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Preparing your company for a sale: Tips, strategies & tools to keep in mind

When deciding to sell your company, you can either choose to sell it in its current condition or prepare for a Merger and Acquisition (M&A).

A strategic M&A plan can considerably increase the sale value of your venture and should ideally be your chosen plan of action. You will make your company more attractive to potential buyers if you address your businesses weaknesses well in advance of any due diligence or negotiation processes. Here are a few simple steps that can help you maximize the value of your business.

Create a pre-M&A improvement plan

Before devising an M&A improvement plan, you must first take stock of the different aspects of your company such as:

  • Identifying areas that are doing well, those that are performing below average and need your intervention, and those that need a complete overhaul.
  • Creating a timeline and dedicated project to address any identified concerns and complete upgradations.
  • Assigning resources that you are willing to allocate for handling the M&A process and internal performance improvement initiatives.

Remember, recognizing the needs of your company early on will help put you in a better position during negotiations. Investors are usually looking for small companies with the potential for larger projected growth in the future. Many owners often make the mistake of discontinuing investments to improve a company once they decide to exit. Instead, this is the time where you must attempt to increase the value of your company by investing in equipment and upgrading processes to lead to higher performance. Your company’s value is directly linked to how it performs in the period leading up to, and during the M&A.

Keep your plans to yourself

Avoid disclosing your plans to enter an M&A until after the deal is sealed. While consulting with your legal advisors and accounts department, emphasize the need for discretion even if their profiles are contractually bound in non disclosures.

The news of your plans to sell the company might induce panic in your staff, generating uncertainty, which in turn might devalue the business right when it needs to be performing at its peak. Instead, train your employees to be able to carry on tasks in the absence of your supervision. Develop repeatable processes and create quantifiable parameters to ensure that your business continues to grow even after your departure.

Pay close attention to managerial staff and resolve any internal conflicts. Take every measure possible to avoid high turnover before M&A. Remember a high rate of employee retention is the sign of a healthy business!

Increase your EBITDA

Your company’s earnings before interest, taxes, depreciation and amortization will be the most likely metric used to evaluate its worth. The higher your EBITDA, the larger settlement you’re likely to receive. Thus, instead of focusing on gross revenue, attempt to push your EBITDA. Analyze your expenses to highlight funds that can be reallocated to increase your working capital, BPS, and boost EBITDA. If needed, hire extra marketing personnel and increase your top-line growth to maximize earning potential.

An investor is likely to evaluate your company’s track record of sales to estimate its projected earnings. It then makes strategic sense to expand your marketing team while preparing for an M&A. You can also choose to set up a revenue juggernaut in this phase to help realize hidden potential.

Prepare for a financial audit

A financial audit is a likely requirement before an M&A. Hire a reputable firm to conduct your own audit before entering negotiations in order to help improve the financial health of your business

A professional audit will also enable you to better understand what potential buyers might be looking for, give you a sense of what a GAAP audit constitutes, and having this data at your disposal will grant you an advantage during negotiations.

During the M&A process make it a point to highlight a history of compensation. Many entrepreneurs tend to combine their personal financial portfolios with their company’s. It is always advisable to clearly demarcate a separation early on and pay yourself a salary which adequately covers your expense and leaves behind a safety net to sustain your lifestyle.

Prepare a 3-year financial projection

A plan which includes clear financial projections is critical to garnering credibility for your company during M&A presentations. While surpassing quantifiable goals and milestones can add value to your company’s acquisition offer, failing to meet set financial targets can seriously jeopardize a sale. Hence, be certain that the projected numbers are achievable in the proposed period.

There are a couple of measures that you can put into place before framing your proposal. These must include knowing the Strengths, Weaknesses, Opportunities and Threats (SWOT) of your business. A SWOT analysis is critical before attempting to prepare a financial projection. Setting achievable goals and highlighting your competitive sustainability attests to the business acumen of your enterprise, while a well-planned execution of the presentation puts the ball in your court during negotiations.

Identify potential buyers

Networking in the right circles is key to finding investors that best suit your agenda. Keeping up-to-date with industry trends, and potential investors’ investment portfolios can help you pitch your company for sale. Identify a list of potential buyers, establish contact, and foster their interest in your enterprise.

Treat buyers like clients, highlighting how your company can best serve their interests. Share your projected milestones with prospective buyers and highlight a potential business that might profit from partnering with your company. Paint them a larger picture of where you see your company in the years to come, focusing on how they would benefit from processes that you have already put into place and in motion for a seamless transition/integration.

Prepare for final negotiations

If you’ve successfully made it to this stage, you will now be the best judge of the value of your company. Armed with a SWOT analysis, a successful 3-year projection, and favorable EBITDA, here’s the last negotiation tactic to note so you have the upper hand, ensuring you have addressed any misdemeanors from your company’s past.

Investors will jump at the opportunity to poke holes in your company’s reputation in order to offer a lower buyout. By acknowledging any mistakes from the past, you can gain control of M&A negotiations. Remember to state things as they are, and not provide explanations or empty apologies. Set-up the circumstance that might have led to a disruption and focus on the measures you put into place to contain an unfavorable situation and prevent future occurrences. Assign a short duration to address these concerns right before commencing M&A proceedings, effectively warding off any possibilities of them being brought up later to throw you off track.

