Article written by: Jason Zhao, CPA, CA, CBV
Corporate Finance, Principal
Exit plans of the baby-boomer business owners have been delayed but their need to exit has not gone away. The value of the average business has been limited for a few key reasons. Most businesses have been structured and operated with the tax legislation in mind; profit has been kept low to minimize tax. Little effort has been invested in removing waste from the business. Owners generally have wanted to fund their life-style, and even their children’s’ life-styles, rather than invest in growth. Another factor is that the ability of some owners to manage a growing business has been limited, and there has been a reluctance to learn about leadership or invest in consulting services to develop growth capacity.
Outlined below are ten steps that can be used to maximize the value of a business:
PHASE ONE – OPTIMUM PERFORMANCE
Step 1 – Profit Improvement
Improve the profitability of the business by removing waste. There is no point in putting more business through an incapable company. The key measure of how efficiently a business converts its sales is the profit of the business.
Step 2 – Growth Plan
Grow the business. A positive trend line of the sales growth can provide confidence that the sales process in the business is working well.
At the end of this first phase the business performance should be optimized, cash is created to fund the next phase of the process, and the sales and profit trend lines show a continuous and predictable improvement. It is at this point that Phase 2 can be commenced.
PHASE TWO – POLISHING THE BUSINESS
In this phase make sure that all the elements of a great business are in place.
Step 3 – Lock in revenue (contracts)
Make sure that, wherever possible, the future revenue of the business is locked in, preferably with long-term contracts. A buyer of the business needs a degree of certainty of the five-year revenue outlook so contracts with customers need to be robust.
Step 4 – Lock in management (no reliance on founder)
Establish a management infrastructure that removes reliance on the owner. The management skills and experience (and processes) to lead the business in the absence of the owner need to be in place.
Step 5 - Brand
Protect the brand of the business. This includes your web-presence, social media, patents, and other intellectual property protection.
Step 6 – Reduce Debt (clean up balance sheet)
Reduce the debt levels of the business in order to clean up the balance sheet. The cash created in Step 1 can be used to retire debt and remove loan accounts.
At the end of Phase 2 the business looks as good as it can, and it is now that the sales process can formally begin.
PHASE THREE – CREATION OF THE SALE
The key success factor in maximizing the sales price is to find a buyer who “needs” to buy the business.
Step 7 – Find a buyer who ‘needs’ the business
Ideally several potential buyers have been identified at this point (through brokers or other industry contacts) and an analysis of why the business is essential for each potential buyer is carried out. This analysis often requires changes to the look and feel of the business. The information gained from the analysis enables a specific sale process for each potential buyer to be developed and implemented.
Step 8 – Negotiate well for the seller
Make sure that the negotiation process goes well. Often the business owner needs to be coached on their role in the sale. The psychology of the sale process must be clearly defined and followed. There is no point in having built a valuable business and then handling the negotiation of the sale badly.
Step 9 – Anticipate all objections and value reducing tactics
Anticipating all the likely objections that will be raised by the buyer and their value-reducing tactics in the sales process are just part of the sales process planning.
Step 10 – Manage all the risk
To manage the risk in the sales process we suggest using a Failure Mode and Effect Analysis (FMEA) process to control all identified risks.
If these ten steps are rigorously followed over a period of 2-4 years, the probability of getting a high price for the business is maximized. Don’t leave the opportunity to make these critical changes too late, ask for assistance.
Contact us to discuss how we can assist in maximizing your business’s value:
Jason Zhao, CPA, CA, CBV
Corporate Finance, Principal