Business Transition

Closing in on Transition - Capturing Maximum Value for your Business

Closing in on Transition - Capturing Maximum Value for your Business
 

Even business leaders who have done everything right find that a successful transition takes preparation, patience and time. 

According to a recent SunTrust study of 532 business leaders, 8 percent say they plan to sell the business to another firm, 6 percent plan to sell to current employees and 5 percent plan to transition the business to family.

On average it takes 6 to 12 months to complete the sale of a business ("Know when It's Time to Sell Your Business", 2013), not including preparation. If you are considering a transaction or transition within the next few years, the time to start is now.

Getting your Business Ready

No one wants to sell at the wrong time.  You can mitigate some of the timing risk through analysis that studies:

Overall Market Conditions

Start by re-looking at the overall market conditions for your industry.  Selling always takes longer than you think, so think about conditions today as well as projections for the next few years.  Mr. Hluck advises, “Get a feel for the appeal of businesses in your market by looking at recent, comparable sales in your industry. Look for strategic industry players who have an appetite for a company like yours as well as for private equity and investor groups active in your market.”

Layer on your business performance and trends.  Mr. Hluck continues, “Ask yourself if your business is positioned to take advantage of market conditions.  Will a prospective buyer find your plans and strategies valuable in the current and future environment?  Are you poised to grow, hold steady, or show a slight decline in revenues or customer sales streams?”

Value Levers for your Company

Many firms use business value as the primary metric for actions they take in their businesses.  Business value becomes even more important nearing a sale. Understand where business value can be created for your company, the value levers, and focus on them as you prepare for the sale.  While value levers vary widely by type of business, industry and company strategy, zeroing in on the fundamentals of where your company makes money and which investments translate to returns is a great practice.  Buyers assign value to ease of transition, particularly to a skilled employee base and to sophisticated operating and administrative processes. Performance measurement is critical when you need accurate metrics to present your sales story to potential purchasers.

Mr. Hluck advises, “Economic performance and profits are usually the main levers.  But, ensuring that your business will successfully carry on after you leave creates tremendous value for a purchaser.”

 

Start Developing your Advisory and Execution Team

Once you have decided to sell or transition, communicate your intentions with the stakeholders of your business. These stakeholders may include the Board of Directors, other partners/owners and upper management.   Even sole proprietors need to keep stakeholders like spouses, family members and management teams apprised.  Start these communications as soon as the sale decision is made.   

You will need an advisory team to help with the transition.   External advisors allow you to keep running and growing the business, without slowing the business sale process.  Key team members may include CPA, financial planner, business broker or consultant, SunTrust Relationship Manager and outside legal counsel.  These professionals can review your business, help organize documents and suggest others who may be necessary for the sale, such as investment bankers, marketing or public relations professionals.  In some cases, your team may connect you directly to potential buyers.

The proceeds from the sale of your business will become your personal funds.  Work with personal financial advisors before the sale to create a personal financial plan and review investment options aligned with your goals.  Engage private wealth management advisors and retirement investment professionals well in advance of the sale to build plans that protect your wealth going forward.

Understanding the Process and Mechanics of a Sale

Many owners have not been through a sale before and are not familiar with final preparatory steps.  Mr. Hluck says, “Remember that crisp execution of the sale mechanics reflects well on your execution capabilities in the core company and helps prevent speed bumps in the sales process.” 

1) Get Financials and Legal in Shape

Organize your financial books.  That means financial statements that follow Generally Accepted Accounting Principles (GAAP) and are audited over multiple years. Minimize working capital and sell off obsolete inventory to avoid transferring assets that are often not “paid for” in the price.  Ensure that patents or intellectual property are appropriately documented and will transfer with the business.

Keep key employees and management onboard by ensuring their contracts are in order and by providing them incentives to make the sale a success.  Potential purchasers will often want the option to retain the management team and core employees. 

Identify any contracts or leases that should be conveyed with the sale. Shore up vendor, supplier and customer contracts, ensuring they are all up to date.  Remember to make sure all licenses and permits are current.  Your business will be more attractive to a buyer if all your paperwork is in order.

2) Determine the Value of your Company

Your advisors can help you set the asking price of your business.  Use their financial and market expertise to review the sales trends of peer companies in your industry.  They will advise you on multiples and recent comparable sales.  They will also guide you in setting a price that balances securing full business value for the ownership team against the need to expedite the sale and closing process.

 

3) Develop a Marketing Plan

Potential purchasers generally realize that you know the business better than they do and want to hear your presentation of its prospects.  Well organized financial records are a must. A treatment of product attributes, access to markets, brand names, distribution channels and intangibles such as vendor relationships, operations and systems development, customer loyalty and personnel management should be included in any marketing materials. Include any other plans that can help the purchaser feel confident in the operations, finances and viability of your business.

4) Identify Prospective Buyers

Whether selling through a confidential sale or a public auction, buyer outreach is one of the most exhaustive steps in the sales process.  You and your advisors should use all available data to review competitors, customers, employees, suppliers, private equity firms and any other firms that are suitable as a strategic or financial buyer.

If keeping the sale confidential, your advisors can help you reach out to appropriate parties.  If you go the public route, you can get the word out in relevant trade publications to gain additional exposure that will either attract suitors or help them assign a higher value to the company.

5) Negotiate and Structure the Deal

There are many ways to structure your deal:

Negotiation Components

Non-compete agreements - Typically, the purchaser will request that the selling owner agree not to engage in a similar business that would compete with the existing business for a stated period of time.  Non-compete agreements provide assurances the seller's personal skills will not be used competitively against the company.  As a seller, before signing a non-compete, carefully consider how competitive prohibitions fit with your future plans.

Management participation in transition – Depending on the type of transaction, including management in the structure of the sale, with a guaranteed length of employment after the transition, will foster loyalty, help assuage any employee fear of layoffs and ensure the business continues to operate consistently after the sale.

Deal Structure

Assets vs. Stock - In an asset sale, the buyer purchases individual assets of the company, such as equipment, facilities, licenses, inventory, etc., but not the legal business entity.   The buyer can specify the assets they want and exclude others.  A stock sale transfers ownership in the legal entity, allowing the purchaser to "step into the shoes" of the seller.  Here, the purchaser assumes all liabilities and obligations. 

Seller financing vs. all cash - Seller financing accelerates the sale process, and attracts more buyers since buyers need less cash down. Seller financing sends a strong signal that the seller has faith in the viability of the business.  An all-cash transaction allows the seller to leave the business with all funds upfront, and eliminates any future obligations of the purchaser to the seller.  

6) Review any Legal, Regulatory or Anti-Trust Issues

Your legal advisors should review any possible regulatory issues that need to be considered and advise you on how to structure the sale to avoid problems and complete the transaction successfully.

Getting Started

If a sale or transition is part of your plan over the coming years, you should already be started with planning.

The Six-Year Plan - A Fresh Approach to Planning Keeps Your Ultimate Goals in View outlines a process for longer term planning culminating in a sale. This process can help you in deciding whether now is the right time or whether you have more work to do on your business before selling.

It is vital to include your SunTrust Relationship Manager and other advisors in the decision making process.  Your Relationship Manager can help you think like a buyer and anticipate the financial, market, and operational data a buyer wants.  SunTrust has the know how to assemble and package your story for the buyer. 

Talk to your SunTrust Relationship Manager or visit suntrust.com to understand how SunTrust can help you in your sale process and put you in a position to see your transition strategy to reality.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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