Maximizing Your Business Value: How to Generate a High Value Exit

Maximizing Your Business Value: How to Generate a High Value Exit

There comes a point in time when every business owner plans to exit his or her business, whether as a result of a sale to a third party, transition to the next generation of the family or otherwise.  It is critically important to plan for these transactions and get to work on maximizing the value of that business well in advance of the sale or other transaction primarily for three reasons:  (1) sometimes an exit is not planned, but is brought about by sudden and unforeseen circumstances, such as the death or disability of the business owner; (2) many, if not most, business owners have much of their net worth tied up in their businesses and monetizing that value is often a necessary prerequisite to retirement; and (3) pre-transaction planning yields better after-tax results, significantly reduces the risk allocated to the business owner, and significantly increases the likelihood of a successful transaction.  We have outlined several key areas to focus on in order to generate a high value exit.

Be prepared for due diligence

In every purchase and sale transaction there is a due diligence period allowing the buyer and its advisors (legal, accounting, for example) to research, review and scrutinize the business.  While the scope of due diligence varies significantly based on a variety of factors, buyers generally analyze the performance of the business, the products and services offered by the business, the customer base of the business, the risks attendant to the business and the compliance of the business with applicable laws, rules and regulations.

Historical information found in your files, records and financial statements will be a key indicator of future performance expectations.  It is critical that your records are complete, well-maintained and accurate, that adequate financial controls have been and are in place, and that the business owner is able to produce the necessary data in a timely, accurate and complete fashion to the buyer.  The inability to do so yields a variety of additional questions and raises a host of other issues – all of which serve to de-value the business, reduce the purchase price a buyer is willing to pay, disincentive a buyer from acquiring the business.  Do you have the proper systems and controls in place to successfully manage the business, protect assets and fully support any financial claims you have made to potential buyers?  Are you able to show that revenue is stable and likely to continue, preferably with multiple streams of revenue?  Buyers are more likely to pay a premium for businesses with strong, predictable future earnings.  After all, in determining the price and terms of acquisition, a buyer is assessing the future cash flows that it anticipates will be generated by the business it acquires, as well as the relative amount of confidence the buyer has that the business will generate those revenues post-closing.

Sellers also need to ensure that there business is in compliance with applicable laws, rules and regulations and that the contracts under which it does business are good contracts with appropriate risk allocations and protections.  For instance, are the contracts assignable by the seller?  If not, this may create an issue in an exit transaction.  Do the contracts impose broad indemnification obligations on the seller or other continuing obligations?  Do the contracts have ambiguity?  Under what circumstances can the seller terminate those contracts and what are the consequences?  Do the contracts have clear performance standards?  Do they protect the intellectual property of the seller?  Buyers don’t like bad contracts and are willing to pay less the more risk they have to assume.

Focus on the future

Be prepared to discuss the continued growth strategy for the business.  Serious buyers want to hear about technologies and ideas that are designed to serve audiences in the future.  Do you have new products or services nearly ready for implementation?  Is the business scalable?  Be prepared to share business ideas that are progressive and innovative to show the potential future growth opportunities to prospective buyers.

Diversity is key

Businesses generally achieve the greatest level of success when they have a strong management team and well diversified staff and client base.  Finding, retaining and motivating top talent is a critical component of a successful business and crucial for the sale of any business.  Your team should have the experience and motivation to continue to grow the business after the sale and should be able to demonstrate to potential buyers that the value of the business is not dependent completely on the owner.  The same theory applies to clients – if the company’s largest client were to leave, what would be the impact?  Buyers want to see a very diversified client base where no single client comprises more than 25% of annual revenues.

By the same token, buyers are concerned about key employees remaining in the business post-sale.  Has the seller incentivized them to do so?  If they elect to leave, are there adequate and enforceable restrictive covenants that preclude them from unfairly competing?  We often find that businesses who provide strong incentives and a clear vision to employees about an exit achieve the best outcomes.  The seller wins because the employees focus on getting the company ready for sale and are incentivized to see the transaction through and stay on board post-closing.  The employees win because they receive transaction related compensation that serves as a strong incentive to help the owner achieve a successful exit.

Consult an Orlando Business Lawyer

An experienced Orlando business lawyer can help guide sellers through this process, prepare the business for sale, reduce the risk allocated to the seller and maximize the value of the transaction. The attorneys at Watson Sloane have extensive experience in mergers and acquisitions, purchases and sales, and exit transactions and can quickly assess and identify issues that may negatively impact the sale of your business.  No matter what the reason is for selling your business, avoid selling it as is. The value of nearly every business can be increased, usually significantly, with careful thought and planning and with the right team of advisors. Hire an Orlando Florida business transaction attorney like Watson Sloane to assist you in creating the right exit strategy.