Assess the best exit option

Ultimately, while selling a business for considerable profit is the dream of many contemporary entrepreneurs, when the opportunity finally presents itself it can prove to be a surprisingly emotional decision. Before making the final leap and handing over a company that you have worked several years to build, it is important for you to consider other options that might be at your disposal. Signing over all rights to your company is only one among a plethora of alternatives to capitalize on your hard work. For example you could:

  • Opt for a part liquidation, where you can either maintain control of operations or become a silent investor. This will enable you to retain a stake in the business which you can decide to sell during a larger buyout in the future.
  • Open your company’s portfolio and raise capital through equity, helping your company become larger before exiting at a higher value in the future.
  • Hire a CEO and play an advisor role. If you are feeling overwhelmed by the growing size of your enterprise and feel like you are not being able to contribute to its growth and take it to the next level, you can hire a CEO with relevant industry experience and take on an advisory role for yourself, focusing on the parts of the business process that catch your fancy.

With many points to consider, preparing your company for a sale is by no means an easy task and can be very emotional! However, following these aforementioned steps will at least allow you to realize the full value of your business and give you the due credit for all the years of hard work you’ve put in.

 

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Why Business Owners Sell Their Business

As an entrepreneur, the penultimate day of your life is the day you hand over your baby to someone else. Baby being your own business that you’ve built from the ground up. Making the decision to sell a business you’ve invested so many years of blood, sweat & tears into is incredibly difficult.
Depending on the circumstances, it can be either a deeply positive or a deeply negative experience – but it’s almost ALWAYS an emotional, and bittersweet event. There’s a ton of different reasons why business owners decide to take the leap – let’s talk about a few of them.

Personal Reasons

First and foremost, most business owners do part ways with their own venture purely due to personal reasons. Why? Cause as it’s usually said, running your own show is a 24/7 job and this can get exhausting pretty fast. Other times, it can be a purely be a shift in interest, or that they are hitting retirement. There are many reasons but here are the key ones:

1. Burned out or health problems

Nothing is more demanding than running your own business and this can sometimes either lead to owners burning out or experiencing health issues. In either case, running a business demands a lot of time and effort from its owner and the workload only keeps growing as the business grows in size. When the pressure becomes too much to bear, the owner usually decides to sell the company.

Building on this, owners can also sometimes fall ill, either by way of burnout or just bad luck. In such a case, some businesses are heavily reliant on the owner for its day-to-day operations and if the owner is suffering from health issues and physically not able to run the business. It may be the best option to sell the business in order to keep the business alive.

2. A shift in interests or priorities

We’re all human and we get bored easily, even when it comes to running a business. Especially with owners who may be serial entrepreneurs, once they’ve built a business and successfully got it to steady state, they may get bored and would like to pursue the next business idea in their head. We only have 24 hours a day and this means owners might sometimes fully cash out by selling their business to fund a new one or take a step back from direct ownership, still retaining equity but no longer involved in the day to day operations of the company.

Similarly, we all get old and the time comes when we need to hand over the keys to the kingdom. One of the most common reasons business owners sell their businesses is retirement. Although running a business has its own rewards, doing so for a long time can be exhausting! In such cases it’s normal for owners to feel that the benefits of selling the business far outweigh those of maintaining ownership.

Financial Reasons

methods of company valuationIf personally everything is going great. Sometimes, the reason for selling a business is purely financial, either to cash out and go live in the bahamas for a few years, or to capitalize on a inflated market value, or purely hedge your bets against an economic downturn. Whatever it is, here are the most common financial reasons we’ve seen for owners selling their business:

 

1. Liquidity

Although many business owners have a high net worth for their years of toil and growing their business. A considerable amount of this value is often tied up in the business as equity, and therefore, illiquid. Business owners may decide it’s time to reap some of the rewards and sell all or some their equity to convert it to cash.

In the cases where they only sell some of their equity, this is known as recapitalization. It’s a process where the exiting owner retains a minority equity stake — normally in the range of 10 to 40 percent. Usually, this is done by owners to reduce risk exposure by selling their equity to free up some cash but still retain the benefits of ownership. Generally in this case, you’ll see the exiting owner’s role slowly diminish, allowing them to almost act as advisors to the business but gain more freedom with their time to pursue other interests.

2. Macro Environment factors

Sometimes the industry of an owner’s business is suddenly gaining a lot of interest from outside investors (e.g. Artificial Intelligence right now), this vast pool of capital pushes up acquisition prices. Some owners decide to take advantage of the upswing in value and sell their businesses off at a higher than normal price.

economy businessesSometimes, the revenues of a business can decline for macro factors reasons far beyond the owner’s control — like an economic downturn or a high unemployment rate. Some business owners may choose to wait out such changes, but others can’t or don’t want to. In such scenarios, if the owner doesn’t want to wait till things get better, selling the business becomes the most viable option.

If business owners feel that their industry may go through some changes in the future that can affect their businesses negatively, some owners may be risk-averse and decide to sell sooner rather than wait an economic downturn that devalues their organization or impacts future profitability of the business.

