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Your Checklist To Step Out Or Step Back

Your Checklist To Step Out Or Step Back

June 22, 2014

Every business owner will eventually (some sooner, others later) part ways with the business. And even if you are not thinking about selling, the strategies and steps taken when approaching the sale of a company can increase your business' value and worth now, reaping you benefits. This is Part II to last week’s article addressing the critical issue of building an exit strategy. It’s written by Brand Launcher’s CFO, Ken Goldman, whom I look up to as both a finance pro and as my big brother! In Part I, Ken explained why most businesses do NOT make it to a successful sale. In Part II, he lays out the key pieces that a prospective buyer is going to look at when considering whether your business is worth buying.

Planning Your Exit Ahead of Time

In Part I of this article, I discussed the overall perspective a business owner should have regarding exit strategy: one day, you are going to want to exit your business, and the time to get it ready and worth more is now.

In this article, I’ll dig deeper, showing you the specific aspects that a potential buyer is going to examine. I’ll also point out tips to maximize the chance that you’ll be able to sell for the best price.

Going Under the Microscope

Think into the future, when you’ll put your business up for sale. Potential buyers are going to start the due diligence process to decide what your company is worth. You and your company will suddenly be going “under the microscope.” Can you picture how things will look to possible buyers? Your customer base?  Your procedures and operations? Your employees?

There are several principles that, if properly attended to, will add significantly to the perceived value of the business.  

The Starting Point

In determining the value of a company, the process starts by looking at the balance sheet — that is, what are the hard assets and liabilities of the company? You can be sure that the buyer is getting help from financial professionals in evaluating a potential purchase. The preparation process builds off of your accounting practices.

Financial Statements

Every buyer will want to review at least the last 3 full fiscal years of financial records.  These should be audited or reviewed statements published with a cover letter from your CPA.  Footnotes about one-time or exceptional events that are documented by your accountant carry more credence than verbal explanations you make during due diligence.  If your accountant made suggestions on your internal controls, be sure to document those suggestions, as well as any corrective action.  This gives the buyer confidence that your Profit & Loss Statement and your Balance Sheet really reflect the financial condition of your company.

Payroll and Tax Records

It’s absolutely critical that your taxes and payroll are paid in full and up-to-date. Business taxes can become quite complicated.  Tax bills can fall under the categories of sales tax, use tax, property tax, payroll tax, state income tax and federal income tax – just to name a few.  If there are problems in this area, it has the potential to “spook” buyers.

Corporate Documents

Every company has corporate documents.  It’s easy to treat this type of paperwork casually and just toss things into a file. But this can be costly—during a due diligence process, you can spend valuable hours searching for simple documents. Incorporation papers, corporate minutes, communications from the Secretary of State, business licenses, permits and stock certificates need to be up-to-date and accessible.

In addition to these corporate papers, there are usually a number of contracts that can easily be misplaced.  These include customer contracts, government contracts, vendor agreements, purchase agreements, property leases and equipment leases.  Be sure that you have the “fully executed” copy, i.e. an original with all the appropriate signatures.  It’s too easy to end up with a photocopy or an unsigned electronic version.  

A Well-Run Organization

Moving up the ladder of “value added” practices, buyers want to know that the selling entity is a well-run organization. They want to see a company that has simplified its systems and codified its processes. This makes your business a scalable entity that can handle growth.

Processes and Procedures

Every person within your organization should have a complete, written job description.  In addition, the repetitive tasks and the process flow should also be well documented.  This would include flow diagrams on how the work gets done. As you create these, try to imagine a new management team coming into your company. Would they understand how you operate based on these documents?

Organizational Charts

In developing an organizational chart, it can be useful to think in terms of communication channels.  How does information flow within you company? What are the communication channels in terms Revenue, Operations, and Finance? Sometimes, the CEO will be at the top of all three charts, but not always.

How many people communicate directly with the CEO? Is this too many?  How will it look to the buyer?  Remember, the more the company can operate independent of the owner/CEO the more attractive the company will be to a potential buyer.

