You have been thinking about your retirement plan for years. Your business has provided you with a good living, and now it is the time to take the next step of looking to offload your business and ride into the sunset. But wait a minute, is now the right time to sell your business? How will the market and an acquirer look at your business? Is your business in the best position it can be in to sell at a price that will make sense and provide you with the retirement income you will need for the period of retirement you are looking for? If you are contemplating these questions, here are some tips to consider and ways to best position your business to ensure you receive the highest value possible for your business to achieve your future goals.
Know Your Free and Available Cash Flow
Sounds easy, right? You’re the business owner, of course you know what the cash flow of the business is. But do you really? How much of your expense base is non-operating cash expense? Examples of non-operating cash expenses would be staff lunches, parties, outings, etc. Many business owners are very generous with their employees. These types of expenses are great for the morale of the employees, but is it a core business expense? Understanding what constitutes a core business expense versus a non-operating expense is important for normalizing the cash flow stream. Other items to consider would be personal expenses. While you would like to think that personal expenses do not run through the business, there still might be some that do. Being able to identify and extract those expenses will also improve the business cash flow and ultimately the cash flow value of your business.
Evaluate the Management Structure of Your Business
Many business owners have a very “hands on” approach. This is your business and you have run it for decades. While it might seem great that you know all the ins and outs of their business, what happens if you are not there? Does all that knowledge leave with you? Is there anyone in the business that can operate the business in your absence? One issue that can really affect the value of a business is the lack of a management structure. In the valuation world, valuators will discount the value of the business if there is only one or two key employees in the business. One way to increase the value of your business for a potential acquirer is to have a management structure in place that will allow the business to operate even if one of the key employees is absent. Evaluating your C-suite (COO, CFO, CIO, CMO, etc.) will ensure you have the right leadership in place to operate the business in the event you or a key member of the team is missing. Also, evaluation of your key upper and middle level management personnel will also add value through the depth of their technical knowledge and expertise.
Understand Your Market
This is your business, and you believe that it is clearly the best in the industry. No one competes with your process, procedures, and overall business structure and management. While this might be your belief, understanding what the market is actually saying about your business will also help you to evaluate the real value of your business. Doing your research on your industry and competitors will help you to better identify what strategic advantages your business really has. Maybe your competitors have a product or business model that is more advanced compared to yours. Factors like these will impact market multiples and deal structure. Other items to consider are the types of deals that are being done in your market. Are there private equity organizations looking to buy a turnkey operation? Are there competitors looking to buy market share or just a book of business? All of these considerations have an impact on value and market multiples. Understanding what the market is saying is a very critical component to how to best position your business for its highest value.
Consider Your Goals
For many, the goal is going to be to maximize the cash paid in the transaction. That is clearly a great idea, but do you have other goals with the business transaction you are trying to achieve? For many owners, finding a soft landing spot with the new company is also an objective of a sale due to a sense of loyalty to their employees. Also, ensuring that the clients you so diligently worked with for many years are taken care of by the new owners is often another concern. Sometimes, there is still a desire to continue working, just without the hardship and worry of running the day-to-day business. Alternatively, some owners look for the ability to continue to work and still be active in the business. Your ultimate life goals are also going to drive your decision on whether to sell now or later. Take all of your goals into consideration in addition to the economics of the transaction when making your final decision.
As you can see, sometimes what seem to be the easiest decisions in life are not as easy as they are thought to be. Taking the above points into consideration while contemplating the next steps in your life and your businesses longevity will aid in making the right decision regarding when the right time to sell and transition your business will be.
Here at McKonly and Asbury, LLP, we can assist you with analyzing your business to help you make these decisions and assist you with a sell side process. If you would like to talk to one of our professionals in our on this topic or any other business-related topic, please do not hesitate to contact us.