Strategic Reasons

Sometimes, the reason for selling a company can be strategic or operational. An owner may decide to sell the company for the following strategic reasons:

Finance an expansion

If a company lacks the cash to buy new equipment, hire new employees, and increase advertising to broader its operational footprint, the owner may decide to sell some stake to an entity that can bring in the cash required for the expansion.

Raise capital for an acquisition

A company can benefit from being acquired by an entity that has the capital or debt capacity to consolidate the industry by acquiring a series of smaller competitors. In this scenario, the company improves its profitability by operating in an industry with fewer competitors. Moreover, it gets access to its former competitors’ resources like management talent, patents, etc.

Improve your competitive position in the market

Improve market share

A company being acquired by another one help it improve its market share by allowing it to leverage the larger acquiring company’s distribution and marketing channels, as well as the brand equity and goodwill.

Diversify customer base

Most small companies depend on a single or a relatively small number of customers to generate a large percentage of their revenue. This kind of customer concentration increases enterprise risk as losing even one or several key customers may cause the business to go bankrupt. In such cases a company can significantly lower the volatility of its cash flow by gaining access to the acquirers diversified customer base.

Diversify product and service offerings

A company may also look to be acquired so it can leverage the addition of the other company’s product and service offerings to its portfolio. The company can use the improved product and service portfolio to increase its customer base and revenue.

Import better management

man with business suitA company may seek acquisition by another company that has superior management practices. This strategic move can help to unlock value in the for the acquired business. The acquired business can benefit from the better, more professionally managed IT systems, equipment maintenance, accounting controls, executive leadership, etc.

Leadership succession

Sometimes business owners have to sell their businesses due to poor succession planning. If a business owner doesn’t have a worthy successor, selling the business allows it to continue operating effectively instead of closing its doors or risk declining business performance.

Conclusion

Ultimately, every decision to sell a business is based on various circumstances. Regardless of the reason to sell, it’s important for a business to be professionally appraised by an independent valuation firm so that it’s sold at a fair price, under fair terms, and in the owner’s best interest.

how to protect your company against shady investors

How to Prevent a Shady Investor From Damaging Your Business

The vast majority of organizations require investors to obtain the capital needed to start a new business or expand an existing one. While a specific investor may have the best interests of the company in mind, that’s not always the case. There have been numerous instances where an individual Investor has undermined the company for personal gain rather than contributing to the organization’s growth and long-term success. Before entering into any relationship with an investor, it pays to consider whether that individual is a good fit for the organization seeking funds. Also interesting: using a dataroom for due diligence or M&A transactions.

Why Are Shady Investors Dangerous for Your Business?

Virtually every business exploring new funding sources has long-term goals that may, at times, impact bottom line figures in the near future. Investors should be well aware of the company’s short- and long-term objectives when investing capital. That means they’re willing to forgo significant immediate gains in favor of larger long-term profits. A Shady Investor, on the other hand, will generally act as though they understand the plan but change their attitude significantly once their money has been accepted.

The less-than-optimal Investor will then attempt to alter the strategies employed by the company to enjoy a greater profit sooner. If they have a contractual ability to impact the organization’s business plan, that can quickly lead to problems with company personnel as well as other investors. The net result can, and often is, a failure to achieve the necessary results sought by the company. The question then becomes, what steps can an organization take to protect themselves from a Dangerous Investor?

Safeguard Your Company’s Future

shady investor protectionThe concept of Due Diligence has been around for a long time, but today’s organizations are quickly finding the actual process is evolving. An Investor may be sought out by the organization or may take the initiative and approach a business. Before getting involved with any potential Investor, an organization is always encouraged to look carefully at the potential investor to prevent issues from developing.

  • Investors must understand and accept the company’s culture. An investor who doesn’t is likely to create strife from day one, which is certainly counterproductive. That means company representatives must review the organization’s structure and business strategies with a potential funder prior to accepting their capital. If the fit between the potential Investor and the organization appears appropriate, that’s one less thing to worry about.
  • Don’t neglect to explore the potential funder’s past history as part of the due diligence. While an investor may appear to be a good fit, the individual may not, in reality, have the company’s best interests at heart. Generally, it’s relatively easy to discover how the investor has handled any previous similar relationships. If there is a history of the individual demanding a company change their strategy in the past, there is a strong likelihood it could happen again. It’s best to avoid investors with this type of history or a history that’s not transparent.
  • Avoid diluting a company’s control. As a rule, no single outside investor should be able to acquire over 25 percent of the company in exchange for their investment. In the event the control is diluted too much, the potential for a takeover is simply too great. Even when a relationship with an Investor starts out on a stable footing, things can change. To avoid issues, make sure the existing company owners always retain control.

Of course, there are other due diligence strategies to follow and, as noted, they are evolving rapidly. All companies are routinely encouraged by experts to examine their current practices and take advantage of opportunities to improve those practices.

Investor input can be beneficial for companies, but that input must be limited. That suggests it’s always important to understand exactly who is investing and what their long-term objectives are. If an investor’s objectives actually align with the organization’s, the relationship will benefit both.