Passport to Business Success: Getting Greater Value for Your Business
As we dive into 2016, the climate for selling your business has never been better. Opportunities seem to be seeking the sellers, across a number of industries, as buyers are more aggressively looking to close transactions before an auction occurs, and larger companies and private equity firms are now bidding for small companies. If you’ve been thinking about selling your company, the time is now. Here are a few tips to help you prepare and drive valuation: EBITDA is generally king.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is used in many cases as a measure of transportable profitability. A multiple based on perceived risk is applied to arrive at valuation. Therefore, it is common sense that the greater the EBITDA, the greater the valuation. However, demonstrating that your EBITDA is consistently increasing can drive the multiple the buyer is willing to apply. Look for new ways to reduce costs, increase gross profit and margins or create efficiencies that will increase EBITDA. When it comes to selling your business, don’t fool yourself.
Most business owners believe their business is worth more than the market will pay. You should educate yourself on M&A trends and industry valuation metrics, get more comfortable with the valuation process, and know if your company is a high or low performer. Think about your business model as it compares to your competition and look for ways to enhance your value proposition to separate your business from the pack. Exit strategy doesn’t necessarily mean 100% sale from day one.
Many owners are now looking for assistance in taking their companies to the next level – and that can mean raising capital for shareholder liquidity or for accelerating growth. In either case, one can sell a minority share to a strategic partner that will help accomplish these goals. Finding a partner with capital, a successful track record of growing companies, and industry knowledge is very attractive because it often provides access to international markets, a larger network of contacts, more financial sophistication, and state-of-the-art technology. Many businesses often have IP that is not secured, and as such, creates diminution of value and major issues when trying to close on a sale.
Take the time now to assess the IP you think you own, current contractual rights and how you are protecting your brand and patents. Failing to do so can significantly impact value. As the business owner, it’s not about you.
Reducing the owner’s involvement in the day to day increases the value of your business. Transition from working in the business to on the business. It’s critical that the business is not dependent on any one person. Lock in managers you want to retain with a certain percentage of equity and keep them motivated with creative compensation plans. Create the ability to transition your operations with ease. You want to be able to go on vacation and be confident the company can run smoothly. Implement and improve your corporate governance and controls to strengthen your business and drive value.
Many middle market business owners tend to have a hands-off approach to their internal controls. We find that the owners themselves are the decision makers and they do so without proper governance in place and usually without a working board of directors. However, for sale, better control over internal functions leads to a smoother process and reporting for all parties involved and will create higher value for your company when it comes time to sell. Create accountability for yourself. Company value can be enhanced by its ability to master its own data.
It may have higher than average margins, quality people, and adequate financial controls and processes, but without having a firm grasp of what type of information is being generated, the business has a blind spot and is likely missing an opportunity. Just like a mail order company naturally uses data to better target customers, making the right offer at the right time with the right product, you should be able to demonstrate an understanding of your customers, their demographics, buying habits and opportunities. Proper tax planning is a critical component of a solid financial foundation.
As you gear up for a sale, work with your tax advisor to make sure you are structuring your company for capital gains rather than ordinary income. As the majority of transactions are asset purchases, place emphasis on building intangible assets that create capital gains. By structuring company assets and the transaction properly, you can save a 20% differential in rates.