What Does The Sale Of A Business Really Mean To A Middle-Market Owner?

September 1st, 2005

For most middle-market business owners, the potential sale of their company is the most significant business event they will ever encounter. Needless to say, it can be an incredibly stressful process. Of course, there’s the emotional aspect of transferring ownership of what is probably a long-term psychological and financial investment. For most business owners, there’s also uncertainty about the valuation that their company will achieve. As survivors of the experience can readily attest, proper preparation greatly facilitates the process and reduces the anxiety.

For large public and private transactions (for purposes of this article, values in excess of $100 million), there are multiple information sources available on completed transactions. For smaller, closely-held private enterprises however, these data sources do not readily exist. As such, prospective middle-market sellers often operate under assumptions that can be harmful. The involvement of a veteran, qualified advisory team can help mitigate these issues and greatly facilitate the process.

When should you sell your business?
A moderately aged owner might wish to "smell the roses," spend time with family, travel, etc. An owner of a more advanced age might be well advised, in the absence of a succession plan (family or otherwise), to make his or her personal estate liquid. Just as likely, there may be a strategic rationale to sell one’s business (market developments, competition, etc). Of course, alternatives also exist to remain involved with a business post-sale and are often highly attractive. The potential reasons to sell are varied, and highly dependent upon the owner’s circumstance.

Having an exit strategy allows you to be ready when the time is right. It’s an excellent idea to plan for the inevitable transfer of ownership, regardless of how imminent or potentially far off that sale might be.

How can you enhance your company’s value?
We have witnessed in multiple client engagements the benefit (and conversely, the detriment) of thorough early preparation for a sale of a closely-held business. Proper planning, and the appropriate actions that such planning dictates, clearly enhance not only the sale-ability of a business but the attractiveness of the transaction price and terms.

Providing for a sound infrastructure (management, technology, account base, etc.) will strengthen the core enterprise’s marketability. Engaging a strategic advisor to properly and methodically advise on when to commence a sale process has been demonstrated to greatly enhance the transaction value and the certainty of closing. And also quite important, the ability of an owner to methodically evaluate and consider the potential transaction issues is of considerable aid in not only maximizing value but reducing the stress of the transfer.

Is a valuation necessary in planning for a sale, or is it just an accounting exercise?
While any CPA salivates at the thought of an accounting "exercise," a valuation provides valuable insight into many aspects of a business operation. When performed in a proper fashion, a meaningful review of the corporate opportunities, risk factors, marketing efforts, competitiveness, management team, and various other strategic and operational components, are all performed and analyzed. When combined with the analysis of the operating results, as well as market conditions, these factors assist the valuator in determining the appropriate capitalization rate to apply to the corporate earnings base. In order to enter the market at the right time, with the goal of maximizing deal value and terms, this kind of analysis is essential.

These three topics represent a small sample of key areas we often encounter. There are a multitude of additional issues that potential sellers face. The earliest possible consultation with a strategic advisor will ensure that you will fully benefit from your business’ value.

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