Business owners sell their companies for a variety of reasons. A common objective among those considering a sale is to maximize the value of the business. While the transaction process is multifaceted and intended to drive value, there are measures that can be taken prior to commencing a sale process that can create additional value for the shareholders. We’ve outlined 10 ways to increase the value of your business prior to selling:
1. Focus on cost efficiencies
If you are contemplating a sale of your business in the next two to three years, now is the time to take an aggressive approach to controlling your costs. Where can you carve out the expenses or operate more efficiently? If you are able to demonstrate a one or two-year track record of operating at a more efficient level, the buyer will factor that into their valuation by paying you a multiple of those savings. For example, if your business trades at a multiple of 10 times EBITDA, sustainable cost savings of $1 million will translate into $10 million of additional value.
2. Eliminate non-essential employees or family members
It is not uncommon for private companies to have non-active family members on the payroll. Although terminating such long-term employees or family members can be a sensitive matter, eliminating these costs will improve your EBITDA and could result in a higher overall valuation of the business. Keep in mind that a buyer will eliminate such personnel and related expenses post-close. You should take action prior to a sale so you are compensated for these savings instead of transferring the opportunity on to the buyer.
3. Aggressively focus on working capital efficiencies
Opportunities related to working capital improvements are often overlooked by private business owners, but it is an area that can create significant value pre-sale. By proactively managing and optimizing your working capital prior to a sale transaction, cash generated through the activities will accrue to your benefit while you still own the business. Keep in mind that if you don’t take the opportunity to reap the benefits of working capital efficiencies prior to a sale, prudent buyers will be the beneficiaries by identifying ways in diligence that they can garner any unrealized value for themselves after completing the transaction.
4. Manage your capital expenditures
Prospective buyers will analyze your historical capital expenditures to ensure that you have been appropriately investing in your equipment to maintain and sustain the business. Sellers often want to be compensated for recent expenditures by explaining how they will enhance long-term value, but it is often an uphill battle to get paid for these expenditures. If you are contemplating a sale in the coming years, focus on your capital expenditures and discuss with your transaction advisors how to best manage these expenses.
5. Prepare and incentivize key management team members
Key employees and management teams that are critical to a business’s long-term success are a piece of a company’s overall value proposition. Management teams are typically involved in the sale process since buyers want to hear from key members such as the CFO, Head of Sales, COO, etc. This is a distracting and time-consuming undertaking for these employees. Determining an optimal plan that incentivizes them to actively participate in the process will be critical to a successful sale.
6. Focus on understanding the key objectives of shareholders and management team
As simple as it may sound, it is critical to understand the differing objectives of the stakeholders in your business. Many stakeholders may exist in a business and they will all have an opinion upon a sale, some of which may not be aligned with your own or with each other. You need to understand and manage this appropriately. The ultimate buyer of your business could be a strategic acquirer, a private equity fund or even a family office, and in this time of robust capital markets, all three can be viable buyers. The better you can articulate the objectives of your key stakeholders, the better the chances that your transaction advisors will be able to identify the best buyers to align with those interests.
7. Engage a tax professional
Your business valuation is important, but what’s even more important are your after-tax proceeds. Be proactive and engage with a tax professional early in the sale process. By starting early, you are more likely to identify tax structuring opportunities that could result in significant savings, resulting in higher net proceeds to the shareholders upon a sale.
8. Have your financials audited
Your financial statements will be a basis for your valuation. Investors/buyers will want to see your numbers on a GAAP basis, preferably with an underlying audit. If buyers cannot rely on your financials, they will not be able to give you a reliable valuation. In lieu of an audit, many private companies will opt for a quality of earnings analysis. This entails hiring an accounting firm to conduct an analysis of your financials and financial practices. It is a helpful way to mitigate any potential issues prior to approaching buyers and prepare your management team for eventual discussions with buyers.
9. Settle outstanding litigation
If possible, try to settle all outstanding litigation related to your business prior to undertaking a sale process. Buyers do not want to take on a seller’s legal matters and the issues surrounding any litigation can complicate a sale process. Simply put, the cleaner the business, the easier the sale process.
10. Understand and resolve environmental issues
For companies that own land, own manufacturing facilities or deal with potentially hazardous materials, environmental diligence and preparedness will be a critical part of getting a deal done. Buyers will often walk away from deals if the perceived environmental risk is too great. Depending on the situation, it is often advisable to undertake environmental assessments and remediation prior to a sale. If environmental issues are a potential risk for your business, discuss them with your counsel well before commencing a sale process and determine the best course of action.