Owner Exit Planning: The 7 things you must do before selling your company: part 5

Editor's note: This is the last of a five-part series on preparing yourself and your company for sale to maximket.

You have prepared your business for sale: increased sales, increased profits, strong management team, improved the value detractors and got your house in order. It is now time to take your business to market and see the results of your efforts.

The process of selling your business is like no other sale you have been involved with in your business career. It is different than buying real estate, different than selling your products and different from selling your home. It can be a complicated process, but not difficult if you have a team pulled together that has been there before.

Many business owners have figured out new business actions in the past, so it is a natural reaction to take this process on by yourself. DON'T...this is the single most important transaction of your career and it pays to have the support of a team that can steer you in the right direction and maximize your results.

Get your team together

Pull together a team of professionals that can help you navigate the process.

Business intermediary - A business intermediary is an individual or organization that can sell your business for you. Manage the process and help you maximize the amount you receive for your business. A business intermediary might be a business broker or investment banking firm. These firms will market your business and manage the process. A general rule of thumb is a business broker works with companies that have a value less than $5 million and an investment banker that will provide an auction like service for companies with values over $5 million (these ranges vary by organization). Find a business intermediary through referral if possible and always check references.

Attorney - You may have a business or personal attorney that has supported your organization for years, but do they have acquisition transaction experience? Some of the more difficult deals that get done are due to an attorney on one side that has not done any/many transactions making issue over items that shouldn't be and miss areas to protect you. Find an attorney that has the transaction experience and in many cases they will partner with you and your trusted attorney.

Accountant/Accounting Firm - Your accounting firm can help you and your attorney structure the deal to help minimize taxes. It is also helpful if your accounting firm has assisted other owners in the sale of their business. They can be very beneficial in assisting during the due diligence process as well as working with you to understand the tax implications of your transaction. In the end it is all about what you take home from the sale of your business.

Financial planner - Hopefully you have worked with a financial planner during the early stages of your planning process to understand how much you need to take home from the sale of your business to fund your lifestyle after selling your business. Now is the time for your financial planner to get involved with managing the proceeds from the sale of your business. They are a key player to help you achieve your lifestyle and legacy goals.

Business consultant - A business consultant can help you in the preparation of your business prior to going to market, but they can also help you through the sales process. Business consultants that have worked transactions can help you manage the due diligence process, answer any questions that arise during the process and can help you work with your other advisors to make the process as enjoyable as possible. Selling your business is very stressful and having someone that you can confide in will help ease the process.

This is the most important transaction of your career, so get the right team together to help manage through the process. Take advantage of their experience in managing the transaction process to increase the chances that you end up with a positive outcome and experience. More in-depth information is available in my book, "Owner Exit Planning: Leave On Your Terms"

Larry Turner is CEO of Roundhouse Advisors, Inc. and has over 25 years experience growing, starting up, repositioning, and revitalizing organizations. Roundhouse Advisors is a consulting practice focused on helping businesses increase enterprise value by managing pain, growth and owner exits. Larry is a consultant, public speaker, and the author of “Owner Exit Planning: Leave On Your Own Terms." For additional information visit www.RoundhouseAdvisors.com

Owner Exit Planning: The 7 Things You Must Do Before Putting Your Company On The Market: Part 4

This is part four of a five part series on preparing yourself and your company for sale to maximize your outcome.

Preparing your company for sale includes more than just improving the value drivers and fixing the value detractors in your business. It also means getting your overall house in order to be the best product on the market. Business owners are all getting older, and those that missed going to market before the recession hit in 2008 will all be looking for an opportunity to sell their business when the economy improves.

This means that there will be a huge number of businesses going on the market over the next few years, and those that are best prepared will sell faster and get better prices than those companies that are not prepared. Be ready in all areas of your business, and specifically during prospective buyer visits and due diligence.

Visits and due diligence is an opportunity for the buyer to look at your company and all areas of your business. The process is similar to staging your house for sale…those that are staged better sell quicker and at a higher price. That is where “getting your house in order” comes into play in your exit planning process.

Get your house in order

Getting your house in order involves focusing on those last few areas in your business that will be reviewed by a prospective buyer. In many respects, these may be areas of your business that should have been kept up over the years but you never really got to them. They may be general housekeeping, paperwork or legal issues.

