A survey of 230 of America's fastest growing companies (according to Inc. magazine) indicated that more than one in three business owners plans to sell their company within the next five years. Yet, a recent survey by Securian Financial Services found that more than 60 percent of business owners don't have an exit plan, but 78 percent anticipate the need for the business sale to fund their retirement.
Five years may sound like a lot of time to develop an exit plan, determine the value of your business and find the right buyer, but it's not. Selling a business is hard work. Waiting until you are actively selling should not be the first time you think about how much your business is worth.
While this may seem counterintuitive, the ideal time to start thinking about your business valuation and planning your exit strategy is when you start your business, especially if you have one or more partners. If that ship has already sailed, then the time is now.
You may be thinking, "But I just started!" or, "I'm going to pass this business down to my children, and then on to their children." Or, like many owners, you may believe that you are the source of any value your business might have.
The truth is, this kind of thinking often means business owners leave money on the table, missing key opportunities to increase the value of their business that could lead to bigger profits when it is time to sell. Another common scenario is a business owner closing up shop without exploring the possibility of selling the business, ultimately losing out on a major liquidity event they have been working towards for many years. So, what are some things a business owner can do to increase the value of the business now in order to maximize its potential down the road?
Three to Five Years Out
- Understand your "magic number." To fund your retirement goals, you must understand the amount of funds you need to live well into retirement.
- Understand company value now. Studies show that for most entrepreneurs, their business is their largest asset in their portfolio. A critical piece of information is understanding what your business is ultimately worth. In a best case scenario, you will find that you can comfortably retire today.
- Conduct a gap analysis and value enhancement. You have found that exiting your business will not fully fund your retirement. It's time to quantify the extra value you need to build into your business and implement a plan to achieve it. This might include revenue growth, new customer and industry segments or simply risk reduction in certain critical areas.
Two to Three Years Out
- Clean up your financial statements. This is particularly important if you are starting to think about selling. Regardless of the method used to value a company, the number one concern for a buyer is their ability to generate profit. The most reliable indicator of this ability is your past performance. Often obscured in past performance are items like "non-operational" expenses, one-time or unusual expenses and personal expenses run through the business and shareholder perks. A valuation professional can work with you to document those and build them back into the value of your business. This has a direct, significant impact on increasing both the actual and the perceived value.
- Implement your value enhancement plan. Grow revenue. Add product lines. Reduce unnecessary expenses. One of the clearest ways to enhance value as a construction company is to broaden your customer pool (too much work with a small group of clients is a red flag for buyers) and to seek out recurring revenue (and get out of the feast or famine cycle that some operators find themselves in). Your overall goal is to execute, execute, execute.
- Protect your assets. Work with your team to ensure your assets are well protected and you are well positioned to sell on a tax-favorable basis. Depending on the size of your company, this might include your CPA, a tax attorney or a trust-and-estates attorney.
One Year Out
- Confirm valuation and magic number. Time to revisit valuation and financial planning. Have you increased value as planned? Is your magic number still the same? If so, it is time to sell.
- Select your exit team. Selling a business is a complex process with a steep learning curve. An exit team often includes a transaction attorney, business broker or mergers and acquisitions advisor, your CPA and your wealth manager.
- Transition on your terms. Having worked your exit plan, now is the time to sell on favorable terms and enjoy your retirement.
Quick-Hitting Valuation Enhancement
- Control costs and keep your financial statements in good order.
- Market the overall business, not the business owner.
- Make sure you have the right employees on board and recognize their efforts. Retaining great people is far less expensive than recruiting and training new ones.
- Develop and embody an organizational culture and brand that is authentic, consistent and resonates with your clients, employees and other various stakeholders.