by Collette Parker
The blood, sweat, tears and late nights put into a start-up business will one day culminate in an exit strategy. Whether you are passing the company to a son or daughter, a partner, or selling to a competitor or larger corporation, the day must come to say goodbye.
It helps to be prepared for that day, and the sooner the better. Ironically, the birth of a new company naturally inspires an exit strategy. To be prepared means to get the highest valuation for your company; to do that, you have to give yourself adequate time and do your homework.
Start 15 years ago
First of all, says Mike Iverson, CPA and founder of Trillium Financial, plan for the sale of a company well before the day you must sell. “Often business owners don’t give themselves enough time. Give yourself a three- to five-year planning period to lay the groundwork so that your business is functioning at a high level.”
A buyer will wonder why you are selling your business, and will look for any gaps or holes in your business plan and market. Give yourself enough time to find the gaps yourself and fill them as best as you can.
Iverson has worked with business owners in the past that have very thoughtfully gone through the process of selling. They were contacted by other companies who asked, “Have you ever thought of selling your business?” They might answer, “I’m not ready now,” but cultivated those relationships with a specific purpose in mind. They knew that such relationships could result in connecting with a person who could acquire his or her company, and they understood how prudent it was to develop a business relationship with that individual to learn how they operate.
“Start those relationships early on, even as you start the company – maybe 15 years before you want to exit,” says Iverson. Then you have relationships in place, and the sale becomes a more natural result.
Do Your Homework
The other aspect of preparing to sell a company is making sure the company is ready for you to walk away from it, and still functions properly.
“Someone has to do the financial due diligence,” says Iverson. “You may have to hire someone to help clean things up, such as customer files and HR files. I can’t stress enough how important it is to get all records in order. It will make the process that much quicker.”
If you’re selling to an individual, that is a different process than selling to a public company.
Iverson spent several years at a public company working in mergers and acquisitions, and observed that emerging growth companies under $20 million that sold for higher valuations had good solid records and complete financial information. They closed their financial records on a regular monthly basis and had an accountant on staff who could ensure the information was complete, timely, and correct.
“Not only will the selling process go much smoother, but it can actually increase the value of the business,” says Iverson. “If you go into a business where administration, accounting, and operations are very disorganized, you will likely get limited or incomplete information which will cause you to question if the numbers given to you are correct.”
“Companies that get the best valuation, in my experience,” says Iverson, “are those that have their financial house, their administrative house and their operational house in order. They are the companies that have planned their sale for a period of time, and they have the right theme in place that could help perpetuate their business even without the owner being there.”
Be Ready to Let Go
If you’re going to sell and you are the sole owner, your business has much greater value if you have set it up so when you walk away, there are no hiccups. You should not be the only rainmaker, nor the only person who knows how to make it run.
“Some companies that are less than $10 million have a tendency to want to be in every piece of the business and have a strong personality that people equate to the business. That can run the risk of diminishing the value of the business”, says Iverson.
Ultimately, when someone is looking to buy your business, they want to buy an operating business they can bring into the fold, have it running immediately and not invest a lot of resources. Customer retention is one of the key elements of success, especially when the owner is gone. While some owners or management teams stay in place after a sale to help transition, nine out of ten times the owners will not be there 24 months after the sale.
Letting go is tough for an entrepreneur who has put their full energy and life’s savings into building a vibrant business. Planning ahead for the day they want to exit will provide better odds that the business will continue in capable hands and make the sale easier for everyone.