual companies. As oversimplified formulas, they can result in gross distortions of value that are virtually ignored or irrelevant in the professional M&A marketplace. Through the Exit Planning phase of the Compass M&A Service, we can help you understand how companies are valued and we will document the value of your business.
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Tip #2: Develop a Formal Exit Plan
It's a given fact that every successful business owner will someday exit his-or-her company. This will happen one of several ways, such as through a sale, transition or planned succession. However, most owners are so involved in the day-to-day challenges and activities associated with running the enterprise that they lose sight of this eventuality. The fact is, if an owner does not prepare for the time when he-or-she will leave the business, the event is not likely to yield the expected or desired results. Exit planning takes time and requires a proven process that includes a clear definition of objectives and the careful consideration of appropriate options. An exit plan is an action strategy designed to protect the net worth of a business owner and maximize the value of the business. When this is done properly, it provides a roadmap for satisfying personal needs and achieving financial objectives.
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Tip #3: Seek Professional Guidance
The sale of a business is frequently the largest and most important financial event of a business owner's life. It is usually something a business owner achieves only once in their professional career. The successful sale of a business requires a carefully planned and methodically structured process in which each step is done right-the first time-when seeking to maximize the financial reward. While owners are expert at successfully running their companies, few are prepared to navigate this complex process. The best buyers are experienced and fully understand the process on several levels. The right professional intermediary can provide invaluable advice, support and representation.
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Tip #4: Timing Counts
Be in control of the process. Have an exit plan. And be ready to take action when the time is right. Timing is critical to many successful business transactions. The time when a business enters the market can determine how quickly it sells and at what price. Selling when the market is right presents an opportunity to maximize proceeds. We advise clients to be proactive, prepare careful documentation, watch the market, test the market and constantly reassess exit strategy objectives in terms of external factors and changing market conditions.
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Tip #5: Actively Select the Right Type of Buyer
The best buyers are usually not companies you already know, because they frequently lack the means and motivation to pay what a company is really worth. The best buyers have strategic acquisition goals and are willing to pay accordingly. In contrast to local buyers or those known to the business owner, some of the best buyers are often among the most unexpected acquirers. For example, companies-both public and private-often pay premium prices to acquire seemingly ordinary businesses that offer a strategic or synergistic advantage to their current operations.
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Tip #6: Understand Buyer Motivations
Understanding buyer motives and why a particular company may be important to them is a great benefit to a business owner when the goal is to optimize value. For example, for many corporate buyers acquisitions are an integral part of a preferred strategy for achieving growth and expansion goals, improving operating efficiency or increasing profitability. Most corporate executives have a strategy to achieve overall corporate objectives through both organic growth and through acquisitions. They know it is often faster, easier and more cost- and time-efficient to buy market share than to expand organically. Business owners who can view the sales process from the perspective of potential buyers tend to benefit the most when it comes to maximizing their exit options and the proceeds from the eventual sale.
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Tip #7: Document the Value of Your Business
The old adage, "You can never make a second first impression" is true when dealing with sophisticated buyers; it is essential that you have quality documentation prepared and ready. The sophisticated buyer expects you to have clear and concise information about your business. This package is essential to attracting the attention of the best buyers. Documentation prepared from the perspective of potential buyers can turn a company's past into a valuable, saleable future. Complete and well-prepared documentation will present a realistic, defensible foundation for the company's value and substantiate buyer expectations of future earnings. It should give potential buyers a detailed, accurate and strategically compelling representation of how the business is likely to perform in the future.
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Tip #8: The More Buyers, the Better the Deal
No one understands the laws of supply and demand better than a business owner. A single buyer can gain too much control over a transaction and weaken the seller's negotiating position. Without alternative buyers, a seller has fewer options and limited leverage in terms of obtaining the desired price and terms. Multiple buyers create a competitive environment with a sense of urgency.
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Tip #9: Explain the Past, Sell the Future
All too often, business owners are so focused on the past business performance that they discount the value of the future of the business. The best buyers are looking for acquisitions that help them achieve their strategic goals and objectives. Business owners who only focus on the past performance of the business and base its worth on valuation or "rules-of-thumb" multiples or solely on past performance generally undervalue their businesses. Instead, business owners need to consider a buyer's strategic or synergistic acquisition criteria and the company's future earnings potential to realize optimum value.
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Tip #10: Help the Buyer Value Your Business
The value of a business changes almost every day. For this reason a seller should not put a price on a business. It is understood by M&A professionals that whoever mentions price first loses. For sellers, it pays to focus on how the business buyer benefits, such as through geographic expansion, earnings potential, product or service line extension, dividend-paying capacity or the potential return on investment. With this disciplined approach-in combination with a carefully structured marketing plan that properly positions the business in the marketplace, accurate and compelling documentation, access to the motivated buyers and favorable timing-a negotiated price can be achieved that is based on the optimum market value.
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