Policy Manuals

How do you handle personnel issues?  Do you have an employee policy manual?  Is your benefits package documented?  Do you do formal performance reviews?  Do new employees understand expectations?  Do you have an orientation program? The more professional your approach to Human Resource issues, the more likely you’ll have motivated employees. And of course, a strong workforce adds value to your company.

Adding Value

In determining what a willing buyer should pay for a company, the most important and the most difficult part of the valuation process is the premium to be paid for the intangible assets. Intangibles vary from industry to industry, but the most common forms of intangibles are goodwill, branding, and the prospect for growth. The perceived value of these intangibles can mean the difference between a modest and a significant premium over the tangible assets. The following tactics can play an important role in boosting the value of intangible assets.

Trademarks

A company’s success in establishing a recognized trademark depends to a large degree on its reputation for quality products and/or services.  By properly registering your trade name, logo, and other branding elements, you’re protecting your assets from use by outside parties. This, in turn, provides the buyer a substantial intangible asset that cannot be diluted by the competition. For some companies, other intellectual property such as patents or copyrights can also add significantly to the perceived value of the company.

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Non-Compete and Non-Solicitation Agreements

Every successful company depends on key employees who help drive the business on a daily basis. Having employment agreements with these key employees that includes a non-compete and/or a non-solicitation clause will provide significant protection to the acquiring company.

A buyer is always concerned about the continuation of revenue after the deal closes. One particular concern is that key employees might leave the company and perhaps even take customers to a competitor. That’s why these agreements are essential.

From a practical perspective, it can be difficult to add a non-compete once the employee has been with the company for a length of time.  The best time to secure a non-compete is when an employee first starts work for you company.  The non-compete and the non-solicitation clause can be incorporated into your employee policy manual. The details and the enforcement of non-compete arrangements will vary from state to state.  Be sure you get good legal advice on what’s appropriate for your company.

Budgeting

One of the more challenging aspects of running a company is establishing a budget on an annual basis. This includes forecasting sales and expenses. This can be tedious, but it gets easier the longer you do it. No one can foretell the future, but every year that you compare the “actuals” to the “budget” you get a great learning experience for you and your staff — and your budgets will hopefully become more and more accurate.

To a buyer, a company with a track record of successful budgeting becomes more attractive.  Future projections will have more credibility.  That’s what’s really being purchased: not the history, but what should happen in the future.

Incentivizing Key Employees

As you build your business, it’s important that all team members are moving in the same direction. Key managers, who are involved with the budgeting process and have some control over revenue/expenses in their profit center, should have a bonus that rewards them for net profits.  There are a number of ways this can be structured. It could be a percentage of the net; there could be a threshold to cross before any bonus is paid; or there could be a chart relating total net to the manager’s bonus. These types of incentives will assure the buyer that key employees understand the importance of the bottom line.

Strategic Planning

There are many approaches to strategic planning.  A strategic planning process that includes a discussion of the marketplace, competitive advantages, and operating profitably are indicators of a well-run company. As with budgeting, by planning and seeing the results over the course of several years, you and your staff will become better and better at the planning process. To the potential buyer, a company that thinks strategically is worth more than one that is simply reactive.

Plant Now, Harvest Later

For many business owners, their company is a significant portion of their personal assets.  And it’s worth planting now — evaluating, planning, and improving — in order to harvest later when it comes time to sell.

Your first step is evaluating the Sellability of your company.

Brand Launcher is happy to provide you with access to your free Sellability Score. This tool will take you 13 minutes to complete, and you’ll receive a detailed 27-page report with your overall score as well as a detailed score on eight key drivers. Studies have shown that a Sellability Score of 80 or more indicates that your company is worth 70% more than the average business in your field.

Click on the image to the right to find out your Sellability Score.

When it comes time to plan your exit strategy, call us at Brand Launcher (410-235-7070).  We’re happy to help you identify the tactics that will give the biggest return on your biggest investment.