By Frank T. Ardito, CPA
Vice president & Director
The rapid pace of mergers and acquisitions today is being driven by an unusual set of economic and social factors, including the COVID-19 pandemic and the wave of retirements among the Baby Boom generation. In many cases, buyers who are flush with cash are offering above-market prices for businesses.
The key question for sellers is whether they are adequately prepared for exit. Most owners of small and medium-sized businesses have never gone through a sale and should understand the factors that distinguish between successful business transitions and difficult ones.
Do your planning
Before entertaining offers, it’s important to establish a plan to help guide you through the process. Knowing where you want to go is only half the battle. Knowing how to get there and who will help you along the way is important, too. Consider the following:
Who should be involved on the road to exit? Assemble a team of advisors who can help you prepare your business for sale, including your accountant, your lawyer and your banker. Your team also may include a valuation specialist.
Obtain a business valuation to help form a baseline rationale for your asking price and benchmark that value to the market if the information is available. If the value doesn’t align with the asking price you had in mind, figure out why and how you can reach the value you want. A valuation report should provide guidance as to what improvements to the company may increase its overall value. This is the time to invest in your company to get to the asking price you want.
Who are your likely buyers? You may not need to go to the market to find a buyer if you have a family member, a group of key employees, a competitor or a large customer who would like to buy your company. If you are in a market with limited buyers, though, an investment banker with a larger network may help you identify buyers.
Determine what needs to be done to satisfy all stakeholders, including banks and potential buyers. If your business has never had a financial statement audit, now is the time to obtain one. This will help move any negotiations forward more quickly.
Consider the post-acquisition phase. What will your continuing obligations be to the company, particularly during an earn-out period? You should plan on being involved in transitioning key relationships with employees, customers and advisors. The new owners will bring in their culture and technology, but you can continue to provide industry insight and experience during the transition phase.
What are the cash flow and tax implications of the sale? The deal structure will be important in determining cash flow and tax issues. The deal structure also will help determine things like the earn-out period and how any outstanding company debt will be paid off.
Your personal needs and the shape of your estate will determine the terms of the deal. Decide on a price that will help you retire, as well as what you expect to receive in cash and what kind of tax implications you can live with.
Manage emotional risk
Managing the emotional side of selling a business is more important than it may sound. A business is not just a set of books, a production line, inventory and customer accounts. It is long-time employees whose loyalty and hard work helped you achieve success. It may be your life’s work or a multi-generational legacy of your family. It is probably a key part of your personal identity.
Listen to your trusted advisors, who will help you avoid making emotion-fueled mistakes.
If you would like to discuss putting a transition plan in place for your business, contact your G.T. Reilly advisor.
