AN EXIT STRATEGY TAILORED TO YOUR NEEDS

There are numerous buyers in the market, continually seeking out operationally attractive businesses looking to be sold. But not all potential buyers are qualified to purchase your  business. Why? Some are very price­ focused and unlikely to place the same value as you do on the customer base being acquired which is the business’ principal asset. Others will have insufficient credit-worthiness to obtain debt financing needed to purchase your business. And others may acknowledge the value and negotiate an agreeable sale price, but then use tactics such as unfair contract terms and conditions that, if left unchallenged, would place you in an unenviable position post-closing.

So how do you avoid the assortment of unqualified buyers and identify those who are qualified to end up with a satisfactory outcome? Hiring a competent business broker (a/k/a intermediary) as part of a transactional advisory team will help you navigate such landscape for which a typical seller has never encountered before. An experienced broker will be familiar with the pool of available buyers and pre-qualify each one of them in the early stages of the selling process. During this phase only qualified buyers will make it to the negotiating table.

Marketable Qualities Lead to High Value

Rarely are two businesses so structurally similar to simply say they’re of equal value to a buyer. Sure, each one may generate $1 million in revenue, and so applying a 1.2x multiple says they’re each worth $1.2 million. But that isn’t a true reflection of what sets your business apart from the competition. It’s not just about gross revenue or net profit. It’s about EVERYTHING concerning the business; recurring vs one-time revenues, profitability, quality of customers, service experience, management oversight and direction, software systems, business processes and procedures, etc. And these are all factored and measured against the average mix of industry peers in your local area, state, or region in order to determine what your asking sale price should be.

Without even involving your accountant, the table below gives you a quick snapshot of how businesses are measured in terms of marketable qualities, those that will set your business apart from the competition, and will be of most value to a prospective buyer.

	High Value	Average Value	Low Value
Customers Under Contract	80-100% under Contract	50%-80% under Contract	Less than 50% under Contract
Average $ per Hour for services	Above Industry Average	Industry Average	Below Industry Average
Gross Margin	HIGH (Optimized Costs)	AVERAGE (Analysis is Needed)	LOW (High Operating Costs)
Customer Loss or “Churn”	Less than 1.0% per month	1.0 – 2.0% per month	More than 2.0% per month
Business Processes	Repeatable & Streamlined	Consistent but Inefficient	Inconsistent & Inefficient
Employees	Experienced / Happy Employees	“Mixed Bag” of Employees	Inexperienced / Unhappy Employees

Notice that quantity of customers isn’t even part of the discussion. That’s because your High Value business with $1 million in revenues has fewer, but higher quality customers, with predictable revenue streams at higher gross margins, and with streamlined operations ( e.g. efficient route management), as compared with a Low Value business that generates the same $1 million annually but lacks all of the other valuable marketable qualities. Which business would you want to buy if the roles were reversed? Wouldn’t you rather pay a market premium for a High Value business that provides both immediate and long-term returns? Absolutely!

Now that we have a clearer understanding of marketable value, let’s look at the decision-making process itself.

Going Forward with a Sale Strategy

The decision process leading to the sale of a business is of a highly personal nature and no doubt carries its own emotional baggage. Depending on your age, the decision process requires you to objectively begin with establishing achievable personal and financial goals over a 5-25 year timeframe. Enlisting the services of a trusted adviser will help pull it all together in terms of validating financial assumptions, reviewing accounting reports, accurately determining and negotiating price, providing due diligence support, and helping conclude the sale with the highest possible after-tax payout to you.

After making a complete and honest assessment of your personal, business and financial goals, it’s time to do some “housekeeping” and take preliminary steps below leading up to the point of engagement for marketing the business for sale.

1. 1. Financial Statements – make sure all of the accounting records are in order. Accuracy counts, especially with respect to determining maximum valuation, as well as during the due diligence and contract negotiation processes.
   2. Customer List – make sure this list is up-to-date. A mix of commercial and residential accounts who have signed renewable, transferrable multi-year contracts are ideal as they generate a recurring revenue stream that buyers desire.
   3. Trusted Adviser – not all business brokers are created equal. Enlist and retain the services of an experienced advisory team having both operational experience and multi-disciplinary skills in accounting, mergers & acquisitions, legal, tax and estate planning areas, as these are all important aspects of achieving a successful deal.

