exit planning Archives - TAB Corporate

5 Things Strategic Buyers Will Look For in Your Business

Silhouette of businessman in keyhole
Is selling your company part of your exit strategy? Here are 5 big considerations a strategic buyer will look at when evaluating the value of your business.

1. Purpose for Buying

The first thing a strategic buyer will consider is their own purpose for being interested in purchasing your business. Some reasons a strategic buyer might be interested in purchasing your business are:

To gain market share and increase sales volume simply by eliminating a piece of the competition. Think about your company’s position in the market and how that position will help or hurt your ability to sell at a premium price.

To help the strategic buyer gain industry competencies in areas that their current organization is lagging. Take a look at your potential buyers and learn about their businesses. How does your organization differ from theirs in a way that will appeal to their long-term success?

To enter a new market. They may be interested in entering your geographic market, appeal to your demographic market, or to diversify their products or services—just as a couple examples.

2. Dependency on Current Owner(s)

The less dependent the sales and operations of the business are on you and/or other owners, the more valuable your selling price is going to be. A general rule of thumb is that no more than 10% of the sales of your business should be dependent on the efforts and connections of any one person—particularly the owner. Operations also need to be largely independent of your direct involvement.  Ask yourself (or, better yet, try it): Would my business survive for 90 days without me? If not, it’s time to start developing and executing a plan to make your business run without you.

3. Strength of CFO & Financial Records

This is a critically important factor that a strategic buyer will certainly assess. The lack of strong financial management and statements will usually cost you much more in the selling price than the cost of preparing them. If you are lacking in this area, consider working with your CFO to bring in a 3rd party financial expert who can help bring systems and statements up to date.

4. The Strength of Your Management Team and  Information System (MIS)

Excluding yourself, how strong is your existing management team? Is it strong enough to stay in place and be able to run the business when you are gone? How strong is the relationship between your management team and suppliers, clients, and employees? Does it consist of young blood that a strategic buyer can expect to develop to improve processes and assets in the future? A strategic buyer will be considering these questions when reviewing the strength of your existing management team when determining if they want to buy, as well as how much your company is worth.

Similarly, how effective is your MIS? Even though a strategic buyer might replace it with something they prefer or are using elsewhere, the lack of a state-of-the-art MIS is usually an indication that you don’t have all of the management tools you need to run your business in its most profitable manner.

5. Strength of Sales Team

Strategic buyers will look at the professionalism and turnover of your sales team. Lower turnover will give them more confidence in the continuity and accuracy of sales projections. Again, they will also look at how dependent your company’s sales are directly on you as the owner. The less dependent sales are on you, the higher they will value your business.






 

6 Succession Planning Tips for Baby Boomers

Succession Planning for Baby Boomers

Unless you’re a serial entrepreneur who started a business with the sole motive of selling it, passing the reins of your company to someone else can take an emotional toll. If you happen to also be part of America’s largest generation of retiring business owners—the baby boomers—finding the right successor has probably been on your mind in recent years.

Perhaps you’re a family business owner deciding how to fairly split assets and responsibility among heirs. In a recent feature for Family Business Magazine, editor Barbara Spector keenly observes some telling statistics from The Alternative Board’s survey of small business owners.

“Less than half (43%) of the family business owners who participated in the TAB study say they are satisfied with their succession plan. About a quarter (24%) admitted to being dissatisfied with their plan, and 33% said they don’t have a succession plan.”

Spector postulates about the 62% of respondents who doubt their business will even remain in the family when they exit, “Perhaps these business owners plan to sell because they doubt their family members are viable successors.”

While it’s estimated that 80% of businesses worldwide are family-owned, there’s a 20% chance yours is not. You may simply be a hard-working sole proprietor seeking a worthy buyer for the company you worked so hard to build. Regardless of who the next owner of your business will be, your focus should be on making decisions now that will set you up for the comfortable retirement you’ve earned.

Executive business coach John F. Dini is the author of Beating the Boomer Bust, which focuses on the unique challenges faced by retiring baby boomer entrepreneurs. Since he’s an expert on succession planning, we asked him the following questions to help provide you with a better exit strategy for your business:

1) What should you consider when choosing a successor?

A successor is often very different from a second in command. For a key employee, you want skills that compliment yours. For a successor, they should be more similar. Often, however, founding owners had the opportunity to learn different aspects of the business as it grew. It may not be reasonable to expect someone who is up to speed in as many areas as the seller currently handles.

2) How can you determine the amount of money you should take when you “cash out”?

Valuation is determined by the industry and the type of buyer. Appraisals are well worth the cost. Many owners lose good opportunities because they value their businesses based on what they need for retirement, what they heard about someone else at a trade show, or because they misunderstand the formulae (for instance, “All small companies sell for five times revenue.”) That’s simply not true.

3) What documents should be part of a succession plan?

If you are planning an internal succession (to family or employees) you will need new employment agreements, stock buy/sell documentation, probably a promissory note defining conditions of payment and security, and perhaps a non-qualified deferred compensation plan for the seller, the prospective buyer, or both.

4) How can you impart the values and culture of the business you’ve built to the next generation?

That is a broad leadership question. In relation to succession, understanding why you run the business the way that you do should be a prerequisite to consideration as a successor.

5) How can you begin stepping away from the business during succession planning?

You need not only a financial plan, but a management succession plan. Ideally, each year that you are still involved should have goals for passing on responsibility for portions of the business.

6) What role should you play in the business once you’ve retired?

As little as possible, and preferably none. Every time you come in the perception of authority shifts. If you trained your successor well, being available as an advisor should be sufficient.

As Mr. Dini points out in his award-winning book, Hunting In A Farmer’s World, “Buyers of any type will pay more for a business that has documented systems, skilled management, and a history of executing according to plan without the owner’s intervention.”

In other words, don’t spend too much time working in your business. Rather, begin phasing yourself out of the daily activities as early as possible and with strategic succession planning. After all, wouldn’t you rather enjoy your golden years on the golf course or at a resort than worrying about every stressful detail that kept you up at night as the owner?