Preparing to Sell Your Business

One of the most daunting tasks an entrepreneur will ever face may be the sale of the business they've labored years to nurture and grow. Good advance planning and the help of a professional mergers and acquisitions (M&A) advisor can increase the opportunity for a smooth-running and financially rewarding transaction. Below are some basic guidelines.

KNOW WHEN TO SELL. As the old adage goes, timing is everything. In the sale of a business, it is perhaps the most critical consideration. In my experience, the average owner sells three to seven years beyond the point when they should have sold. Maybe they didn't anticipate market changes, were unable to source new capital to fund growth or were suddenly faced with a personal crisis. Whatever the reason, delaying the decision can erode value.

Astute owners develop an exit strategy years before they expect to sell and are prepared when the time arrives. They factor into their plans the knowledge that it typically takes 12 to 18 months to complete a transaction and that the new owner may want them to remain with the company for a period of time after the sale to guide integration and ensure the business performs according to projections. Moreover, they time the sale to take advantage of market conditions while also advancing their personal goals.

KNOW THE TRUE VALUE. Every business is unique and there is no single, simple formula for determining value. Rather, it is the culmination of a thoughtful process involving extensive research and analysis. The process begins with recasting historical financial statements to provide a normalized view of the business as if it had been a profit center of a larger corporation, not a stand-alone entity. However, these historical financials alone do not reveal value. Why? Because buyers buy the future, not the past. Historical financials serve as a starting point for building pro forma financials, which look five years into the future and project the company's performance potential assuming new owners with resources to support growth. Pro forma financials require in-depth market research to determine reasonable assumptions regarding revenue and profitability trends, growth rates and other factors.

Also integral to the valuation process is the identification of intangible assets. These are attributes that are important contributors to the company -- and important considerations for buyers--but aren't necessarily represented in the financial statements. Intangibles include a loyal customer base, patents and licenses, supplier contracts, trade secrets, distributorships and others.

All of these elements--adjusted historical financials, intangibles and pro forma financials--come together to reveal a valuation range that informed buyers will likely be willing to pay. Most owners find that professional assistance from a qualified M&A advisor is essential to arriving at a comprehensive valuation.

SEEK A VARIETY OF BUYERS. Many owners assume that the most likely buyers are close by -- local competitors or a major customer, for example. In fact these candidates often are less desirable because their purchase decisions are driven by a desire to acquire assets, consolidate redundant functions and cut costs. Wise business owners look beyond these and seek the largest possible pool of strategic buyers who may be willing to pay a premium for the future potential and intangibles of the company -- not just its assets. These strategic buyers are typically larger private and public corporations in the U.S. and abroad.

Most entrepreneurs sell only one business in a lifetime. Therefore, it is important to seek the help of a qualified M&A advisor who is properly licensed and has a track record of delivering premium values to companies of similar size. With proper planning and advice, the sale can be a positive and profitable experience.

Richard M. Rodnick is CEO of RSM EquiCo, a global investment banking firm serving private middle-market companies and a subsidiary of H&R Block. For more information, visit www.rsmequico.com.