Developing an Accurate Valuation Model

The pro forma Income Statement (“P&L”) and Balance Sheet have been prepared and reviewed for accuracy (Step 1), thus providing a high level of confidence in gross profits and profitability. The Customer List has been vetted (Step 2) to include those customers who will be retained under new ownership to contribute recurring revenue after the sale is completed, and either exclude one-time customers or put them on a marketing lead list. The Trusted Adviser (Step 3) then follows a formalized process to (a) analyze the primary set of accounting records, (b) identify and extract incremental value hidden within your operations software (e.g. CRM, ERP/MRP, etc.), and (c) develop an accurate valuation model not just based on revenue, assets and marketable qualities alone, but one that also incorporates strategies to maximize after-tax proceeds aligned with your overall financial goals.

Let’s look at the various valuation models many brokers use to determine a sale price, with the understanding that each valuation model by itself is fundamentally flawed.

1. Valuation Based on a Multiple of Earnings

Valuation may be based on a multiple of annualized free cash flow (aka EBITDA), with earnings adjusted upward for any owner discretionary expenses (“perks”) claimed as business expenses on the P&L. Where market data is available about recent transactions, an average of the multiples paid for similar deals in a local or metro area market could be applied even though not necessarily an “apples to apples” comparison with your own business.

2. Valuation Based on Revenues & Expenses

Although an easy way for brokers to apply an industry average multiple to your Gross Revenues alone, valuation as a multiple of revenues is an overly simplistic “rule of thumb” model and the most inaccurate one to use given all companies have different Gross Revenues, Direct Labor Costs, Gross Profit Margin, Selling & Marketing Expenses, as well as General and Administrative Expenses. Again, this type of approach typically results in a less than favorable deal outcome for a seller.

3. Valuation by Comparative Market Analysis

Unlike a typical real estate transaction which becomes public knowledge, we often hear in the trade press about M&A deals being completed, but without disclosure of the financial terms. Price multiples (tied to revenues) are rumored to be between ‘X’ and ‘Y’, along with other key financial terms. Confidentiality Agreements prevent advisers from sharing these details with the public making better analysis difficult. Comparative analysis is therefore generally anecdotal rather than quantitative and should be considered inaccurate.

Although the above models could provide you with a rough estimate of value, a trusted adviser with industry-specific experience and multi-disciplinary skills will collect and disseminate all internal knowledge and external data to develop a multi-faceted valuation model. Better than any other, this complex but more accurate model will provide the documented evidence needed to accurately represent your High Value business and achieve a maximum sale price from a buyer.

Getting to the Negotiating Table

With the help of your trusted adviser, a selling price is established and presented to one or more qualified buyers expressing an interest to purchase your business. With company records in order and your trusted adviser at your side, getting a Letter of Intent and offer price by the leading candidate greases the skids and makes their Due Diligence task a less onerous, more straightforward exercise. There may be multiple qualified buyers “in play coming to the negotiating table creating a potential bidding war and driving up the sale price. And after they have studied the books and looked at your operation at a high level, those who are serious will be ready to present an offer in the form of a Letter of Intent (aka Term Sheet). Your trusted adviser will also tell you when reasonable concessions or different terms should be considered if negotiations have stalled at any point in the process. In the end, you must do what makes sense for you, but a win-win approach should always be part of one’s thinking.

Closing the Deal: Signing on the Dotted Line

With a signed LOI in hand, Due Diligence commences with a thorough review of the business, and assuming no deal-breaking items are discovered, a definitive Purchase & Sale Agreement (and other ancillary legal documents) are then drafted and reviewed by your trusted adviser and a competent lawyer with merger and acquisition experience. Any final changes, additions, and deletions are incorporated and the contract signed with a subsequent closing date selected to consummate the transaction, conditioned upon satisfactory completion of the buyer’s due diligence and representations and warranties made by the seller. Once this is done and any other conditions satisfied, the deal is concluded and funds and assets exchanged by the parties to finalize the transaction.

What You Need to Know

• There are both qualified and unqualified buyers out there
• The accounting records and books must be in order
• The customer list must be up-to-date
• Look for a trusted adviser who knows your industry and can advise you on all topics related to the sale of a business: accounting, business software, legal, tax, and retirement- related issues
• Understand how valuation models are not all created equal
• Rest assured the due diligence process will be less painful than a visit to the dentist
• Your business is valuable and therefore an attractive purchase opportunity for the RIGHT buyer(s)

What We Recommend

If you are thinking about selling your business but aren’t sure what your business is worth or how to go about initiating a sale, we are here to help you. Contact us for a free 1-hour exit planning consultation. It is confidential and without any obligation. You only have to share a few things about your business, and we will make an overall assessment and answer your questions. This free consultation should help you in making sure that such a life-changing decision to sell is right for you.