Financial rewards aside, most businesses owners are in business to enjoy the flexibility of being their own boss. In a down market, how can a baby boomer maximize the value in a business to be sold?
We find those businesses that run their business like a business are well prepared to sell that business.
They understand who the buyer is (or will be) and typically maximize the value when they sell
Hallmarks of a successful business include budgets, internal controls, sound accounting and personnel policies, plus an independent board of advisors. It is also a good idea to keep personal expenses out of the business, regardless of how they are accounted for. It may make perfect economic sense to have the company machine shop work on your private boat. You make sure that accounting includes the services in your W-2 income tax filing.
But look at that decision from an employee's perspective. It's been a hard year, with no raises. Now those employees see your pleasure boat basking in the care of your indentured servants.
Since the employees don't see the behind-the-scenes accounting, they think you are not above board with your financial dealings. When it comes time to sell, a potential buyer doing due-diligence does not get a
clear understanding of either the machine shop's operational efficiency, or the company's operating profit.
Many experts believe that you need to position your company for a sale up to five years in advance. A typical purchaser is going to look back at three years of records. After all, anybody can make things look good for a year or two.
Many savvy purchasers will do a ratio analysis to see how key ratios compare to industry averages. You need to measure these same ratios.
For example: You typically hire a college intern over the summer to handle administrative tasks around the office. You pay him well, because that intern just happens to be your son, on summer break from college.
But when it comes time to sell the company, the ratio analysis shows that your labor costs are higher than
that of your competition. A buyer could conclude that you are either under-pricing your product, or that yours is not the most efficient operation.
While you could disclose these types of adjustments to a potential suitor, a best practice is to run the business during the periods covered by due diligence with the fewest adjustments possible. That way, the buyer will feel comfortable about the integrity of the financial data and the business itself.
You also want to make sure that you fully understand how companies are valued and paid for, so that you can correctly anticipate questions and have a good handle on how much the business will fetch.
The complexion of the purchaser has changed significantly over the last decade. Private equity firms have
fewer options to finance a deal. This has reduced the number of the deals they are doing.
The tight finance markets have limited business lines of credit, creating higher cash-on-hand
requirements. Home equity lines of credit have been pulled back as well, further limiting options for
potential purchasers.
Who is buying businesses these days? Primarily private people looking to buy into the American Dream or
existing companies looking to expand. Both have limited capital.
In this market, it's important that the seller carry a note to provide at least a portion of the deal amount.
All-cash deals are rare, and typically don't fetch top dollar. If you carry paper on a transaction, make sure to do your due diligence on the purchaser. A note secured by the business itself may not be worth what is owed if the new owner does not operate the business well.
Other potential purchasers might come from within. Consider grooming your top manager to take the reins.
This might entail sending him/her to executive MBA classes or other specialized training. You want them to
be successful so that after they purchase the company, it generates sufficient cash flow to pay the debt.
Mike Bosma is managing shareholder of Bosma Group, a CPA firm dedicated to serving closely held growing businesses. Contact him at 786-4900 ext. 111 or mbosma@thebosamgroup.com.
