While selling a business can be a time-consuming, complicated and emotional process, the personal and financial rewards can be profound for a business owner.
The key ingredient for successfully navigating the business monetization process is to start planning well in advance. Even if a business owner does not anticipate selling the business for several years, laying the right planning foundation can help maximize the selling price and avoid headaches down the road.
Keep the End Goal in Mind.
Well before immersing themselves in the complex intricacies of the business monetization process, business owners need a deep understanding of what their post-monetization personal financial needs and goals are and if a business monetization can get actually them there. Ideally, a business monetization would result in enough money to A) replace income previously provided to the business owner by the business; B) provide for a financial safety net in the event of unexpected financial developments; and C) fund aspirational goals like philanthropy and family wealth transfers.
It’s best to project a range of values for various potential exit options (sale, recap or other monetization alternatives) on an after-tax, after-fee basis, then analyze how the proceeds of the sale would perform under a range of projected market returns to see which goals can be funded with confidence and which goals are less likely.
Get Your Ducks in a Row.
By planning well in advance and getting organized, a business owner has the greatest potential to maximize the business monetization price. Building out the management team so that the company is not overly reliant on the business owner, and ensuring that key employees can be retained would make the company more attractive to an outside buyer. Also, many small businesses have sales departments that are highly reliant on a few key individuals – “institutionalizing” the company’s sales process can make the company more valuable. Organizing the company’s documents and getting the company’s financials audited by a recognized accounting firm would also be beneficial.
View Your Business from a Buyer’s Perspective.
While a valuation or business appraisal report is a good starting point for building the case for the best price a business owner could get, a business owner selling her business must develop a convincing justification for a sale price from both strategic and financial buyers’ perspectives. Understand why a strategic buyer might want your business and try to quantify the potential synergies.
Also, understand that buyers have deal preferences that you may be opposed to. Buyers typically prefer asset purchases to avoid potential liabilities, while sellers prefer stock sales to get capital gains treatment and avoid double taxation.
Identify and address any potential red flags such as: high customer concentration, changes in performance or legal claims. When due diligence by a buyer is conducted, be upfront about skeletons in the closet and potential problem areas.
Build the Team.
Often times, business owners are inexperienced in the monetization process and negotiate with buyers with much more transactional experience, so having the right team for a business monetization can have a tremendous impact on the success of the transaction. The team’s CPA, investment banker, corporate attorney, trusts and estates attorney and financial advisor all bring different skill sets and motivations to selling the company, so it’s best to choose each wisely. When it comes to the legal structure, the in-house counsel can add a lot of value to the monetization, since she will have tremendous institutional knowledge, but a mergers and acquisitions attorney brings specialized skills. Having both on the team can be very helpful.
As the business owner builds the business monetization team, they can help the business owner understand the business, tax, legal and financial implications of various monetization options.
Visualize Your Post-Monetization Life.
In all likelihood, the mental wiring for many business owners is programmed to run a business, not exit a business. The exit process can be hard, but waking up every day and not running a business for many successful business owners could be even more difficult. The importance of actively thinking about potential post business monetization activities and interests well before the actual business monetization should not be overlooked.
Be Aware of Potential Landmines.
Having a backup monetization plan in case the planned transaction does not close could save the day. If business monetization fails completely, the business owner would ideally have a business strategy in place to continue running the business.
Without proper planning, a business owner could pay too much in estate or capital gains taxes, leave wealth on the table or at worst, fail to realize their personal financial goals. Again, the key is planning far in advance.