You need to present your business in the best light with prospective buyers and the following are some examples of areas that could trip you up:

Some Examples:

Pick up your office – You will be bringing prospective buyers through your facility, so make sure it looks the best possible. This includes cleaning carpets, purge files of old information, organize your production or development facility, and have all employees pick up their areas. Prepare for this process just as you would an important customer visit to your facility. First impressions are important with the buyer.

Clean up legal issues – Take care of any pending or current legal disputes in your business. This can kill a deal or at the very least provide negotiation power to the buyer. This includes making sure all software in your business is properly licensed.

Normalize earnings early – Most privately held businesses legally manage their profits to minimize taxes. Adjust or normalize your earnings well before going to market. The last thing you want is to be in a weak position at the negotiation table, and starting this discussion with talk of adding back profit due to your business practices immediately puts you in a weaker position.

Eliminate baggage – Settle disputes with your employees, customers and suppliers before going to market. These areas will surface during due diligence and could hurt your chances of maximizing the price you receive at the time of sale.

These are only a few areas to review and fix prior to going to taking your company to market. By reviewing those areas in your business that represents risk to an outside buyer, you can be prepared for the due diligence process and maximize the value you receive from the sale of your business. More in-depth information is available in my book, “Owner Exit Planning: Leave On Your Terms.”

Coming up: Managing through the process.

Larry Turner is CEO of Roundhouse Advisors, Inc. and has over 25 years experience growing, starting up, repositioning, and revitalizing organizations. Roundhouse Advisors is a consulting practice focused on helping businesses increase enterprise value by managing pain, growth and owner exits. Larry is a consultant, public speaker, and the author of “Owner Exit Planning: Leave On Your Own Terms”. For additional information visit www.RoundhouseAdvisors.com

Owner Exit Planning: The 7 Things You Must Do Before Putting Your Company On The Market: Part 3

This is part three of a five part series on preparing yourself and your company for sale to maximize your outcome.

Preparing your company for sale includes more than just improving the value drivers in the business. There are a number of areas a prospective buyer will review during the sales process that are not readily visible when they make the initial offer. These areas will be looked at in depth during due diligence when placing your company on the market for sale.

Due diligence is an opportunity for the buyer to look deep into your company and review all information, processes and structure of the company that was presented during the first part of the sales process. This is where those areas that were neglected over time come back and can negatively impact the price you get for your business. These areas make up the value detractors.

Manage the Value Detractors

The value detractors include areas of your business that are reviewed during due diligence by the buyer and can represent risk to the new owner. Risk comes in many forms and can include too much revenue concentration in only a few customers, aging IT infrastructure, or lack of process in the organization. These are only a few areas that can cost a new buyer additional money after purchasing the business, or can represent risk in the revenue stream.

Most offers are based on a multiple of the free cash flow in the business, and any risk to the revenue can impact the purchase price a prospective buyer is willing to pay for a business. You need to objectively review your operation and identify those areas that a buyer would view as risk to their investment.

Some Examples:

• How secure is the revenue in your business with you gone? Many business owners are the key interface with customers, and when gone represents risk to someone else running the business. In this example it is critical that you have already transitioned many of the key sales activities to others in your company, so you can demonstrate your lack of involvement in the day-to-day sales efforts.

• Do you have a procedure manual that outlines the processes of your organization, or do key employees have the process in their head? The risk to a buyer in this case is from employees leaving or out for extended periods of time. Focus efforts on developing a procedure manual that outlines the key areas in your business and defines the process flow of your organization. It should be written in a way that would allow a new employee or temp to read a section as it relates the job they are doing and perform that task with some guidance. A buyer will look at the procedure manual as a road map to provide direction in the operation.

• Is your IT infrastructure outdated? The buyer will look at this area as an additional investment they will need to make within the first 12 months of purchase. Have your IT infrastructure reviewed approximately 18 months before going to market and update the equipment and software that is outdated. By managing this upgrade far enough in advance of taking your company to market allows you to make smaller monthly investments, as opposed to one large investment. This approach helps you manage your cash flows during the time leading up to your liquidity event.

• Too much revenue in too few clients. You have a problem if only a few customers make up 10% t0 15% of your total revenue. This lack of diversity represents risk to the new buyer in the security of the future revenue and cash flow in the business. This is also a difficult item to fix in a short time frame. The only solution is to increase sales with other customers to lessen the impact of the large customers.

