It’s the best of times and the worst of times to be a business owner. For many, the promise of a liquidity event represents the culmination of their life’s work. But how do you optimize your valuation or determine the ideal timing of the event?
Here are 10 steps to optimise the value of your company:
1. Start with the end in mind
Think like a buyer would. In addition to a growth plan, a buyer will want to understand the strategic value your company adds to their portfolio, the diversity of income and customers, and the likelihood that management will stay (which may matter less to a strategic buyer than to a financial buyer).
2. Include your team in the process
Many private company owners are skittish about sharing information regarding a potential exit with their management teams. Whether it is appropriate to do so is dependent on a number of variables, including the sophistication of the team. Senior managers are going to find out eventually, and utilizing their talents to drive valuation is often a success factor. Handcuffing them through a long-term incentive plan (LTIP) is an important best practice (as opposed to providing them equity). It’s is just good business to reward the people who get you there.
3. Focus on the growth story
The single most important variable in optimizing value is being able to demonstrate consistent, predictable revenue void of too much concentration risk in a few customers. The business owner must maintain laser focus on growth in the three to five years before the sale. Any buyer will want proof that the business can “scale.”
4. Secure the right advisers early
Many business owners talk to wealth advisers, strategic planning consultants, transactional attorneys and investment bankers late in the process. Create a team of advisers who can collaborate for several years in advance and have the pieces in place when you are ready to sell to optimize your valuation. Assign a “quarterback” to drive a seamless process.
5. Formalize your exit plan
After you have met with your team and advisers, formalize your company’s strategic plan and exit plan. Your exit will need to coincide with a succession plan. Note that a majority of “earn out” consulting agreements do not pan out. While there may be tax benefits to having a consulting agreement post-transaction, make sure you understand their limitations when you’re trying to optimize your valuation.
6. Understand valuation
Every business owner thinks their business is worth more than it actually is. Get an expert business valuation done, in part to set the basis for your long-term incentive plan.
7. Minimize tax liability
Too many owners wait far too long to consider their tax liability during a transaction, and they end up giving away a sizable chunk of their gain in taxes. The right advisers may have you consider relocation for the business or the owner, or other tax-mitigating strategies such as forming an ESOP. This is why a CPA who knows M&A is so critical to optimize your valuation.
8. Ensure you have solid financial statements
A fatal flaw that will end a process before it begins is a lack of financial controls. Buyers will immediately discount any company that does not have solid financial statements and performance for at least three years.
9. Be patient
Selling in a down cycle can be costly. Waiting until you have assembled the right team, advisers and financial history can dramatically increase valuation. As private equity becomes interested at about $5 million in EBITDA, crossing this threshold is important in maximizing value
10. Develop your life plan
Owners often have a sizable portion of their financial wealth wrapped up in their businesses and make invalid assumptions about the cost of retirement.
Source: Marc Emmer. Read more by clicking at the image below:
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