If you believe the reports, then over the next 18 months more than 1,000,000 privately-held businesses will change hands. That is a staggering statistic. As I think back to my economics class in college, I recall the lectures on supply and demand; the greater the supply, the lower the price. Assuming this is the case, a business owner should take proactive steps to enhance the value of the business and prepare it for an exit.
- Develop the management team and reduce owner dependence. We typically refer to this as “working on the business, rather than in the business.” The business needs to function effectively without the owner. If the business suffers significantly without the owner, then business value has not been created.
- Prepare a business assessment. A potential buyer will have its own due diligence team looking at the company’s financial information for at least the last three years. Therefore, it is important for the business owner to prepare his or her own objective assessment of the company, identifying its strengths, weaknesses, opportunities, and threats. Armed with this information, the owner can focus resources on making improvements.
- Protect key employees. Obtain employment and non-compete agreements. Regardless of whether or not you are planning to sell the business, the last thing you want is for a key employee to leave and join a competitor.
- Reduce risk. Identify and eliminate any potential legal matters. Ensure that key contracts are assumable/transferable upon sale. Reduce customer concentration by diversifying revenue streams. Tax non-compliance, specifically issues related to sales and use taxes, can result in significant problems and adjustments in a sale.
- Obtain a financial statement audit. An audit provides a high level of credibility and reduces the buyer’s fear about what he is buying.
- Establish your team of qualified advisors. Involve your accountant and lawyer early so they can guide your through the process.
Buyers typically pay based upon a company’s trailing twelve-month earnings and expected future earnings. As a successful exit can take years of preparation, addressing the above items will enhance the business’s value now and in the future. As Benjamin Franklin said, “By failing to prepare, you are preparing to fail.”
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