The failure to properly prepare for the
sale of your business can put family
members and others connected to your venture at serious risk. A well-thought-out strategy, however, can ensure that others will benefit from the wealth you have
created.
“Planning for your eventual departure is
the best thing that you can do for your family, the nonprofit organizations that you support and other enterprises that you care
about,” says Mike Silva, senior vice president and group manager of Comerica Bank.
Smart Business spoke with Silva about
exit planning, the importance of clear financial reporting and how to preserve value
during the selling process.
How should business owners go about
preparing for the sale of their business?
Buyers of businesses today, more than
ever, are focused on purchasing a stream of
cash flows. Whatever you can do to
enhance and grow that stream will directly
accrue value to you as the seller. Consistently working to maximize EBITDA
(earnings before interest, taxes, depreciation and amortization) is important in order
to show a positive growth trend.
One seemingly simple way to boost cash
flows and maximize EBITDA is to increase
the price of your goods or services.
Oftentimes, business owners are reluctant
to increase prices because they are worried
that such a move will drive away customers.
However, we’ve found that the market
today is more open to price increases from
businesses that are leaders in their field
because of the perceived value that is associated with doing business with these companies. We are in an environment now
where we’ve seen substantial increases in
the cost of commodities and people are
used to paying more.
How far in advance of an anticipated departure should exit planning occur?
I don’t know if you can start too early. A
couple of years in advance of an anticipated
departure would be the minimum. You
should start by talking to a mergers and
acquisitions attorney, your CPA and your banker. Also, it might be helpful to speak
with some investment bankers about ways
to enhance the value of your business.
Why is it so important for a company’s financial reporting to be clear and accurate?
When you start the process of selling your
business, it is important to think about the
quality of information that prospective buyers will be looking at because you will want
them to write a check for five to eight (or
more) times the EBITDA of your business.
We see a lot of deals where valuations are
substantially decreased during the due diligence process because the quality of information is subpar. Having good, clean, consistent financial reporting is crucial.
What are some common techniques for exiting a business?
There is a wide gambit of techniques available ranging from handing or selling the
business to a son or a daughter to hiring an
investment bank and conducting an auction. Questions to consider in identifying the
appropriate method for your situation
include: Do you have potential successors involved with the business? Do you have a
management team to whom you would like
to sell the business? Would you be OK with
selling the business to an outsider?
Also, a lot depends on the size of your
business. If it is a smaller business you
might be able to sell it to your management
team and take a payout from future cash
flows over a period of time as your payment.
If you have a larger business this strategy
won’t work and your options would be to
sell to a financial or strategic buyer.
How should owners go about determining the
value of their business?
It is important to keep track of multiples of
cash flow paid for businesses in your industry. This information can come from talking
to competitors, others in your industry,
M&A lawyers, CPAs and investment
bankers. Ultimately, however, the value of
your business is what the market will pay
when you decide to sell it. Ideally, you
would like two or more potential acquirers
to fall in love with your business and then
you can bid them against each other.
During the selling process, how can owners
best preserve the value of their business?
Losing focus on day-to-day operations
during the selling process is a common
problem, especially for entrepreneurial
businesses where the owner is the primary
operator. The due diligence, negotiations
and sales process can be all-consuming. If
you’re the person responsible for making
sure everything runs smoothly, it can be
very hard to concentrate on both selling and
running a business. It is important to have a
good internal finance person to keep you on
track.
Also, in order to preserve value, it is important to be extremely selective to whom you
market your business. If, and when, your
competitors get wind of the fact that your
business is up for sale, they are certainly
going to try and exploit this and try to take
away your customers.
MIKE SILVA is senior vice president and group manager of Comerica Bank’s San Francisco and North Bay Middle Market Group. Reach
him at (415) 477-3274 or [email protected].