Entrepreneurs who are contemplating selling their company and moving on to the next chapter of their life typically have this burning question: “How can I get top dollar for my business?”
At Balentine, when we respond to this question, we begin a discussion about value. Every business becomes more valuable when it is producing strong returns, leading its market niche, and poised for growth. Popular services or products that are free from hidden liabilities and can scale up for growth are well positioned to attract buyers with deep pockets. Even businesses that are not yet profitable can be sold based on the promise of future returns.
Consider the similarities between selling a business and selling a home. Smart sellers get their house in order. They tend to details, both cosmetic and foundational. They have the gutters cleaned, rugs shampooed, and holes in the roof patched. They make a list of major upgrades they’ve completed, get the property surveyed, and inspect every corner for issues that might scare away potential buyers. For owners who have been keeping up with these issues all along, the sales process is much easier and potentially more profitable.
Adopt the mindset of always running your business as if it’s for sale.
In the same way, it’s far easier to command a high price for your business if you’ve kept up with housekeeping and maintenance. That’s one reason we suggest entrepreneurs adopt the mindset of always running your business as if it’s for sale. With this philosophy, you stay on top of the myriad details and issues that go into building and retaining value of your precious sweat equity.
The following three strategies will help you position a business for a sale. By keeping up with these tasks, you are poised to ultimately earn more for your venture, whether you’re planning to exit this year or in ten years.
1. Be Diligent about the Paper Trail
Every business has critical documents that are foundational to operations and will be inspected by prospective buyers who are undertaking due diligence. You want to keep all these important documents up to date and easily accessible. For example, you want to have current:
- Corporate documents
- Real estate deeds
- Equipment leases
- Insurance policies
- Tax returns
- Balance sheets
- Loan statements
- Audit statements
- Business continuity and risk management plans
- Proof of protected intellectual property, such as patents and trademarks
- Non-disclosure, non-compete, and non-solicit agreements, when needed to protect business-critical intellectual property or sales territories
2. Make Yourself Replaceable
Entrepreneurs who sell their business to investors but remain on to run operations often complain that they feel like an indentured servant. They retain many of the same headaches and responsibilities they had as CEO, but with a new boss and fewer of the perks that go along with ownership.
In my experience, the very best exits involve selling a business, not a person. A business attracts the most sale value if it is sustainable and capable of operating successfully without you, its current leader, at the helm. You need a clear succession plan that allows for new management and clear documentation that captures all functional procedures and policies, so that institutional knowledge is retained.
One company founder did a great job of preparing strategically. Two years before he intended to put the firm up for sale, he made himself chairman of the board and promoted an internal candidate to CEO. Then, when he later pursued a sale, the private equity firm that emerged as the top bidder could see that there was a proven and professional management team in place. They had confidence that the company’s fortunes didn’t all rise and fall with one individual. They were buying a business, not the founder’s personality.
Deals can have different structures, and it may be necessary for a founder to work for the acquirer for some period of time. But long-term, the only way that you're going to be able to leave after a sale is if the acquirer determines you are no longer essential for the ongoing success of the business. That means you have to deputize and hire people around you who can continue to grow the business.
3. Reinvest for the Future
Growing and protecting any business is much like farming. You nurture the soil so crops are more likely to grow well. If you get complacent and don’t attend to all the elements that can go wrong, the seedlings could get eaten by predators or wither and die. If you stop planting and tilling the next 40 acres, the harvest could dwindle.
One of the most important decisions entrepreneurs make is how much of the profits to plow back into the business. Certain industries are especially vulnerable to market shifts and need ongoing research and development to ensure the company stays competitive.
The Eastman Kodak Company, founded in the late 1800s, serves as an example of what happens when a company doesn’t put enough resources back into the business to position itself strategically. During the 20thcentury, Kodak became such a dominant presence in the photographic film market that its advertising slogan “A Kodak moment” entered the common vernacular. Yet when digital imaging emerged, Kodak failed to quickly embrace the new technology. By 2012, the company had sold off valuable patents and still lost so much market share that it filed for bankruptcy protection.
Sometimes, the competitor that takes you out is the one you don’t see coming.
Not every business owner is motivated to grow an organization to its highest possible long-term value. Some are satisfied with a smaller operation from which they harvest cash and finance their lifestyle. They stay in their comfort zone, but also face the risk that market forces could shift over time and potentially devastate the harvest. Sometimes, the competitor that takes you out is the one you don’t see coming. In addition, a lifestyle business commands a lower price when it comes time to sell.
Family businesses may face internal tensions over such priorities, with differing opinions about how much money to distribute to shareholders versus how much to reinvest. One multigenerational company had survived and thrived over three generations until recently, when two siblings shared control. Sue became the CEO, overseeing the day-to-day operations, while her brother, Scott, followed his muse to become a performing artist engaged in cultural pursuits. From her perspective inside the company, Sue saw an urgent need for the business to invest in new technologies and ramp up its marketing campaigns. Scott was uninterested in any steps that reduced cash distributions required to maintain his lifestyle. The siblings remained at odds until Sue finally bought out her brother’s share. With full control, she could steer the company for long-term growth and position this important asset to survive for future generations while maintaining family harmony.
Any time excessive cash is being harvested out of a business, potential buyers recognize greater risk and won’t pay as much. Business leaders need to stay informed about their products, services, and marketplace, so they can make calculated investments back into the business. We recommend you get into the habit of regularly tracking your company metrics, or key performance indicators, so you have data to inform reinvestment decisions.
Value creation comes from underlying real growth rather than simple financial engineering. If you practice making thoughtful decisions about reinvesting versus taking money out of the business, the company’s profits and long-term growth can become optimized. This, in turn, will bring you higher multiples at sales time.