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Prepare Your Company for Sale by Starting Now

By Generational Equity

01/04/2017

One of the most important concepts that we focus on in our exit planning conferences is the reality of time. As we have discussed before, there are two types of business owners:

  • Those that make the time to create a PLAN to sell
  • Those that let time slip by and HAVE to sell

Being in the first category is far better than being in the latter one. However, we continue to see a large number of business owners, many of them aging baby boomers who attend our workshops, that have no plan in place. It is fortunate that they are attending our conference because investing a few hours with us reaps huge rewards later.

One of the central issues with time is that it can pass you by quickly and we understand why. The average entrepreneur spends 60-70 hours a week simply keeping the company moving forward, leaving little free time to plan or even think strategically. That is why we feel so strongly about encouraging business owners to set aside a day and attend one of our workshops – it can really jumpstart your planning process.

Here is why getting started early can be so important: According to Axial (a website introducing capital providers to business owners), you should start your sell-side due diligence several years before you plan to market the business:

The sell-side due diligence process will assist companies in resolving or managing potential issues before potential buyers discover the problems on their own. To best position a company for a successful sale, we recommend beginning the sell-side diligence process one to three years in advance of the anticipated sale.

In The Generational Group lexicon, we call “sell-side due diligence” our Business Evaluation process, as well as our Roadmap for Enhancing Value. These two documents serve to provide our clients with three things:

  • An idea of the company’s current business enterprise value
  • A full financial analysis on the health of the company including a complete recasting of historic financials and five year projections.
  • Specific strategies (Roadmap) on steps to take to both enhance the company’s value, but to also improve its salability.

We likewise recommend that our Business Evaluation be undertaken as far in advance of your planned sale as possible. Why? First, as you can see from the items I listed above, there is quite a bit of work that we need to do in order to accurately value a client. Even with full cooperation of a client in getting us historical financials that are accurate, our process typically takes 60-90 days (much longer if our client does not have financials and/or they are not appropriately prepared).

Growing Value

In conjunction with the initial valuation, we also provide our Roadmap. With an idea of value and strategies to implement, many clients decide to enter our Hold and Grow (or Hold to Grow) Program. This is why we recommend that our clients sign up with us as early as possible: it is more than likely you will have several areas that need attention in order to improve the company’s valuation and thus reduce its perceived risk in the eyes of buyers.

For many business owners, the reality of the huge role RISK plays in valuing privately held companies is a new revelation. No one likes to be told that their baby – the entity they birthed, grew, and nurtured over years and years of hard work and sacrifice – needs a facelift and a tummy tuck. By the very definition, a closely held, family-run, private company is not required to disclose much information about its financials, operations, client base, or suppliers to the general public. Unlike publicly held companies that are required to file quarterly and annual reports disclosing everything, closely held companies are not.

People often ask me, “Why are multiples on publicly held companies in my industry so much higher than multiples for privately held businesses?” The answer is far more complex than this, but at the peril of sounding overly simplistic, I suggest that the level of risk being much, much higher naturally impacts the valuation of a privately held company for many buyers.

For this reason, the more you can do to reduce risk in your business, the better your valuation, hence the need to hire an M&A firm to adequately prepare you and your company for buyer scrutiny. And the first key step is a thorough, complete, and accurate evaluation of the business.

The great news for our clients is that our relationship with them does not end the day we deliver our initial findings. No, unlike others in our industry, we stay with our clients contractually for five years and provide at least two updates of value during that timeframe so that our clients who enter our Hold and Grow Program can clearly see how their value is being enhanced.

Again, time is your enemy. It flies by so very fast. The good news is The Generational Group of Companies, and our cadre of valuation and deal making professionals, are here to help you take control of time and PLAN for your financial future. If you are considering an exit event of any sort (and there are numerous options ranging from a partial sale to an equity firm to a full sale to a strategic player and everything in between) in the next 3-5 years, it is incumbent upon yourself to attend one of our complimentary, exit planning conferences entitled “How and When to Exit Your Business for Maximum Value.”

To learn more about our services and to find out if your business meets our criteria to attend, please use these links:

And again, no matter what, I strongly encourage you to start your sell-side due diligence process as early as you can. Be a business owner that PLANS an exit, not one that is FORCED to exit by external circumstances.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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