Having worked with a substantial number of privately held companies in the past, the topic of ultimately selling the business is one that typically comes up when the owner is starting to think about retirement. In fact, however, the preparation for this ultimate event should have probably been started years and years ago. Be that as it may, it is something that needs to be thought through and looked at from a number of different perspectives. Business owners, whether or not they have a vision to sell their business immediately or sometime in the future, should think about the following five issues if they want the process to go smoother.
- Generational wealth transfer – if this is a goal of the business owner, this plan should be put into place as early as possible, before the value of the company becomes meaningful. Even if there is a tax liability generated with this transfer, and the plan is to grow the business down the road, this tax liability will be small when compared to what it could be in the future.
- Management succession – when the time comes to sell the business, buyers will discount the value of the business if there is no one in place they feel is capable of taking the reins once the owner is cashed out. Develop a management succession plan and hire outstanding people to develop a strong management team.
- Separate personal from business – in some privately owned businesses, the line between personal expenses and business expenses can become blurred. The more you need to explain to a potential buyer that the cash flow of the business is substantially higher than it looks due to all of these expenses, the less leverage you have to negotiate a strong valuation.
- Retain strong advisors – selling a business is typically something an owner will only do once. As a result, they will not have the experience required to get the best possible deal closed. Hiring a strong investment banker and a capable M&A attorney are crucial. A good investment banker will be able to present the company for sale in the best possible light and will also know the appropriate audience to market the business to as well. M&A law is a very specific practice and hiring an attorney with this background is also a must. Otherwise, you have a strong potential of leaving money on the table and also subjecting yourself to potential future risk after the transaction.
- Don’t run the business to sell it – I’ve seen too many companies make short term decisions to try to enhance a potential transaction. Sometimes these decisions might not be the best decision for the business long term. Manage the business to grow and generate strong profits and valuation – when the time comes, it will take care of itself.