Eventually, all businesses are either sold or ownership is otherwise transferred. How do you, as a business owner, make it more attractive to buyers and increase its exit value to you? Below are a few critical best practices for you to implement and ways a business attorney can assist in the process.
Motivated Management Team
According to a recent Bain & Company survey[1], talent retention is the second most important factor in acquisition success. Accordingly, retaining and motivating top talent is crucial for maximizing the sale value of your business. Your management team needs to be equipped with the necessary skills to grow and drive your company when you exit. A management team that is motivated and capable to address the challenges ahead will show buyers that your business’s value is not dependent solely on the company’s owner(s). Well-structured employment agreements and incentive programs are an integral part of this. An attorney skilled in employment law can review your current policies, procedures and employment agreements and assure you have best practices in place to meet your value building goals.
Multiple, Recurring Revenue Streams
Your company will be more desirable to potential buyers if its revenue is stable and diversified. For example, recurring revenues, such as those from long term sales contracts or software as a service (SaaS) agreements, demonstrate to a buyer that they are likely to continue into the future. Additionally, more than one stream of revenue reduces the risk that any single service or product may suffer a downturn or even fail in the market. Buyers will be far more willing to pay a premium for a company that can show predictable future revenue. A business attorney can assist by crafting customer agreements, from terms of sale documents to service level agreements, which assure the rights and obligations of both parties are protected and clear.
Scalability & Growth Plan
Buyers want to know that your company can continue to grow and create value for them. The vehicle for doing this is a realistic, written business plan that shows the potential for profit and growth. Does your company have new products in the pipeline for future release? How can your business be scaled if additional resources are available? Can your business model be extended to enter new markets successfully? These are just a few examples of factors that you can use to demonstrate what your company’s future growth potential is for buyers.
Customer Diversification
If the largest customer of your company left, what would the impact on your business be? Usually, if a single customer makes up more than 10 percent of a company’s revenue, it will affect the value of a company due to the risk that losing that customer will have a significant impact on your business. A business we worked with had an automotive aftermarket parts customer that comprised 85 percent of its sales. One day, the customer called and said that it would not be placing further orders for at least nine months because its inventory levels were too high. The company struggled for five years to grow its then nascent medical and building product lines, each with multiple customers, to a level that would allow it to withstand another such shock from its automotive business market segment.
Financial Controls & Systems
When selling your business, buyers will look closely at your company’s financial information as part of their due diligence. They want to assure themselves that they will be buying the value generating capability that you have said they will be getting. It’s about credibility. This means that the quality of your financial information will have a big impact on how well your company sells or whether it sells at all. Buyers also want to know that the systems are in place so they have the necessary information to manage the business and accurately track its results. We worked on a matter where the financial records were in a shambolic state. Although the buyer was essentially acquiring the customer list and the gross profit could be verified fairly easily, the buyer’s team lost trust in the seller and the deal fell through.
How an Attorney Can Help
In today’s business environment, it takes a team of professionals with the specialized skills and experience to assist the business owner in executing a successful business sale that maximizes the value of the sale to the owner. A business attorney is an integral part of that team. The Law Offices of Katharina Martinka has had almost 20 years of that in-depth experience assisting business owners in successful business exits.
If a specialty area falls outside our capabilities, we can recommend another very capable attorney with that expertise and with whom we’ve had experience. We can also refer professionals in other disciplines, such as investment banking, valuations and tax, who can round out the team. For example, we have worked closely with Tech Coast Equity Group in Orange County, CA, which provides a broad range of strategic services to business owners and buyers, throughout the planning and transaction closing phases of an exit.[2]
Although a business can be taken to market at any time, it typically takes at least two years prepare it for sale and position it to maximize sale value for the owner. Most steps to do so constitute best business practices and will yield results along the way, as well as upon exit. The further you plan ahead, the greater your yield will be upon your exit.
Note that these are but of a few of the key ingredients needed for a successful, high value business sale. Please contact the Law Offices of Katharina Martinka for any questions you may have or for further insights.
[1] Sinead Mullen, Tim Leonard, and Marc Berman, “Reimagining Talent in M&A”, Bain and Company, Februay 8, 2022. https://www.bain.com/insights/reimagining-talent-m-and-a-report-2022/
[2] Tech Coast Equity Group services url: http://www.techcoastequity.net/services/