Selling your business – part 1
In this 2-part blog, we will explore the mechanics of selling your business successfully.
The current economic climate has forced extreme caution to be exercised during the sale of a business. There are numerous pitfalls sellers must avoid, adding further to the complexity of the transaction. Here are the five key steps:
1. establishing the value of the business,
2. finding a buyer,
3. negotiating the selling price,
4. structuring the deal, and
5. closing the deal.
Identifying the hazards contained in each of these phases of a sale provides protection for the seller and eases the way for a successful outcome.
Establishing the value of the business
The first step is determining an accurate estimate of the worth of a business. When we consider what method to use in valuation, it is only natural to focus on the financial statement. Here is where extreme caution is necessary.
The biggest mistake made is to consider the review of the financial statement merely an exercise in number crunching. A properly conducted valuation involves a complete investigation of a company’s business foundation. It includes defining the company’s future opportunities and major risks, along with their projected impact. Four factors must be evaluated.
- The marketing plan and customer base: The strength of the marketing plan as well as the diversity and loyalty of the consumer base are key factors.
- The quality vs. price of the product/research and development (R&D): Companies that manufacture a product must document their ability to produce quality at a low price, as well as the caliber of the R&D function.
- Quality of product/ service and efficiencies: A company that is in the distribution end or service business is evaluated based on the demographics of the trading area, the quality of the product and/or service line, the appearance of its locations, and the cost-effectiveness of the operation.
- Management team/workforce: Another key factor is the quality of the management team and a well-motivated workforce. Business owners often take for granted the highly qualified individuals performing valuable services that are key to the successful operations of the company. A buyer of a business most likely will be interested in knowing which key staffers can be retained after the sale.
Finding a buyer
The process of finding a suitable buyer begins with knowing who is currently buying and what their motives are. This has become increasingly important as the pool of potential buyers has shrunk considerably due to the recent economic downturn. Without this information, the seller may overlook a category of buyers that represents the best opportunity for a lucrative sale. Medium and large-size firms are bought by financial investors such as private equity firms, companies looking for strategic partners, and a very limited number of individual buyers.
A clear understanding of your company’s position within the marketplace is extremely important when looking for a buyer. Failure to do so can result in overlooking a segment of buyers that may represent the greatest potential for a sale. For example, assume that your company produces a highly successful product that could be sold through one or more potential buyers’ distribution channels. That would increase the value of your company to that particular group of buyers.
The seller must also consider the vitality of the industry in which their company competes as well as their company’s position within that industry. Many sellers make the mistake of underestimating where their company is positioned, which will negatively impact the value they place on their business. There are factors that increase a company’s value based on its position:
- a new company outperforming its competitors,
- a company that represents a good strategic acquisition,
- a company that is a candidate for consolidation, and
- a company that is underperforming in a booming industry.
In the next blog, we will discuss negotiating the selling price, structuring the deal, and closing the deal.