How to Prepare Your Business for a Favorable Exit

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Specialized in governance, strategy, finance and M&A. Author and experienced external director. Kona Advisors LLC.

If you are serious about selling a business, you need to prepare for the process. I find savvy owners start positioning for exit three to five years before they want out. Then you might need a year to complete a transaction.

Many buyers are looking for discounted future cash flows on a favorable basis. When they look at your business, they will focus on sales growth, EBITDA and the quality of the management team. The discount rate reflects their view of the risk in the deal and their IRR objectives.

If the company is doing well and profitable, the accounts are in order and there is a complete management team with adequate succession plans, there may not be much to prepare.

To get the most realistic assessment of what your business is worth and the type of buyer it might want, I recommend doing your own assessment before going to market. Investment bankers can help with this; they can do some of this work for you as part of their effort to win the job, so don’t be shy. This is also a good way to determine what it will be like to work with them during the six to nine months that a typical exit process requires.

Below are some steps you should take to prepare your business for a favorable exit.

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Have a strong growth story

It has been proven time and again that you get more for your company if you have a strong growth story in a good market. To get the most value for your business, you want to give buyers a strong growth story they can confirm. However, your future forecast should hold, as buyers will confirm each of the assumptions in your forecast.

This growth story requires detailed knowledge of your market position and industry dynamics. An easy way to organize this is to use Porter’s five competitive forces, including industry competition, the potential of new entrants to the industry, supplier power, customer power, and the threat of substitute products. While dated in some ways, I find these forces still convey what buyers want to understand. You want to project your current competitive position against what you expect to see in five years. After all, that’s what buyers are trying to figure out.

improve EBITDA

The decision to sell is often anchored but your expected net proceeds and your earnings before interest, taxes, depreciation and amortization (EBITDA). If you don’t like the song, you still own the business, so I suggest you take action to improve the business before you sell it.

If you repair the business, the buyer must pay you for the improvement. If you don’t fix it, you get a discount, as the buyer bears the risk of making the improvement. This should factor into your sales timeline.

Your choices are more revenue or less expense, but preferably both. The growth story and the quality of your assumptions should address the revenue opportunities. Whether it’s new products, new geographic markets or new distribution channels, take the time to map out these plans.

It is common to overestimate potential cost savings. Buyers will typically lower your savings estimates to some degree. This depends on whether the buyer is strategic or financial in nature.

Strengthen management

Sellers typically do better when they provide a complete management team to the buyer. But that assumes the team is made up of high-performing executives who are determined to stick around for as long as the buyer wants. Reality is rarely so convenient.

Part of the team may be about to retire or may not want to continue under a new owner. Some may not perform well. Savvy salespeople analyze and rebuild the team before it goes to market, or create a story that appeals to the buyer.

You may also need some convincing to let the team stay for a new owner. Your ability to close the deal may be limited by one or two unwilling individuals. This is when deal-specific incentives make sense to consider.

Make an informed decision

The above points help to assess the marketability of your business, but do not provide insight into whether you should sell it. At this point, you should have a forecasted income statement and balance sheet. You need to focus on future cash flows and deliberately answer questions like: How much capital is needed to grow the business? What are the working capital requirements? What is the borrowing capacity of the company?

Growing businesses typically consume capital, so as you push the growth story, you’re likely to need more capital, which could affect the buyers coming to the table.

The Net Present Value (NPV) analysis plays a vital role in determining net proceeds and is likely to be a major driver in the decision to sell a business. NPV is calculated based on the discount rate, which represents the perceived risk associated with the business.

Assuming a discount rate of 5% (similar to a savings account) implies that there is little risk associated with achieving the company’s financial objectives. However, I find that potential buyers evaluating your business are more likely to use higher discount rates, usually ranging from 15% to 30%.

While most people don’t spend time working out the NPV and Net Income models, I find savvy salespeople always do.

If you have the energy, desire, and access to capital, you might consider keeping the business only to retire later at a much higher value. But market windows open and close, so you’ll have to trade off between the time it takes to substantially improve the business (usually a few years) and when the market is best to sell your business.


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