Our firm frequently meets with business owners who are not ready to sell today but will need to sell over the next decade. The majority of these owners will be the last of the baby boomer generation who will want to retire in the next 5-10 years. It’s understandable, with high inflation and a looming recession, that many owners have put off retirement plans, but they should still start preparing their business to sell. All too often, we see business owners who could have received much more at the closing table and would have experienced a much smoother ownership transition if they had only modified a few key aspects of their business in the years prior to selling. Below are these 5 key areas that business owners should start addressing years before they’re ready to sell:
Financial trends are critical but there is much more to just having an experienced accountant and solid financial statements. Different tax strategies based on the type of entity should be considered along with a plan for positioning the business to attract the right type of deal structure and increase available financing options. Depending on the type of business, determining ways to address working capital and understanding realistic capital expenditures should also be addressed and implemented as part of the strategy.
Tangible assets are always an important factor, but intangible assets are often overlooked or inaccurately valued. Patents and trade secrets can help drive value when they’ve been properly monetized in the business and can be easily shown in the financial reporting. Inventory management is another key area that often goes unaddressed until it’s too late which could result in requiring the seller to give up more working capital than necessary at the closing table. Both client and supplier agreements are also critical to fully understand and address to ensure any restrictions in terms of assignment and assumably are built into the timing of the sale.
3. Real Estate
Whether the real estate is owned or leased, understanding all the options available is essential. Many times, sellers will minimize the importance of addressing these issues early in the process before going to market. With the commercial real estate market in a continual state of flux, it’s more important than ever to understand the capacity of the current facility and what resources will be needed to grow the business after the ownership transition. In addition, the strategy needs to clearly outline growth opportunities and help ensure the real estate does not negatively impact the value of the business. By having the real estate available in the purchase with the business, financing options become more attractive which can help drive buyer interest and overall business value.
The dependence of the business on the owner is one of the top factors that can drive business value. If an owner can effectively start building themselves out of the business at least a few years prior to the sale, the return can be appreciable at the closing table. This requires consistent focus on training of key employees and 2nd level management in the company. In addition, documenting all processes and methods of doing business will help build the foundation to help ensure a smooth transition and future growth.
While there are many aspects an owner can change in their business, understanding changing market conditions and industry trends is just as important. Markets will cycle but key industry metrics used to value a business for the most part remain the same so knowing how these apply to a specific business can further position a business for sale at the right time. It’s also critical to understand how barriers to entry have changed and how future local/national legislation could change the market. While publicly available information can provide a high-level vision of the future, access to reliable industry reports to provide key insights over the next 5-10 years can prove to be invaluable when it’s time to take the business to market.
Our firm works together with an owner’s key advisors which often includes accountants, financial planners, business advisors, etc. Because we can provide a unique perspective for an owner on the true sellability of their business, we’re now offering a “Strategic Sellability Plan” (SSP) to help owners start addressing these key areas as they prepare to sell. The SSP will help reveal potential sellability hurdles and encourage owners to work with their key advisors to implement a specifically tailored strategy to address these issues when there’s still enough time to make these key adjustments in the business. If you or a business owner you know is interested in learning more, please contact us for more information. The majority of our business comes from referrals, and we appreciate your continued trust in our firm.
Robert W. Amerine
President, CBI, M&AMI