Drive Value Prior to Your Exit - O'Keeffe and O'Malley

Drive Value Prior to Your Exit

Apr 13, 2016

In a perfect world, a business owner would start and build their company with some end game or exit plan in mind. In fact, 96% of all business owners agree that they should have an exit plan in place, but only 18% of them actually do. Ideally, business owners would begin executing their exit plan two years in advance, with one year as the very minimum.

Having a plan in place allows owners to focus on those issues that drive the value of the business as the business grows, rather than waiting until a buyer becomes interested. For example, while acquirers look at five-year trends of revenues, expenses and changes on the balance sheet, the most influential data that can impact a business's value are the most recent 12 months or the "Trailing 12 Months."  Buyers who wait to change "value drivers" until a buyer is just starting to look at the business leave a lot of money on the table. Most acquirers won't pay for reduced expenditures that haven't happened yet, even though it's the future earnings the buyer is really purchasing.

Remember that every dollar that an owner can generate in additional profits can often generate $3, $4, $5 or more in additional selling price. That means that $200,000 in additional earnings might bring $600,000 to $1,000,000 or more in selling price.

Also consider whether key customer and vendor relationships are dependent on the owner. Buyers want to see transferable relationships that won’t be overly vulnerable to competitors once the owner departs. Develop a strong management team to back up the owner. Otherwise, the owner will need to stay on board working with the buyer for an extended period of time and the selling price may be paid out over time.

Key employees are a threat to become competitors. Having employees sign non-compete and confidentiality agreements before they find out the business is being sold keeps you in control and will comfort a buyer’s anxiety. Make sure employees are cross-trained in multiple areas of the business, as this minimizes the negative effects of employee defections before and after a sale.

We recommend business owners conduct a pre-due diligence of their own organization. Letters of Intent (LOI) often fall apart because of unknown items that come up in due diligence or because the due diligence process drags out in an attempt to address certain issues that would have been resolved if known earlier. Identifying hidden skeletons prior to selling allows owners to resolve issues on their time frame. Having a pre-due diligence package assembled prior to selling comforts and impresses buyers, plus it speeds the selling process towards closing after an LOI is executed.

The above examples are just few ways planning and focusing on those disciplines that drive the value of the business can amount to some serious dollars when selling. They may even make the difference in whether the company sells at all.

Please contact us for additional "value drivers" that should be part of your exit plan.