As a business owner, whether alone or in partnership. There will inevitably come a time when you MUST exit your business. The fact that we have finite lives guarantees this. Most of us, however, will want to exit our businesses while we can. You control the process, usually with the objective of maximizing our returns from years of effort in that business. It is rarely possible to pick a date in the future on which you would like to leave your business, wait until that date, and then sell the business for maximum proceeds. For example, if, in 1998, a business owner decided he wanted to sell his business in ten years, he probably would not have received maximum value selling it in 2008, if it could have been sold at all. How do you prepare for issues when selling your business?
A more profitable line of thought is to sell “when the time is right.” How does one determine when the time is right? Obviously, one of the major considerations must be that you want to do it. But there are other factors that enter picking the right time. We have observed that some of these are contradictory. What one might intuitively believe is a good thing in realizing premium value, may in fact work to the seller’s disadvantage. Recognizing the impact, both good and bad, that some of these contradictions can have on the sale of your business can help you to identify the windows of opportunity that you should seize.
8 contradictory situations that will impact the value of your business, and the timing of when you should sell.
- The best time to sell your business is when you are happy owning it! Or to put it another way, you can negotiate the hardest if you have both the ability and enthusiasm to continue owning and running your business. Buyers are always trying to identify “motivated sellers,” and “frantic sellers” are easy prey. But if your best offer is one where you say to yourself, “I’d buy this company for that,”. Rejecting the offer is exactly what you do. Don’t take your company to market if you are not ready to sell. Try to take your company to market when you have the option to keep it.
The value of your business will peak before its operations or products peak. Buyers use past performance to indicate future possibilities, but they are not buying the past. If the business or products have already hit their peaks, buyers will have less enthusiasm and will see less value in the future. A bright future will generate excitement that will be reflected both in the sale price and in the number of potential bidders that will be attracted to the company.
- Increasing sales with your largest customers may not increase business value. Buyers always evaluate what the impact on the business would be to lose a customer, the “concentration of business” risk. As this concentration risk goes up, business valuations go down. But who is going to turn down more business from their best customer, maybe opening a door to a competitor? Virtually no one! There is an increasing percentage of businesses with a small number of customers. This means you should redouble your sales efforts with other customers. If that is not possible, try to secure your significant customer to longer-term deals that will take time to unwind. You need to be able to show a buyer that a big customer needs you.
- Underpaying yourself or key employees does not create business value. It may be a good way to control cash flow and preserve assets, but a buyer is going to assume that he will have to pay market value to fill those positions and will proforma that impact into his pricing model. Likewise, paying yourself more than would be required to hire competent management does not subtract from your business value. Buyers will make a similar adjustment in the positive for excessive compensation.
- Owning your facility may be viewed as a negative by a buyer. Even though the facility may be great for your uses. Many business buyers view investing in companies and investing in real estate to be very different types of investments. For a buyer, owning real estate diminishes the flexibility they seek for the period after acquisition. For example, by making it more difficult to consolidate synergistic operations. Often, this potential negative can be mitigated by moving the real estate into a separate entity and leasing it to the company. When your company is sold, negotiating an appropriate lease will be part of the transaction.
- Minimizing taxes may not be the best way to maximize your company’s value. Using the shortest depreciable life on assets may reduce your taxes, but not reflect the real economic life of the asset and reduce your earnings. Though it would not affect EBITDA, it may mislead an outsider on how quickly assets need to be replaced. Using LIFO inventory methods may reduce taxes but will usually lower reported earnings and EBITDA. Locating your business in a lower tax area may put you at an inconvenient distance. It can affect your market and employee talent you need to thrive. Pursuing aggressive or questionable tax positions will cause buyers to want to buy assets. Buyers are more cautious about buying your stock to avoid tax exposure. This can potentially cause you to have ordinary income rather than capital gains.
- The cost of an audit or formal review by a qualified independent CPA may raise the confidence of a buyer and increase your value. It almost always assists in reducing the effort that must go into the due diligence process of the buyer by instilling discipline in the company’s record keeping.
- Having family members in the business is usually a detraction to buyers. Although you may enjoy working with family and have inherent trust. An acquirer will usually discount the contribution of family members. They assume the family members are loyal to you even after they buy the company. Identifying, quantifying, and mitigating contradictory business issues is part of the service we provide to our clients at Aaron, Bell International, Inc. We can help you determine when “the time is right” to sell your business.