With corporate buyers hoarding record amounts of cash and interest rates near historic lows, the current market conditions are ideal for turning your business into your retirement plan. If you feel ready to sell your business, make sure your efforts translate to the most dollars — whether that means creating wealth or making ends meet. Consider these tips to maximize the proceeds in the sale of your business.
Start planning and preparing early
The average business sale cycle is six to nine months, but experts recommend preparing to sell your business much earlier than that (three to five years ahead of your target sale date) to fully maximize proceeds.
The business principles that make a company attractive to a potential buyer will also set up your business for ongoing success. Since you never know when a buyer will make you an offer you can’t resist, adopt a mindset to always be prepared.
Pay special attention to:
- Keeping your financials clean. If your business is not large enough to support an internal accountant, outsourcing monthly accounting work is a way to stay within budget while keeping up with your financial reporting.
- Investing in your management team. Ideally, your management team should be able to run your business in your absence. Putting your time and resources toward building strong leadership will ease concerns a potential buyer may have about future revenue streams and growth potential.
- Fine-tuning your systems and processes. The cleaner your software, systems, processes, and procedures are to follow, the easier it will be for a buyer to continue business operations with minimal interruptions post-close.
- Creating wealth. Avoid common pitfalls that can diminish or consume, rather than create, wealth from your business. (More on that later.)
Complete your due diligence
A sophisticated buyer will include legal documentation, financial reporting, management team, operational processes, and IT systems in their due diligence. Some sellers will engage advisors to do sell-side due diligence to identify financial, legal, or operational areas of concern that may come up during the deal.
A little proactive diligence can help management to address these issues before going to market, saving everyone the frustration and headaches of failed transactions later.
Create wealth, don’t just consume it
Your tax advisors likely have stressed the importance of minimizing your overall tax liability by maximizing the cash available from your business to fund your lifestyle. This is excellent advice — until you are trying to sell your business.
In the years preceding a sale, pay special attention to making it most attractive. This might mean paying a little more in taxes to avoid artificially lowering profits or taking too much cash out of the business to fund your lifestyle.
Instead, focus on increasing profits and investing cash in the business. With the help of a financial advisor and a solid investment strategy, you can stretch the cash you do draw further. Remember, keep your business as a means of creating wealth rather than consuming the revenue as you go.
And for the necessary personal expenses: remember to document, document, document. The buyer’s due diligence will often allow for adding back to EBITDA (earnings before interest, taxes, depreciation, and amortization) one-time or non-recurring expenses and clearly documented personal expenses. Without documentation, there are no add-backs.
Depending on the risk involved in the business, you may also have a sizable multiplier when figuring out the potential sale price, increasing the impact these expenses can have.
For example, a business with EBITDA of $1 million and a multiplier of 5 has a potential sale price of $5 million. If this business were able to add back $250,000 in personal expenses, the sale price would be $6.25 million. By closely tracking expenses eligible for add-back treatment in the years leading up to a sale, you can ensure you are creating wealth rather than simply consuming it.
View your business as a buyer
From a buyer’s perspective, one of the main concerns is whether the business will continue to thrive without you. Any steps you can take before a sale to maximize continued cash flow will also maximize stakeholder value — and the purchase price.
Do not underestimate the impact the right tax, advisory, and wealth management team, as well as the right succession plan, can have on getting the most out of your business. Talk to one of our experts today to learn more about our transaction advisory services.