All too often, business owners wait to form an exit strategy until they’re ready to sell. However, insufficient advanced planning can cause the owner to receive a diminished valuation at the time of the sale. Below are several best practices CGK recommends to those looking to cash out:
Ensure That Crucial Employees are Fully Incentivized
Top-level managers who aren’t sole shareholders can create a significant conflict of interest during the sale process, and they can hold other shareholders hostage during negotiations. To avoid these struggles, the business owner and their M&A advisor can come up with incentives (such as stock options or sale bonuses) for key employees.
Find a Reliable Advisor for the Transaction
A strong advisory team can add significant value to the sale process; in many cases, they can offset the cost of hiring. When a seller creates a relationship with an M&A advisor like CGK, they get the benefit of the broker’s merger and acquisition experience, knowledge, and insight.
Divest the Company of Unnecessary Expenses
Many privately-owned companies are operated to minimize shareholders’ and owners’ tax liabilities. However, when these businesses are sold, the goal is to show as high a profit as is possible. To achieve this goal, a broker will suggest areas in which cuts can be made. When these expenses are trimmed one or two years before the sale, the owner loses a tax write-off, but they’ll gain it back many-fold when the company is sold.
Get the Company’s Numbers In Order
A company’s financial statements are crucial in determining its value. However, many companies’ financials are in disarray, which makes them look less credible and diminishes their value. If the company has more than $5 million in revenue, the owner should ask for a quality of earnings report of the last two years’ financial statements. Smaller businesses can have their financials evaluated by a reputable accountant. With the results of an audit, the business broker can point out the company’s financial weaknesses and give the owner time to resolve pressing issues.
Run a Tight Ship
Everyone occasionally lets their housekeeping fall by the wayside, and most of the time, there are no ill effects. However, when it’s time to sell a business, disorganized records can result in a lower valuation. Before consulting a M&A advisor, the business owner should ensure that all files are in order and review them often, noting provisions and clauses that could affect a potential sale.
Form a Plan for Growth
While an owner may be prepared to exit the business, he or she should still be thinking about the future of the company. Buyers don’t look for companies that are stagnant or declining, and when the owner can show at least three years of future growth potential, they’re more likely to make a sale.
Selling a business is a difficult decision even under the best of circumstances, and being unprepared can make things worse. By following these tips, sellers can increase the company’s value and get it ready for a sale. Call or email today to speak to a CGK M&A advisors. We are not your “run-of-the mill” business brokers. We have the experience and credentials to back it up. Visit our website to learn more.
