It’s that time of year again: the time to make New Year’s resolutions. Perhaps your goals for this year include achieving better physical and mental wellness, or reading a certain number of books, or traveling to a once-in-a-lifetime destination.
As we look ahead to 2020, here are some goals for owners to consider for the coming year to get into the mindset of preparing for a successful future exit:
Resolution #1: Address often-overlooked or under-considered financial planning opportunities. There are several key pre-sale planning opportunities we encourage owners to engage in before becoming involved in a sale process. Addressing these matters before they are faced with the pressure of a pending sale enables the owner to think about them calmly and develop a coherent plan to deal with them. Pre-sale financial planning considerations we often address with clients include:
- charitable giving,
- estate planning,
- incentives for key management and diffusing of any potential management buyout issues,
- “taking the call” and accumulating buyer inquiries,
- having conversations with family members about the owner’s plans to sell the company, and
- considering how the
owner will spend their time post-sale.
All are important for the owner to ponder prior to undertaking a sale process. There is no better time to start than in the year ahead.
Resolution #2: Proactively manage potential “unintended consequences” and avoidable SNAFUs related to a sale. We advise owners to run their company so that it can be sold on a moment’s notice, even if they are not considering a sale in the near term, or at all. However, owners often do not heed this advice. Thus, when it comes time to prepare their company for sale or go through diligence in a sale process, owners (or worse, the buyer) may uncover issues about their company about which they were not previously aware — issues that may cost them money and/or time to correct, or may even cause the company to be unsalable, or unsalable at a price/terms that meet the owner’s objectives. We call these “unintended consequences” of a sale, and they may include: unearthing of accounting and tax issues, learning that customer and vendor contracts may not be as “iron clad” as the owner believed, uncovering an intellectual property infringement, or learning that employee retirement plans are not in compliance, among others.
Related, we have also witnessed several “transaction SNAFUs” that are generally unforeseen or unanticipated, but that must be dealt with as they arise during the sale process, including a failure to address cross-collateralization concerns with the company’s lender with regard to real estate ownership; not apprising minority shareholders of the deal; not addressing required consents from key parties such as customers, vendors and landlords; failing to “take care of” key employees; not confirming that divorce decrees are iron clad regarding an ex-spouse’s rights in the event of a company sale; and hoping for the best that any issues will just go away or somehow resolve themselves during the course of a transaction.
With proper planning and foresight, the majority of “unintended consequences” and transaction SNAFUs can largely be avoided.
Resolution #3: Carefully weigh any non-financial considerations of a potential sale. Owners who are contemplating a sale have more to think about than achieving the highest price and best terms. There may be other personal, non-quantifiable, non-financial considerations that hold just as much weight — if not more significance — to the owner when deciding whether or not to move forward with the decision to sell.
For example, an owner who is seeking to focus on other activities they would rather be doing instead of running their business, such as spending time with friends and family, traveling or pursuing other interests or hobbies may, indeed, be ready to sell their company. Selling frees them up to channel the energy they are spending at the helm of the business into the aforementioned activities.
Resolution #4: Understand how to realize fair market value in a sale process, including evaluating prospective buyers prior to undertaking a sale process. Oftentimes, business owners are not fully aware of the fair market value of their company if they were to market it for sale, nor how to achieve it. Fair market value is defined as “the price at which a company would change hands in a transaction between a willing buyer and a willing seller, both being reasonably informed as to all of the relevant facts about the business, and neither party being under any compulsion to buy or sell.”
Estimating fair market value is not easy, and achieving it is about the sale process and perceived competition for the company in the marketplace. If the company is marketed to an appropriate number of “targeted” buyer candidates — those that appear to have a legitimate reason for considering the acquisition opportunity and have the financial resources to close the transaction — the market will tell the owner the fair market value of their business. Owners should keep in mind that the market is highly segmented — companies and situations must match very specific criteria in order for certain buyers to consider the opportunity.
At the end of the day, consummating a successful sale comes down to finding the right fit for both the buyer and seller, which starts with constructing a strong list of buyer candidates and engineering a sale at a price that is not only fair according to the owner and the market, but also achieves the owner’s objectives.
Resolution #5: Position the company to be able to invest in the business even if (and especially if) a recession hits. Recessions are an inevitable part of the business cycle. However, no one can predict precisely when a recession will occur, only that one will happen eventually. Nonetheless, business owners can benefit from a recession, regardless of exit timing. A recession may present an opportunity for an owner to invest in their business when their counterparts are scrambling just to keep the lights on. Even if the owner is not thinking about selling their company for many years to come, recessions present an opportunity for them to shore up their companies to emerge in a position of strength when the economy experiences an upturn again. It also positions them to create more business value by buying assets like inventory and equipment “on sale” and/or hiring talented employees that may not have otherwise been available. However, the owner must have plenty of dry powder on hand to take advantage of these opportunities when they arise. Investing proactively during a recession will have a positive impact on business value regardless of whether the owner plans to exit their business in the near term or many years in the future.
Resolution #6: Become familiar with the role of the investment banker in the sale process. Sellers often do not quite understand the role of an investment banker when they engage one to sell their company, but they certainly understand and appreciate their role by the time the sale closes. Hiring an investment banker gives the seller confidence that the deal will get done right, close in a timely and efficient manner and the result will be a higher-than-anticipated valuation with more favorable terms than they might have been able to achieve on their own. Hiring an investment banker also signals to the market that the seller is serious about selling their company. In addition, it is a sign of professionalism and lets buyers know the deal is competitive. Working together, the seller and the investment banker can achieve a favorable outcome to a sale that achieves the seller’s objectives.
Bonus Resolution #7: Bone up on our Universal Advice for Sellers. Working with owners prior to and during the sale process, we find ourselves dispensing the same pearls of wisdom again and again. These are recurring themes that keep coming up time and again that cause us to repeat them consistently to our clients. Read the entire three-part series on our blog (Part 1, Part 2 and Part 3).
Regardless of whether a sale is imminent or years out, carefully considering all of these resolutions and taking proactive steps in the year ahead can help owners to be more prepared to consummate a successful transaction that achieves their objectives when the “stars align” and they are ready to undertake a sale process.
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