The decision to sell your business is one of the most complex and difficult decisions that faces an entrepreneur, and after the decision has been made, the real hard work begins.
Many corporate and sophisticated buyers acquire or create a business with a definite exit strategy in place. Oftentimes, business owners start or buy and manage a business with little or no thought about its eventual sale, at least not until the time arrives. The reason to sell a business in Los Angeles or another part of the country may be some factor beyond the control of the owner. In other cases, it is a personal decision about the right time to sell.
Properly preparing your business for sale can greatly increase its value and marketability when it is time to go to market and is presented to prospective buyers. If time allows, you should start planning one to three years in advance to adequately prepare the business with a goal of maximizing its value.
Our advisors are often asked, “How can I ensure that my business is prepared so that it best demonstrates its true market value and I receive the best price?” Engaging Keystone Business Advisors early in this process can pay dividends later. One of our M&A advisors will help you identify key weaknesses and obstacles that, if addressed effectively, could substantially increase the value of your business.
Below, we have analyzed some of the most essential components to consider before you sell a business in Southern California. Should you like further information or have detailed questions, please contact us, and we will respond to your inquiries as soon as possible.
- Awareness of Marketability
- Financial Performance Indicators
- Infrastructure and Human Resources
- Personal Objectives and Goals
If you are serious about selling your California business now or in the future, we encourage you to register for consultation. All information and discussions will be kept strictly confidential.
Awareness of Marketability
This is perhaps the broadest component that a potential seller should consider. Sellers must recognize that the best time to sell their business is when things are going well, both for the business and for the particular industry. This is when your business is at a premium and is most desirable. However, often businesses are not sold as they are approaching their peak but instead somewhere in between the peaks and the valleys, whether growing or declining.
Sellers should consider how the business is performing in relation to the rest of the market and their competitors. In addition, market expectations for expansion, contraction, or consolidation are important factors in business sales and acquisitions. Another element for consideration in the marketability of the sale of your business is its competitive advantage and market standing.
- Does the business service a general or a niche market?
- Is the company seen as a market leader?
- Does the company maintain any competitive advantages?
- What are the barriers to entry for competition? Are startup costs low or high?
- For service-related businesses, what are the demographic conditions in the surrounding area?
- What is the future outlook or development plans for the area?
These are all just initial considerations that help sellers gain a well-rounded perspective on the M&A environment as it relates to their business and industry.
Financial Performance Indicators
Does the past and present necessarily predict the future earning potential of the business? Simply stated, buyers purchase future earning potential and look to historical performance to predict a certain future. This is not an easy task and is where much of the focus is spent in the selling process. Ideally, a seller needs to demonstrate a steady trend of profitability and growth over the previous 3–5 years to help solidify the forecast for future earnings.
The more stable or predictable the financial picture, the better the pricing and terms for the seller. But it should be noted that, as a general rule, a buyer buys for potential but wants to pay for what is there now. Somewhere in between is often where the deal is struck, especially for the stronger, more growth-oriented companies. It is often the insight and guidance of the business broker or M&A advisor that helps buyers recognize and sellers attain the higher value.
However, this financial portrait is being viewed by multiple perspectives, and not everyone will view it the same. The financial statements and net income or loss are only part of this picture and only one perspective. Businesses are established to reach the goals of reliability and diversity, but instead are often sidetracked by a variety of economic conditions or the demanding needs of one or two key accounts. This is where predictability starts to wane and risk starts to rise.
Business owners must take a look at several factors (to name only a few) that may impact the marketability and business valuation:
- Concentration of accounts
- Quality of financial statements and tax returns
- Economic outlook for the market
- Gross margins and other industry comparative ratios
- Additional capital expenditures required for growth
Beyond analysis of the firm’s financial statements, these are all important factors that can impact the fair market valuation of the business. A business owner should consider these in relation to his/her business when establishing selling expectations.
Infrastructure and Human Resources
Another key element that a seller must be cognizant of is the importance of the infrastructure that the business has in place. Entrepreneurs are instrumental in the creation and growth of the business. But is the owner/operator an instrumental part of the business going forward? And how replaceable is he or she? If the business is too closely tied to the owner alone, the sale becomes more difficult and generally requires an ongoing role for the seller.
Further consideration to the market value of the business and compensation to the seller must be given in the case of an ongoing role for that seller. If a buyer must pay the seller a reasonable market rate for the services being rendered, it may lessen the earnings of the company for that period. This is a typical negotiating point where a “give a little to get a little” strategy can be very helpful. A seller wants to consider which is more important at the time of sale:
- A higher purchase price and upfront payments with a slightly lower ongoing salary for the duration of the transition period or employment contract; or
- A slightly lower purchase price with more upside potential for an earn out and a more aggressive ongoing salary.
Knowing this upfront can help the seller and M&A advisor establish a plan of attack for negotiations.
The buyer will look at the working capital and the additional capital expenditures that they will have after the acquisition of a business. The buyer will also take a close look at the existing human resources and access to further skilled personnel as another essential element. For the business to grow, is the right staff already in place, or will further skilled, experienced staff be needed? This is just one more example of a buyer’s perspective and how he might approach the acquisition opportunity.
Personal Objectives and Goals
The ultimate sale of the business and the satisfaction of the seller come back to whether the sale will achieve the goals that the seller initially established. A seller has to consider two divergent perspectives for the sale of the business; namely, his own perspective and needs versus those of the buyer. An M&A advisor or business broker in Los Angeles will be prepared to discuss these elements in detail so that a business owner can reach the most accurate conclusions.
First, the seller has to set goals for where they would like to be 12, 18, or maybe even 24 months after the sale. Retirement with a certain amount of money in the bank, reinvestment in another business, an employment contract with the new, more funded owner, or many other motivating factors must be weighed. Also, in setting the price, the seller must consider whether time or money is more important. Some sellers establish a specific price they want to achieve, and they have the time to wait until that price is achievable, even if it means focusing efforts to grow the business and its earnings to justify the desired price. Other sellers have a desired price, but getting out of the business within a year is their primary motivating factor. Which kind of seller are you?
Second, you and your M&A advisor should work closely with your legal, tax, and financial planning advisors to make sure you have covered all your bases. A good Southern California-based investment banker or business broker will work closely with your CPA or accountant to discuss tax planning and purchase price allocations to minimize your taxes. We also recommend that you consult with your attorney to make sure that you have made all required disclosures to mitigate your risks after the sale. If you are planning to retire, have you met with your financial planner to confirm that you will have enough money to do so? Keystone takes a collaborative approach and prefers to work directly with your key advisors to ensure that sensitive information is protected, uncertainty is avoided, and your after-tax proceeds are maximized.
Third, the seller must recognize and be able to present the true earning capabilities of the business. A buyer will need to receive or pay the operator a salary commensurate with the industry averages for that position. Your buyer will also require earnings that are sufficient to cover the debt service owed on the purchase of the business and provide a reasonable return on the initial investment. The objectives of buyers will vary. Some require an immediate compensation and return. Others are buying for the future and consider the initial period of fostering growth to be part of their investment. Others are attracted to a perceived synergy or perhaps the cost savings of consolidation or centralization of certain functions.
In the end, if the needs and objectives of both the buyer and seller can be met at a price and structure that makes sense to both, then you are on your way to a sale. But be aware that there will be other obstacles along the way.