When selling an asset as valuable as most privately owned businesses it’s worth investing some time and effort in researching the exit process to maximize the value of the transaction.
Below are eight of the most critical components of making sure that you, as a business seller, don’t leave money on the table:
Some sellers think that their business is worth “what they need to retire”. Some think that they can impute the PE multiple of a similar, but public company on their earnings. Some think it’s the book value on the company’s balance sheet. Some people ask their accountants (that have no business valuation certifications). However, none of these are appropriate methods of valuing a business.
There are seven primary business valuation methodologies. In the vast majority of cases only two are appropriate for valuing privately held going concern businesses. But, it’s equally important to know if you business circumstance is the exception.
The individual valuing your business not only needs to know the correct methodology to use, but also be familiar enough with the current macro-economic factors to choose a multiple.
Lastly and perhaps most importantly the business valuator must be able to defend their work product to buyers, loan packagers, lenders, underwriters and the SBA.
Intellectual property is one of, if not the most, challenging asset to value. It is imperative that clients that have patent portfolios retain business valuators with specific intellectual property experience and contacts.
Unrecognized, Undervalued and Excess Assets
Another asset class that is often mishandled even by longtime business valuators is inventory. Admittedly in most cases inventory is included in the purchase price. But, not always as there are two scenarios where it should never be included in the purchase price. The valuator needs to know all of the scenarios in which it is included, when it should be in addition to the purchase price and what circumstances justify an adjustment to maximize the value to the seller.
Known, unknown, potential and contingent liabilities can be “papered around”, but its much cleaner to resolve or mitigate those possible. For example, if there is suspected environmental issues a phase 1 study should be done by the seller so that the costs to mitigate don’t slow or derail a sale.
One of the least consistent areas of business brokerage and M&A advisory services is marketing. Most firms write a brief narrative and post it on 2-3 business for sale websites and wait for the phone to ring.
ENLIGN uses a 12-step marketing program that insures maximum exposure to the public listing information. If an individual is legitimately interested in a business with the attributes of one of our clients they will find it – or we will find them!
An experienced business intermediary is not an expense to the transaction. They bring more to the table than they take. Two closings come to mind where a simple adjustment to a single term or condition have resulted in over $500,000 in additional seller proceeds.
Proper Legal Documentation Preparation
As important as the intermediaries negotiation skill are its equally important that you have a business transaction attorney (not just a ‘business’ attorney) draft ALL legal documents from the LOI to the Closing Binder Schedules because it’s not just what you negotiate – but what you get to keep.
Professional Process Management
Selling a business is hard – real hard. When a fellow business intermediary is complaining about something that has happened that they now have to deal with I am quick to remind them that if selling a business were easy everyone would be doing it and we wouldn’t have a career in guiding others through the complex process.
When selling your most valuable asset, your business, you want to maximize the value of the transaction. To do so requires a refined process led by an experienced intermediary. This starts with the business being properly valued and that unique assets such as intellectual property are not overlooked. The amount of FF&E and inventory should be in line with similar businesses and priced accordingly as part of the purchase price or in addition. Any contingent and known liabilities should be satisfied or mitigated to the reasonable degree feasible. The business needs to be marketed confidentially to only viable buyers at the right time. One of the most valuable skills a business intermediary brings to the table is negotiation skills.
In the end what’s most important is what you get to ultimately keep which requires that the transaction binder be professionally prepared by an experienced transaction attorney.
Selling a business is a complex undertaking which has dozens of potential pitfalls. The business intermediary you choose is your transaction quarterback. They need to know how to play every position and manage the deal team through a successful closing.
To insure that you aren’t leaving money on the table build the most experienced deal team you can. In the long run it will save you time and stress, let you stay focused on running the business, maximize confidentiality and most importantly maximize the value of your business sale.