Exit planning is more than just preparing to walk away from the business. It’s about crafting a compelling narrative that shows where the company has been and where it’s headed. In preparing to sell, business owners need to assess levers that unlock incremental value. This includes demonstrating a clear growth trajectory, including expansion opportunities, to potential buyers.
A crucial aspect of this preparation is cleaning up financials. Business owners must ensure they have solid financial statements that justify a business’ valuation. This often involves seeking a third-party audit to verify financial measures such as EBITDA (earnings before interest, taxes, depreciation and amortization) and confirm the quality of earnings. Streamlining operations to optimize earnings is also key as buyers look for operational efficiency and profitability.
Consider Personal and Business Planning
As essential as it is to prepare the business for sale, it’s equally important for owners to engage in thorough financial planning. Consider your personal life objectives and financial needs post-sale. What do you want to do with the proceeds? What are your long-term financial goals, and how much do you truly need? Understanding these objectives early on ensures you’re fully prepared for life after the sale.
On the business side, preparing for a sale includes deciding whether to use a business broker or investment banker. The choice will depend on the company’s size. For businesses valued at less than $5 million, a business broker may be the best option. Brokers typically market to a broad audience and negotiate with a single buyer. For larger companies—especially those with valuations exceeding $15 million—a controlled auction process involving an investment banker is often more suitable. The banker contacts potential buyers and creates a competitive bidding environment with multiple phases and rounds of negotiations.
Controlled Auction Process and Due Diligence
In a controlled auction, an investment banker helps the business owner develop a compelling narrative and reach out to potential buyers. The auction process usually starts with a teaser—a brief document describing the business while keeping its identity confidential. Interested buyers must sign nondisclosure agreements before receiving a detailed confidential information memorandum, which outlines the business’ financials, operations and growth opportunities.
From there, buyers submit an indication of interest to articulate their interest and ability to meet the seller’s expectations. The top potential buyers then submit a letter of intent. Due diligence follows for 60 days to 90 days as the company’s financials, operations and legal documents undergo inspection.
The Role of Culture & Terms
Beyond the financial aspects, potential buyers consider the company’s culture and how well it aligns with their own. The sale terms, including the structure of the deal, can greatly impact both sides. Sellers should work with their legal and financial advisers to draft the final purchase agreement—whether that is an asset purchase agreement or a stock purchase agreement.
Contact me if you would like to conduct a free in-depth valuation to discover the asset, liquidation, equity and enterprise values of your business and see how your 12 financial ratios stack up against your competition’s. I would be glad to take your ownership through the process, provide the resulting 26-page report and show how to optimize your value.
A Few Other Key Points:
- Never negotiate alone.
- Avoid selling to one buyer. “If you have one buyer, you have no buyers.”
- Build and execute on your growth strategy before you sell. Demonstrate it can be accomplished. Often your potential can be your most valuable asset, and proving it can be golden.
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Mark Faust
513-621-8000
mark@em1990.com
@markfaustsr
