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How To Sell Your Company At A Premium

Author: Ethan Smith

A flurry of large company mergers and acquisitions this year is kindling hope among entrepreneurs seeking to sell.

With AT&T, GE, Time Warner Cable and other large companies announcing mega merger and acquisition plans, 2014 is being called the year of the deal. Some of the same fundamentals driving the world's biggest companies to buy and sell each other has also sparked deal-making among entrepreneurs. Companies that have had capital sitting on the sidelines are now looking for somewhere to invest it, says Freedom Business Advisors' Noah B. Rosenfarb, a CPA and personal CFO who helps owners sell their businesses.

Take Advantage of Economic Good Times

In the years that followed the 2008 financial crisis, companies large and small hoarded cash. Operating for lean times, businesses stopped hiring, buying equipment and making acquisitions – anything to conserve money. But slowly management behavior moved from recession to recovery. By 2013, the number and size of deals – and money available for purchases – was growing. A Babson College survey of middle-market investment banks, brokerage firms and commercial bankers showed more s for every type of middle-market financing last year. The same held true for smaller deals. The survey measured the level of SBA-guaranteed bank term loans as the metric for financing small-business M&A. It found a strong rebound in SBA loans especially from community banks.

This is the best market to sell in the last six to seven years, says Rosenfarb. If you're thinking of catching a wave, it might be a good time to do it.

But Don't Rush to Sell

Surfers' spirits being what they are, catching that wave may seem easy. It actually takes time, planning and the right mindset. Entrepreneurs tempted by bullish headlines to post a for sale sign should listen to Chris Snider, CEO of Exit Planning Institute, a national organization that trains financial advisers on the fundamentals of selling a business. He argues that selling should be treated like retirement and started early.

Exit planning is a process, not an event," Snider says. "It's a way of running your business that maximizes its value and provides a means to achieving an owner's personal and financial goals.

As good as Snider's advice sounds, many entrepreneurs fail to follow it. Instead, they treat selling their business as an event approached when they are ready to retire, burned out or facing an unexpected life change. That's what happened to Chris Cooper's father.

My dad was a CPA who started his business at our dining-room table and grew it into a five-person operation. He always thought if he could work one or two more years, he'd be ready to sell. Then he became ill. He stayed too long, observes Cooper, who now advises business owners on exit strategies at Kent State University's Ohio Employee Ownership Center.

Cooper says his father was critical to operations, and when he became sick, he could no longer function at a high level and left the business with a void.

Many owners fall into the same trap. When a business owner leaves, they may end up taking a lot of the value with them, says Cooper. Without that value, a business may be worth little to a buyer.

Exit Planning

To determine how effectively owners had planned for their inevitable departure, Cooper worked with the Exit Planning Institute on a national study of business owners. The findings from the 2013 study showed a dramatic lack of planning. Almost half of all respondents planned to sell in the next five years. Even so, the vast majority of all surveyed lacked a transition plan, or at least had nothing documented or communicated. Cooper says he's seen business-transition plans come together in as little as six months, but generally an owner should count on three-to-five years to write the plan and follow its steps for successful results.

Combining the study's findings with national figures, the authors estimate that 3 million business owners will try to sell their companies over the next five years. They say that without a plan, most will be disappointed.

Five Steps to a Money-Generating Plan

If you're one of those business owners pondering an exit, and you want to make the best possible money on the deal, here are five steps to get started:

1. Find your vision. Begin by answering one question: How do I want to spend my time, money and energy after I sell? Many people find this kind of soul searching difficult and avoid it. Unfortunately, owners who enter negotiations with a potential buyer without a vision for the future rarely conclude the deal. Put your future-life vision in a document so you can refer to it when needed; update as necessary.

2. Research stakeholders' goals. Then answer the next key question: What do my stakeholders want from my company? Stakeholders include people whose actions affect the health of the business – employees, other owners, investors and family members. The goals of these pivotal people will shape the future of the business, and a smart buyer will want to know and agree with their objectives before concluding a deal.

3. Investigate exit strategies. Options include selling to a competitor, cashing in with a private-equity firm and creating an employee stock ownership plan, or ESOP. Selling to a third party, such as a competitor, typically generates a bigger price for you because your business represents a strategic niche that the competitor or private-equity firm has been trying to fill. If you're considering a third party, seek the assistance of a business broker, who will typically be experienced in finding a buyer, managing paperwork, navigating tax and other laws, and closing the deal more quickly than an entrepreneur selling a business for the first time. A broker will concentrate on the sale, allowing the entrepreneur to continue to focus on running – and maintaining the value – of her business.

4. Value your business. The entrepreneur has grown it from an idea into an organization with employees, assets, intellectual property and a reputation. It's priceless – to the entrepreneur. Potential buyers will assign a price to the business and walk away if they consider the owner's price outlandish. The International Business Brokers Association's fourth-quarter report for 2013 lists common deal-killing mistakes. More than a quarter of all sales fail because sellers make unrealistic expectations tied to how much their company is worth. To avoid killing the deal, do independent research. Hire a valuation or appraisal firm, or do your own due diligence by consulting online databases of businesses for sale, such as BizBuySell.

5. Fix any problems. Look for issues that will scare off potential buyers and fix them before opening the books for inspection. Lawsuits by a customer or an employee are two examples. What's critical to planning is being willing to make adjustments. If the lawsuit looks like it will take longer than expected to resolve, the owner should hold off selling. With any luck, the business confidence helping to push companies large and small into deals now will still be strong when the business is ready to command a premium. For more details on selling your business, read Prepare To Sell Your Business.

The Bottom Line

The best way to get the maximum value from selling your company is to plan well in advance. Take a hard look at what your business is worth, and solve any problems that could make it sell for less than it should. Then, take the proceeds and start on your next adventure.

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