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Seven things you must do before selling your company: part 2

Larry Turner //May 10, 2010//

Seven things you must do before selling your company: part 2

Larry Turner //May 10, 2010//

Editor’s note: This is the second of a five-part series on preparing yourself and your company for sale to maximize your outcome. Read part one.

Once you have worked with your financial planner and understand what is needed to sustain a desired lifestyle after the sale of your business, it is time to start working on your business to get it ready for market. The first area to focus on is the value drivers in your business. The primary value drivers for any business include consistently improving cash flow, increasing top line revenue along with a growth story and a strong management team.

A buyer will be looking at the business from a perspective of past performance and current business structure. The buyer will not value your business based on optimistic future business projections, especially if those projections are based on activities and trends that have not been realized in the past.

These dynamics will require you to look at the company differently in the few years prior to putting the business up for sale to provide for the maximum return. The operational actions during that period are different than when you are running the business for your personal needs if you want to maximize your financial outcome at the time of selling your company.

2.) Consistently Improving Cash Flow

Free cash flow is the main measurement for company valuation when it comes time to sell your business. A common measure of free cash flow is Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA), and provides a measurement of company performance without accounting for the items not included in EBITDA.

As an owner looking to sell your company you need to increase EBITDA year over year for the 9 to 36 months prior to selling your company in order to realize the highest value for your company. This may mean managing your company differently over that period of time than you have in the past. Most owners of private companies manage their business to minimize taxes, which means many investments in the business are expensed in the current year and extra expenses in the business may exist to depress earnings.

In an environment of maximizing value, you need to review all business expenses and work with your accountant to properly account for those investments that can be depreciated over a period of time. Review all costs and only incur those that are necessary to run your business.

3.) Growth Story

One of the key areas to steadily improving EBITDA is increasing revenues. A growth story provides background to the prospective buyer on the why and how of the revenue growth. The growth story becomes a basis for the prospective buyer to plan growth going forward, which provides a higher valuation for your company.

We see many companies fall into a stagnant growth mode as the owner and business reaches maturity. This results in a lower valuation of the business, because the new owner needs to recharge the company and find growth opportunities. In these situations many owners can stimulate growth through programs that leverage current company capabilities.

These programs include adjacent growth programs, which may include new products developed for current markets, moving into adjacent market segments with current product offerings, or increasing sales channel capability with your current market and products. Whatever the plan to increase sales you will be best served if you can position those efforts into a credible growth story that can be succinctly conveyed to a prospective buyer and provide a basis for increased company valuation.

4.) Capable Management Team

Most owner-run businesses revolve around the owner making many of the decisions. In these organizations, the company cannot continue without the owner on a daily basis, which can create risk for a new owner. Many buyers are looking for a standalone business with management teams that can run the day-to-day activities after the owner is bought out and has moved on. Key management positions need to be filled with strong individuals with the technical ability to run their function – they should be considered “A” players.

The Value Drivers

There may be other items more specific to your business, but in general these three areas are looked at by an outside organization to develop a price for your company. The value drivers represent those areas that are more readily seen in the process. In our next article we will look at the value detractors that represent risk to a buyer and as a result depress the value of your business at the time of sale.

Coming up: Increasing the value of your business by improving the value detractors, and getting your house in order.
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