Selling Your business Series
Preparing Your Business for Sale
You have decided to sell all or part of what may be your most valuable asset—your business. Many years of planning and calculated decisions to grow your enterprise and reach your business goals have led you to this point—perhaps you are looking to retire from the industry, divest a segment of your enterprise that may not be yielding the success you demand, or sell to your next generation, an existing partner, or trusted management.
Where do you go from here? Where to start? For most business owners, the prospect of monetizing your enterprise is a “once in a lifetime” event. The pressure to execute successfully can be overwhelming.
Prior to founding Corner Capital, many of our team members were business owners as well. From that experience and our 15 years of transacting on behalf of our clients, we compile a few thoughts to consider as you embark on one of the most meaningful events in your professional career.
1. Secure trusted advice from peers, professionals, and family
Early on, discuss your plans with your accountants to help review financial statements and evaluate the tax implications of a sale. We’ve yet to meet a business owner joyfully writing excessive tax checks to state or federal governments. Experienced attorneys play a critical role in the required contract work and legal negotiations, but they can come into play when you have identified the timing of your sale. Often quarterbacking a structured sale process are investment bankers who, with guidance from the business owner, manage the transaction from underwriting to closing. They can prepare adjusted financial statements, compile and present diligence information, prepare marketing materials, leverage their relationships with reliable buyers in a structured sale process to negotiate the most attractive offer and coordinate with the business owner and advisors during formal diligence and closing. Perhaps most importantly, by utilizing all team members you can remain focused on your business performance during the process.
2. Determine an Optimal Sale Structure
Does your company operate across different segments or business lines? It could make sense to market these segments independently as different strategic buyers may see more value in the parts versus the combined enterprise. Do you want to cash out, or do you wish to retain some control? If you intend to sell outright, it is important to find a buyer that will do right by your customers and employees. On the other hand, finding the right partner can bring in a new set of relationships, employees, or other assets to help grow the business, generate a partial liquidity event for the business owner and allow for upside participation in the future. Do you own the real estate associated with your business? If so, the sale could be structured so that only the business operations are sold, allowing the business owner to lease the real estate to the buyer and generate rental income. Deal structure and value will be the most important aspect of your transaction; talk to accountants, investment bankers, and investors to develop an understanding of important parameters.
3. Add Incremental Value
Is your business "asset-light," deriving most of its value from customer contracts? We suggest you conduct a thorough review of customer contracts prior to a sale and extend or renew as many as possible. In an inflationary environment as we are today, do your contracts provide for pricing adjustments? Are your contracts based upon fixed prices? Contract terms can add or detract from your enterprise value. From a physical perspective, something as simple as re-striping a parking lot could add value in a buyer's eyes. Think about your internal processes – are they efficient? Are they driven by technology or are you in the Fred Flintstone era? Digitize as much as possible, leverage software packages, figure out how to let your customers use their smart phones to trade with you.
4. Prepare Adjusted Financial Statements
Many business owners keep their books in an effort to minimize tax burden, which also minimizes reported profit. Before going to market, it is important to normalize or ";adjust" these financial statements to reflect the true profitability of your enterprise. Private companies are often sold on multiples of Asset-Level Earnings before Interest, Taxes, Depreciation, and Amortization ("Asset-Level EBITDA"). Asset-Level EBITDA removes the impact of overhead (corporate & back-office salaries, office rent, etc.), discretionary expenses, and non-recurring items to proxy the normalized gross cash flow (excluding CapEx and changes in working capital) generated by the business assets. Through the underwriting process, advisors develop a deep understanding of every line item on a company's financial statements, and work with the business owner to create adjusted financial statements and calculate Asset-Level EBITDA that accurately represents the profitability and gross cash flow of the business.
Identify and segregate all personal expenses running through the business, such that they are easily reconcilable in your financial statements. Most advisors have seen it all: boats, second homes, vacations, even tractors and backhoes. Transparency about these items is the best course of action.
5. Collect Remaining Diligence Information
In addition to adjusted financial statements, buyers will want to develop a deep understanding of your business assets and operations. This diligence information can include a corporate entity structure, list of real estate attributes, equipment, vehicles, supplier/vendor contracts, liabilities to be assumed by the buyer, and a schedule of customer contracts that highlights key terms while keeping customer names anonymous. Identify whether any other companies restrict your potential sale through a Right of First Refusal or consent clauses. Making the necessary information available upfront will streamline any sale process. Investment bankers typically work with business owners to compile, organize and present this information in a "virtual data room."
6. Highlight Selling Points and Create Marketing Materials
A Confidential Information Memorandum ("CIM") provides potential buyers with a first impression of your business and outlines your sale structure, terms, conditions, and process. Active buyers and strategic acquirers are familiar with reviewing a CIM, utilizing a data room, and asking the right questions. Most know that the process is competitive, and that they will need to sharpen their pencils to provide a compelling proposal. An effective CIM will also describe your business operations, highlight your past success, and present the selling points and opportunities for potential buyers of your business.
7. Picture your life – daily and longer term – after a successful sale.
This lesson cannot be understated. Most businesses have a long history - whether it is in the first generation or the third. One of the most common refrains we hear from owners is: What will I do when I am done? Actually completing the sale will jump start the next period of your life, so have a mental picture of what it will look like. From an everyday standpoint of waking up in the morning, to starting a new hobby or philanthropic participation, determine how this new life-stage will add meaning to you, your family, and other lives around you.
Preparing your business for sale is the essential first step in a transaction process. Still, as practitioners in the middle-market investment banking sector, we know the work is far from over once the initial sale preparations have been made. Business owners that retain Corner Capital to execute the sale of their business rely on our exceptional service and unmatched insight to navigate the transaction process from end to end: from initial preparations, market outreach, and buyer selection to purchase agreement negotiation, diligence, and closing. We love what we do and would be happy to share our expertise and experiences with you.