Once business owners have made the decision to sell, they should begin to focus on maximizing the value of the enterprise. One key area of focus, on a long list of items, is the people working for the business.
One of the most common issues lowering the enterprise value for sellers of small and medium-sized businesses is the misperception of buyers that upon the sale of the business and ultimate exit by the seller, the business will struggle to be as profitable. Whether correct or not, once this perception arises it can be difficult to convince a buyer otherwise. To ensure this perception does not affect enterprise value, a seller should proactively take specific actions to mitigate this perception and thereby maximize value.
Ownership team
If a business has a single owner, it is simple to determine whether the owner will exit immediately upon sale of the business or at some point thereafter. With multiple owners, though, what is often not discussed is what each owner wants to do following the sale. The buyer may want all of the owners, or sometimes select owners, to continue working with the business for a transition period or retain an ownership interest in the business for a few years post-transaction. These are safeguards utilized by buyers to ensure the goodwill of the business is transitioned to the buyer smoothly and relationships are maintained.
Owners should identify how long they are willing to stay involved in the business and to what extent. Are they willing to work full time or consult on a part-time basis? Are they willing to retain a small ownership interest in the company in order to realize potential additional upside on the future growth under new ownership?
Management team
One of the first questions sellers ask themselves is, “If I left the business tomorrow, could it operate with the current employees in place?” Though the answer is typically yes, it pays to identify and address any “buts” ahead of time, so they do not become value detractors to potential purchasers. By being able to demonstrate to a potential purchaser that these issues are manageable, sellers reduce the risk of these becoming either “deal-killers” or opportunities for a buyer to seek a reduction in price.
If sellers are not certain management can run the business without them, it is important to begin a transition of roles to capable individuals ahead of a transaction. If the company does not currently possess any such individuals, hiring capable successors in senior roles prior to entering a sale process is likely the seller’s best course of action.
An issue owners may not contemplate before beginning a sale process is at what point to let the management team know about a potential sale. Management is typically not advised until closer to the conclusion of the transaction, which often leaves the business owner, the advisers and potentially the buyer with incomplete information. This approach can often result in discounts to enterprise value.
Formalizing relationships
A family business can sometimes be run with a degree of informality including the manner in which key agreements with suppliers and customers are agreed to. Owners are comfortable with these arrangements, as they were developed through long-term relationships. For buyers, however, these parties may be new to them, and they don’t have the same level of goodwill built up. Where possible, the seller should formalize these arrangements to remove any perceived risk.
Once business owners begin to consider selling their business, they should think about what actions they can take in respect of themselves, their management team and their business relationships, in order to maximize value. It is also worthwhile to look at the business from an external point of view and identify what can be done to make the business more appealing for buyers.
For more information, please contact Daniel Coombe, vice-president, MNP Corporate Finance Inc., at 778-374-2119 or [email protected].
