Based on my experience as a M&A Advisor helping clients during the sale, merger, and acquisition process, here are five tips to consider and act upon now:
- Early in the process, consult key decision-makers and those who will be affected by the deal. Determine who will have a say in the deal and consult with them, even if they are minority owners. If your business is family owned, talk to your family members as soon as possible. Involving your family at the outset can help minimize potential family problems later. This is particularly important if a second or third generation is involved and family members expect to take over or profit from the business. Making sure that family members understand what is going on can help keep harmony in the family.
- Determine whether and for how long you would like to continue to work after the sale. This can be a tough one. You have to be honest with yourself. It is not a bad idea to discuss this with your significant other. This decision is dictated for many by their age, health, and lifestyle preferences. Older business owners may be more prepared to retire and step away than younger ones who may need or want regular incomes to support their lifestyles or remain active. In general, at a minimum, it is a good idea to be prepared to continue working in some capacity during a transition period. In some cases with financial buyers, you might continue to run the business for years until the next sale.
- Organize your documents in advance. Well-structured corporate and financial documents and sound record-keeping practices always make good business sense. Getting your books and records in order now will help keep you from scrambling for documents when potential buyers conduct their due diligence. Keep all your financials, vendor contracts, and customer contracts easily accessible. You will derive immediate benefits from this, as you will be in better shape running your business today with good, timely information.
- Determine whether you want a partial or total exit. Private equity firms and other financial buyers can either buy control or minority positions. In a total exit, you might maximize the consideration you receive, especially if you sell to a strategic buyer (although financial buyers are currently aggressive when it comes to pricing). In a partial exit, there are many social issues to consider that might be just as important as what you receive. If you are going to partner with a private equity firm, the comfortability factor may be more crucial than the dollar amount, since you will not get that until the final exit when you sell your remaining ownership interest.
- Have realistic expectations of value. Ask your advisors to provide realistic guidance on the value of your business. Too often, I hear stories from frustrated sellers who regret having hired advisors who gave unrealistic valuation numbers just so they would get the job. It is equally important for sellers to be realistic and not merely pick whatever numbers they think they need to sustain their lifestyles. A multiple of earnings or EBITDA (earnings before interest, taxes, depreciation, and amortization) is the way most buyers determine what they are willing to pay for a business. The more you earn, and the higher your future projected growth, the more you can expect buyers to pay for your business. The amount buyers are willing to pay also will vary depending upon factors including your company’s size, stability, industry, and working capital needs. It also is important to have a diverse customer base, as your valuation will be hurt if your revenue is heavily concentrated with one or two clients.