Steps to get the maximum return from a business sale
Prep your enterprise for selling from the very start
Business owners give the best years of their lives to build a successful enterprise. But when retirement approaches, they’ll need to start planning for the next stage.
For business owners who conclude that selling to a third party is the on the horizon, there are a number of steps to consider.
The sale of a business should be central to every business owner’s operational culture, says Tom Deans, an entrepreneur-turned-speaker from Orangeville, Ont., whose family has successfully sold businesses worth more than $100 million.
“An owner ought to be building it to be sold from the day a business is incorporated,” he says. “This means building businesses that aren’t reliant on the owner’s direct involvement in operations.”
Owners should allow themselves three to five years to plan and prepare before putting their business up for sale. Take necessary measures to make your business valuable to a potential buyer, says Deans. “When you know how someone else will place a value on your business, an owner will run a completely different, meaning vastly more profitable, business,” he says.
Here are some of key planning steps to prime a business, make it attractive to potential buyers and get the maximum return from its sale. Bulk up profits and cash flow Healthy cash flow means having money in the bank that can be reinvested to support future growth.
“Free cash flow is a really important metric,” says Deans. “Every business owner should know what their free cash flow is. Cash is king and free cash is what buyers love.”
Free cash flow — expressed as EBITDA, or earnings before interest, taxes, depreciation and amortization — can matter even more than sales figures. Additionally, owners could look for ways to plump up profit. Sales and profits are important indicators of a business’s desirability. Launching new products and services, entering new markets and increasing pricing are common ways to boost profit. Business owners could also improve their bottom line by finding new ways to reduce expenses
and create efficiencies. Steps to trim costs Improve energy efficiency Use technology to avoid travel expenses
Automate and outsource where possible Right-size your workforce Find cheaper space Take full advantage of tax credits “When business owners understand that every dollar in operational savings translates into a multiple of dollars come sale time, they will run profoundly different businesses,” says Deans. Be financially transparent A company’s financial statements — annual income statements and balance sheets, etc. — are the most reliable indicators of its future perfor- mance. The more comfortable a buyer feels with your financial information, the greater the perceived value of your business.
Selling a business is part preparation and part marketing. “It requires a business owner to tell a credible narrative about how magnificent their business is and how overwhelmed they are with offers,” notes Deans. Manage and mitigate risk perception The risk equation is simple: the greater the perceived risk, the lower the price buyers are willing to pay. Every business operation is unique, but there are general red flags that tend to increase buyers’ risk perception.
Deans says the perception of risk is greater if “a businesses is too dependent on the owner for operational success, has more than 25 per cent of sales revenue tied to one customer” and is faced with the threat of “technology that will make your product or service obsolete.”
See sidebar for some other risks and how business owners can address them to improve valuation. Passing the baton If you are the driving force behind the success of your business, you want to show the prospective buyer it can run successfully without you.
Build a business that has sound operational systems
Prepare your managerial staff to assume your responsibilities
Train employees to assume leadership roles
Finally, once you’ve made up your mind, move quickly. “Remember two words: Nortel and BlackBerry,” Deans says. “Even big firms with all sorts of market advantages wait too long to monetize their value. They failed to find the end before the end found them.”