These are only a few areas to review and fix prior to going to taking your company to market. By reviewing those areas in your business that represents risk to an outside buyer, you can be prepared for the due diligence process and maximize the value you receive from the sale of your business.

Coming up: Ready your business for market by getting your house in order and managing through the process.

Larry Turner is CEO of Roundhouse Advisors, Inc. and has over 25 years experience growing, starting up, repositioning, and revitalizing organizations. Roundhouse Advisors is a consulting practice focused on helping businesses increase enterprise value by managing pain, growth and owner exits. Larry is a consultant, public speaker, and the author of “Owner Exit Planning: Leave On Your Own Terms”. For additional information visit www.RoundhouseAdvisors.com

Owner Exit Planning Part 2: The 7 Things You Must Do Before Putting Your Company On The Market

This is part two of a five part series on preparing yourself and your company for sale to maximize your outcome.

Once you have worked with your financial planner and understand what is needed to sustain a desired lifestyle after the sale of your business, it is time to start working on your business to get it ready for market. The first area to focus on is the value drivers in your business. The primary value drivers for any business include consistently improving cash flow, increasing top line revenue along with a growth story and a strong management team.

A buyer will be looking at the business from a perspective of past performance and current business structure. The buyer will not value your business based on optimistic future business projections, especially if those projections are based on activities and trends that have not been realized in the past. These dynamics will require you to look at the company differently in the few years prior to putting the business up for sale to provide for the maximum return. The operational actions during that period are different than when you are running the business for your personal needs if you want to maximize your financial outcome at the time of selling your company.

Consistently Improving Cash Flow

Free cash flow is the main measurement for company valuation when it comes time to sell your business. A common measure of free cash flow is Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA), and provides a measurement of company performance without accounting for the items not included in EBITDA.

As an owner looking to sell your company you need to increase EBITDA year over year for the 9 to 36 months prior to selling your company in order to realize the highest value for your company. This may mean managing your company differently over that period of time than you have in the past. Most owners of private companies manage their business to minimize taxes, which means many investments in the business are expensed in the current year and extra expenses in the business may exist to depress earnings.

In an environment of maximizing value, you need to review all business expenses and work with your accountant to properly account for those investments that can be depreciated over a period of time. Review all costs and only incur those that are necessary to run your business.

Growth Story

One of the key areas to steadily improving EBITDA is increasing revenues. A growth story provides background to the prospective buyer on the why and how of the revenue growth. The growth story becomes a basis for the prospective buyer to plan growth going forward, which provides a higher valuation for your company.

We see many companies fall into a stagnant growth mode as the owner and business reaches maturity. This results in a lower valuation of the business, because the new owner needs to recharge the company and find growth opportunities. In these situations many owners can stimulate growth through programs that leverage current company capabilities.

These programs include adjacent growth programs, which may include new products developed for current markets, moving into adjacent market segments with current product offerings, or increasing sales channel capability with your current market and products. Whatever the plan to increase sales you will be best served if you can position those efforts into a credible growth story that can be succinctly conveyed to a prospective buyer and provide a basis for increased company valuation.

Capable Management Team

Most owner-run businesses revolve around the owner making many of the decisions. In these organizations, the company cannot continue without the owner on a daily basis, which can create risk for a new owner. Many buyers are looking for a standalone business with management teams that can run the day-to-day activities after the owner is bought out and has moved on. Key management positions need to be filled with strong individuals with the technical ability to run their function – they should be considered “A” players.

The Value Drivers

There may be other items more specific to your business, but in general these three areas are looked at by an outside organization to develop a price for your company. The value drivers represent those areas that are more readily seen in the process. In our next article we will look at the value detractors that represent risk to a buyer and as a result depress the value of your business at the time of sale.

Coming up: Increasing the value of your business by improving the value detractors, and getting your house in order.

Larry Turner is CEO of Roundhouse Advisors, Inc. and has over 25 years experience growing, starting up, repositioning, and revitalizing organizations. Roundhouse Advisors is a consulting practice focused on helping businesses increase enterprise value by managing pain, growth and owner exits. Larry is a consultant, public speaker, and the author of “Owner Exit Planning: Leave On Your Own Terms”. For additional information visit www.RoundhouseAdvisors.com