By: Carol Roth
“A lack of planning today may cause you to lose value when you ultimately are ready to go sip margaritas on the beach.”
Too often, the shareholders of businesses wait until they are ready to sell their business to start planning for an exit. However, a lack of planning today may cause you to lose value when you ultimately are ready to go sip margaritas on the beach. Here are six best practices to follow before you want out.
1. Make sure your key employees are incentivized. Key managers who are not the sole shareholders of the business can create a huge conflict of interest during a sale and hold shareholders hostage during sale negotiations. Make sure to put in place incentives (like a sale bonus or stock options program) today to avoid eleventh-hour power plays.
2. Establish key advisor relationships early. Strong service providers can add substantial value to a sale process- in fact, they should pay for themselves. Create relationships with an experienced accounting firm, lawyer and investment banker or business broker today. And this means advisors with relevant M&A experience, not your uncle Ira who happens to be the family lawyer. This will give your advisors insight and knowledge so that they can best advise you when you are ready to sell.
3. Get rid of “private company” expenses. Many private firms are run to minimize taxes for the shareholders. However, when you sell your business, the objective is the opposite: you want to show as much profit as possible. It is advisable to cut expenses that aren’t mission critical to operating your business (like the yearly “company conferences” in St. Bart’s, etc.) one to two years prior to selling a business. While you will lose the tax write off today, you should more than compensate for it when you sell the business.
4. Get your numbers into shape. Your financial statements are the key to determining the value of your company. However, many businesses have financials that are a hot mess, making them less credible. If you have > $5 million in revenue, get the last two years of your financial statements audited. Smaller companies should have their financials reviewed by a reputable accounting firm (again, not cousin Gladys the CPA). This can also point out weaknesses in your company’s financial operations/controls, giving you time to correct any issues.
5. Run a tidy “house”. Who doesn’t let their housekeeping slide from time to time? Well in business, having your records in disarray can cost you value- the more administrative items that you have in shambles, the more penalties you will incur from the buyer. Make sure that all of your files are in order and review them frequently, noting special clauses like change of control provisions that could impact a sale.
6. Create a growth plan. While you may be ready to exit your business, show that your business still has opportunities ahead of it. Buyers don’t want to buy a business that is ready to start a downward spiral or even just stay flat. Make sure you can credibly show three years of meaningful growth after the sale.
Carol Roth is an investment banker, business strategist and deal maker. She is a frequent radio, television and print media contributor. She can be reached at 847.215.4880 or firstname.lastname@example.org.
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