Blog Five Strategies to Dress Your Business for SaleNovember 07, 2019
We’ve recently spent some time talking about succession and transition options from your family business, including the value you can receive from each.
Of those options, we’re turning our attention to selling your business, either to a third party, key employee or family member.
With that, we recently sat down with Karen Knowlton CPA CA, a partner at Stawowski McGill, to discuss strategies you should consider when looking to build value within your company. Karen is part of our network of specialists that we work with to ensure all planning recommendations work in harmony with one another – not in silos.
Here are five recommendations she shared with us:
1. Solid Management Team
Having a solid management team in place allows you to distance yourself from the day-to-day operations and, instead, focus on the strategic ways to add value to your organization. An acquirer will reduce their offer significantly or become uninterested entirely if they believe the company’s value could walk out the door with the vendor.
And yes, taking that step back will mean giving up some control of the day-to-day functions. Your transition from the day-to-day won’t happen overnight. You will need time to find and groom the right people to fill the right seats within the team. Expect that your management team will approach things differently than you may have done in the past. If they understand the business, then different approaches can, in fact, contribute to your organization’s value before your exit, as well as the evolution of the business after you leave.
2. Clean Financial Records
Be clear on how certain decisions will impact the financial health of your company. Know what you’ve invested in assets, and how those investments have or will impact your company’s bottom line. Clean financial records will speed up the sale of a business, especially as acquirers begin the due diligence process. If you don’t have a handle on your finances or don’t know where those pockets of value are in the business, your sale proceeds can be limited. Worst case, the deal can fall through.
Also, ensure your business is run with the integrity of a much larger business. Eliminating personal transactions from the business is essential. Smaller family-run businesses tend to blur the line in this regard to realize tax advantages. It can become difficult to untangle the two when it comes time to sell.
3. Capital Expenditures
While a shiny new fleet of trucks might be nice, will it provide you a return on your investment at sale time? Regardless of whether you’re looking to sell, investing in capital expenditures should occur when you know you’re going to earn a return on your investment in the ongoing growth of the business. A new Enterprise Resource Planning (ERP) system might seem like a worthwhile investment to the vendor, yet the buyer may already have one so the amount invested in this technology may be lost capital.
Every industry will be different. Knowing your industry and the technology that is creating opportunities for innovation and efficiencies will be key to deciding if the expenditure will create the return you, as the owner, or them, as the potential acquirer are looking for.
4. Limit Cash Flow Risks
Customer diversification is paramount. Don’t limit your base to just one or two significant customers. A widespread customer base mitigates risks to your business if one of those customers decides to make a change.
Understanding the economic climate around your business and getting ahead of changes can be tricky but crucial in salvaging value in the business. Business owners that can predict the changes and make tough decisions will go farther for longer than their competitors.
Lastly, minimize the value of assets in the business that are creating a lazy balance sheet, such as cash or other liquid investments. It could minimize negotiations with the buyer on the working capital adjustment.
5. Plan Ahead
It has been said before, but needs to be said again. Whether it’s cleaning up financial records or creating a trustworthy management team, you need sufficient time to do it right – anywhere from three to five years before you sell. You don’t want to wait until you have to sell the business to be able to exit. You want to time it right to realize the most value for your business.
In addition, there are tax planning efficiencies gained if you plan well in advance. The lifetime capital gains exemption allows you to reduce the amount of tax you will pay on the sale of your business if your business meets the criteria leading up to and at the time of sale. Getting ahead of the game by talking to an advisor can lead to significant savings, especially in the area of tax.
Lastly, be prepared that the sale process can be time-consuming and emotionally charged. You’ve put your blood, sweat and tears into building the business, so take a strategic approach in selling. It’s important to balance your time and energy between running your business and moving the sale process along as statistics show that many first time offers don’t materialize into a transaction.
If you are looking to start planning for the sale of your business, the advisors at Three60 Wealth & Estate Solutions can help. Three60 Wealth & Estate Solutions helps business families reclaim their time, gain peace of mind and achieve their own unique version of success. The team of Calgary-based wealth and estate planners have curated a trusted network of professionals to eliminate your planning blind spots and identify potential opportunities you may not realize you have.
For a truly different financial planning experience, contact our office online or at 403-640-4414 to schedule an introduction meeting.
Authored by: Jason Nagel, Director of Advanced Planning at Three60 Wealth