The sale of a business can be one of the most critical and lucrative events in someone’s life. However, the execution of this process is subject to many moving parts, so proper planning is vital to the overall success of the sale.
We generally recommend that business owners begin planning for the sale of their company at least two years prior to exposing it to the open market, as it takes time to execute strategies to maximize the selling price, and perhaps more importantly, the after-tax proceeds.
Similar to “home staging” in the real estate market, where a home is made more appealing to attract the highest price, there are various tactics a business owner can deploy to make their business more attractive to potential buyers, and therefore increase its selling price.
Some of the key considerations that influence the price of a business include, but are not limited to, the following:
- Financial Records and Performance;
- Competitive Advantages;
- Concentration Risk; and
- Working with Professional Sell-Side Advisors.
Financial Records
The most relevant financial records are profit and loss statements, balance sheets, and tax returns.
Having accurate, timely, and clean financial records allows potential buyers to form a better understanding of the performance of a business, and can aid in identifying areas of improvement. This reduces the potential impact of unknown variables and risk, which makes the business and the seller more credible, and thus, positively impacts the sale price.
Clean financial records will make it easier to identify any non-recurring, discretionary or personal expenses in the income statement. Furthermore, any non-operating or “redundant” assets and liabilities can be removed (e.g. real estate, portfolio investments, related party/shareholder loans), in order to ensure only operational items are included in the sale.
Recent Performance
Timely financial records are critical, as buyers want to know how a business is currently performing, in order to assess whether the historical results are a fair reflection of the future. Valuations and selling prices are always meant to be forward looking, but it is historical information that often provides the strongest indication of future value, particularly for smaller owner-managed businesses.
Recent financial performance tends to have the most significant impact on the price of a business to a prospective buyer. Sellers tend to benefit where they have demonstrated growth in both revenue and cash flow, and where there is a reasonable expectation that growth will continue. In addition, sellers should focus on sustainable, recurring revenue, rather than one-time deals. In the years leading up to the sale, sellers should undertake measures to increase cash flow, either through cost control measures and/or increasing revenue.
Competitive Advantages
In a broad sense, a competitive advantage can refer to factors that allow a business to generate profits more efficiently than its competitors, either due to the perception of higher quality products and/or services, which influence pricing, or its ability to produce goods or services more efficiently than its rivals. In either case, additional revenues and/or higher margins can be generated compared to competitors.
A business should understand and emphasize the sustainability of its competitive advantages in the marketplace, as a prospective buyer will pay more for a business with strengths that cannot be easily duplicated by competitors.
Concentration Risk
A high level of reliance on a small number of customers, suppliers, or even employees can make a business seem riskier to potential buyers. Diversifying the customer base can result in more stable revenue, thus creating more sustainable value for the business that is less susceptible to loss of a specific customer. Having multiple supplier options, particularly for key inputs, can allow a business to naturally hedge against changing prices and logistical issues. Finally, decentralizing management and key decision making can reduce the risk of loss of any one person, and ultimately make the business a more “turn-key” asset.
Working with Professional Sell-Side Advisors
Working with professionals can have a variety of impacts on the sale price of a business and ensure that the previous recommendations are implemented to maximize the sale price.
For example, professionals can help sellers understand the fair market value of their business, and ensure that price expectations are consistent with market dynamics.
Professionals can also help sellers to market the business to a larger pool of potential buyers, particularly those who are able to obtain the related financing to close a transactions.
Finally, skilled advisors can assist with pre-sale tax structuring opportunities, and can support the due diligence and negotiation process that can potentially unravel a deal.
GG Observations
At Grewal Guyatt LLP, our team of experienced professionals can assist you with the full scope of services involved with selling your business by providing valuation, tax planning, marketing and other advisory services to maximize the proceeds, while dealing with the complex intricacies of the sales process. Obtaining the services of an experienced advisor will provide you comfort and allow you to make an informed decision regarding the sale of your business. Please do not hesitate to reach out for more information.
