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Many business owners spend more time planning their family vacation than preparing to sell their company. Are you ready? Learn the 7 things you need to do before selling your company.
Exit Planning: 7 Steps to Take Before Selling Your Company
Many company owners spend more time planning their family vacation than they do preparing to sell their company. Whether they are planning to sell in three years or three months, they should start preparing right away. When Waypoint Private Capital meets with business owners we advise them to do the following things to ensure maximum value for the company, an acceptable deal structure, and a smooth sale process.
1. Determine the True Earning Power of the Company
Owners should determine the true EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) of their company by identifying those income statement items that are discretionary, one-time, or “owner” expense items that would not be incurred by a new owner. Add the sum of those items to the EBITDA for the current year to come up with an “Adjusted EBITDA” number, which represents the true earnings power of the company.
2. Determine the Valuation of the Company
A good rule of thumb for determining the enterprise value of a mature private company is four to five times adjusted EBITDA (we’ll use four in this example). Therefore, a company with an EBITDA of $2 million has an enterprise value of $8 million. If the company has $1 million of debt, that amount would be subtracted from the enterprise value of $8 million, and the resulting equity value of the company would be $7 million. The equity value is what the owner will walk away with (pre-tax) after selling the company and paying off its debts.
3. Cut Unnecessary Expense
Owners should determine if there are any expenses that can be cut that would not have a negative impact on growth, profitability, or customer service. If the owner can identify those expenses and eliminate them, they will capture the value of those changes at the time of the sale rather than allowing the buyer to capture the value. For example, can the executives get by with one less administrative person? If that person makes $40,000 per year plus benefits of twenty percent, the company will save $48,000 per year and thus increase EBITDA by the same amount. Multiplying that savings by the four or five EBITDA multiple results in an increased value for the company of $192,000 to $240,000.
4. Spend Wisely on Profitable Growth
After spending years building a company, many owners get comfortable with the size of the company and begin to coast. What if they put their foot back on the accelerator for just a couple more years? Spending on salespeople or expanding sales channels can have a big payoff when selling a company, as long as all efforts are focused on producing profitable growth in the near term. If the growth increases profitability by $250,000 the value of the company will increase by at least $1 million.
5. Get Your Records in Order
Buyers and their legal team will want to do an in-depth examination of every aspect of the company prior to closing the acquisition. Information requested will include contracts, organizational charts, monthly financial statements, sales forecasts for the next three years, current and historical customer concentration charts, and many other items. They will typically want to see at least three years of reviewed or audited financial statements. Smaller companies might get away with a review, but larger companies will be better served with an audit by a well-known accounting firm.
6. Review and Strategically Negotiate Contracts
A sophisticated buyer and their legal team will review all of the company’s contacts. When management negotiates contracts that obligate the company to others, they will want to keep the length of the contracts as short as possible to give the buyer greater flexibility to make changes after the sale. The opposite is true for contracts obligating others to the company. Buyers will want to see long-term contracts with customers to give them comfort that the customers will stay with the company after the owner leaves. All contracts should be transferrable to a new owner, which becomes a very important issue when the sale is structured as an asset purchase.
7. Pick Your Advisors
As soon as you decide you want to sell your company you should identify and meet with your advisors, which will include an investment banker, a law firm, a tax partner at an accounting firm, and a wealth management firm. Make sure that your advisors have experience specific to dealing with mergers and acquisitions.
About Waypoint Private Capital
Waypoint Private Capital is an investment banking firm that educates and advises middle-market, privately held companies through critical stages of their business' life cycle. Waypoint helps business owners and entrepreneurs sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from the business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
Steve Sprindis is co-founder and managing director of Waypoint Private Capital. © 2013 Waypoint Private Capital, Inc. All Rights Reserved.