We are in the midst of The Great Ownership Transfer, a demographic megatrend where Baby Boomer business owners are seeking to retire, prompting a surge in private company sales. Owners should prepare for these events just as teams train, strategize and polish every play for “the big game.” The company’s “coach,” the CEO, must prep the company for the M&A process:
Showcase the team while downplaying the retiring CEO. If the seller plans to retire post-sale, then highlight the remaining leadership team. For example, promote the trusted No. 2 to president and showcase them in brochures, industry events and client interactions. The goal is to downplay the departing owner’s role while enhancing the profiles of the remaining managers. Some owners have a hard time accepting their position being minimized. What they fail to realize is that doing so while enhancing their team will increase their business’s sale value.
Invest in taxes. Private company owners seek to minimize taxable income by accelerating expenses, deferring revenue, building inventory reserves, expensing capital equipment, characterizing their Florida condo as a “sales office,” placing family members on the payroll, etc. While effective for tax efficiency, these practices reduce reported income and reduce valuations. As the time for a sale approaches, wise owners “invest in taxes” by maximizing, rather than minimizing, reported income. The resulting higher purchase prices usually far outweigh the increased income taxes.
Upgrade accounting oversight. Most private companies don’t require audits or reviews. Introducing this oversight in advance of a sale gives buyers confidence in the financials. Engaging a CPA firm early to do this is more efficient than scrambling during a sale process. A quality-of-earnings report will further validate and contextualize financial performance. While the QofE may uncover issues, addressing them proactively is better than reacting during buyer due diligence.
Resolve legal and compliance issues. Every business faces some legal exposures — regulatory, contractual, employment-related or tax-related — that could be “red flags” in a sale process; it is best to resolve them ahead of time. This is because 1) the very existence of these items will tarnish the company, 2) buyers will not want to assume these “unknowns” and 3) the claimants will become 10 times more obstinate if their claim is holding up a sale.
Brighten/upgrade the facilities. Just as homeowners stage their homes before listing, businesses should refresh their physical spaces. Clean, modern and well-maintained facilities create a positive first impression. Once they see the impact, CEOs often say, “We should have done this years ago.”
Craft a strategic plan. A compelling five-year strategic plan is a powerful tool in the sale process. This document should candidly assess strengths, weaknesses, opportunities and threats (SWOT) while outlining a clear path forward. The management team must be involved in crafting the plan and endorse its vision. Buyers value transparency and are more confident in businesses that acknowledge challenges and articulate how they could be addressed.
Much of my colleagues’ and my success in selling companies stems from our coaching owners, just as coaches prep athletes, for the big event. With the Great Ownership Transfer underway, this preparation has never been more timely. ●
Mark A. Filippell is Managing director at Citizens
