It is never to early to begin planning and preparing to sell your business. The key to a successful sale is having a well-formulated exit strategy and diligently adhering to a natural timeline.
Three Years Prior to Sale
1) Clarify your life goals. What will you do after your sale? Make sure to have a well thought out post-retirement plan. Also, be sure to recognize the difficulty of finally letting go. Oftentimes, your business has been your life for decades. It is not easy to part with it.
2) Formulate a strategic exit plan. Develop a vision of what the sale will look like. Establish clear financial, and non-financial, objectives. Parse through different models of continuing ownership and employment. If you have shareholders and/or a board of directors, plan how to deal address their interests. Also, be sure to establish an anticipated sale timetable.
3) Build your business. It is no secret that buyers are willing to pay much more for growth. Do away with unprofitable activities, unless near-term improvement is feasible. Strive for quality and diversity in your earnings.
4) Implement professional accounting and IT systems. Develop a system that would be able to accommodate a company twice your current size. Make sure to institute timely reporting.
5) Secure three years of audits. Do not cut corners. Use an established, trusted accounting firm.
6) Begin relationship with M&A professionals. The sale process will be more complex than you initially think. A polished process can increase the sale value by well over 20%. Use an attorney to structure or restructure the corporation and handle tax issues. Work with an investment banker for advice, even several years before the actual sale. An accounting firm will provide invaluable advice on Quality of Earnings as well as add-backs.
7) Maintain quality facilities. Like selling a house, clean and organized facilities will present favorably to potential buyers. It may even be worth moving to a new facility, if your current one is of poor quality or a constraint to profitability and growth. Remember, a quality facility reflects a quality organization.
Two Years Prior to Sale
1) Strengthen management depth and culture. Focus on hiring and developing potential successors at top managerial positions. Do not forget to do so for your own role. Nurture an ethically profit-driven culture across all aspects of your organization.
2) Focus on core business and avoid risks. Continue to drive up your sales, while avoiding any major new intiatives–unless they are “no-brainers.” Keep your focus on new product and service development. Work on bottom line improvements, while continuing to cut unnecessary costs. Demand high productivity from every level of your company.
One Year Prior to Sale
1) Stabilize top management via incentive packages. It is essential that your key managers are motivated to maximize value realized from the sale, and stick around after closing. They will be needed to work with the buyer on inevitable integration issues. Properly incentive management will yield at least 5% higher value. Be sure to bring your top 3-5 managers into the process early on. If they know they are taken care of, they will support the transaction and transition.
2) Keep track of restatements to historical financials to account for extraordinary expenses and nonrecurring items. This includes:
- Nonrecurring fees and expenses
- Extraordinary costs
- Cost of goods sold distortions
- Adjustments for above-market lease expense
- Above-market salaries and other forms of compensation
- Working capital adjustments
- Expenses that should have been capitalized
3) Address potential due diligence issues. Be proactive to ensure environmental compliance. Perform a Phase I audit in normal course of business to identify problems before they arise. Resolve any ongoing major litigation. Settle any open contractual issues with customers and/or suppliers. Make sure your intellectual property is protected via patents, trademarks, trade secrets, and/or copyrights. Prepare for full disclosure. Also, work to minimize your indemnification risk. Conduct a pre-marketing Quality of Earnings review.
Remember, selling your business is no easy process. Many people do it just once in their life. It is important to make sure you do it right. Be realistic about your after-tax financial goals. Demand excellence in the process from all of your advisers (investment banker, attorney, accounting firm, etc.). Most importantly, make all decisions with your head and not your emotions.