Timing the Sale for Maximum Price

Posted on October 28, 2018 by Aron Brajtman

Picking the right time to sell a business can mean the difference between a substantial retirement income and nothing.

Every business will go through four stages of a life cycle. Please see the graph below.

The smart time to sell is when the business has completed its growth stage and is beginning to mature. At this point the business will realise its maximum value.

Too many owners try to sell at the decline stage because they haven’t recognized that their business is in decline. Sometimes the decline is due to increased competition in a mature and no longer growth industry. The competition is fierce and the margins low, hence the whole industry is in decline. Sometimes owners lose some of their passion for the business and the business loses its competitiveness. Frequently the owners have not taken the time to devise or implement systems that allow the business to operate without them.

The high growth and early maturity stages are the ones that will bring the highest selling price. Consequently, this is the period we should be in at sales time.

To sell at the appropriate time will require the owner to take advantage of the growth trajectory and show that the business is a strong money maker.

Over here you can do a self assessment and rate your own preparation for exiting.

See here for what prospective buyers want from a business.

What Buyers Like and Will Pay More For

Posted on October 13, 2018 by Aron Brajtman

When buying a business, buyers and their representatives (agents,lawyers) create a short list of a specific set of criteria. Among them are:

More Cash and Less Inventory
Positive Long-term Contracts
Diversified Base of Customers and Suppliers
Solid Capture and Retention of Order Data
An Audit for the Prior Five Years
A Strong Management Team

Not all may apply to your business but probably most do.

More Cash and Less Inventory

Buyers like to see a strong cash position. This comes from smart management of working capital. The seller can increase their cash position by:

Collecting accounts receivables faster
Clearing inventory that is not moving
Obtaining the most favourable terms for payment from suppliers

Positive Long-Term Contracts

Long term contracts reduce volatility and uncertainty.Buyers will focus on confirming the sustainability of production. Long-term contracts examples are

long-term supply contracts
leases on valuable land and buildings
leases on production facilities and distribution.

Diagnostic to assess your preparedness for exiting

Diversified Base of Customers and Suppliers

The seller should not be dependent on major customers for a large portion of their sales because customers can put pressure and threaten to withdraw their business.

The opportunity to supply a major retailer (i.e. Wal-Mart or Home Depot) or a major manufacturer (Ford or GE) can be a tremendous opportunity for a smaller company, but it can also drain a lot of resources and result in pressure on margins and tremendous customer concentration. While the growth that it drives will increase value, the associated risk of these revenues will reduce value.

Similarly, consider the relationships to suppliers. How dependent is the business on the supplier? How reliable is the supplier?

Capture and Retain Order Data

Without this data, it’s difficult for a buyer to understand how the current sales pipeline compares with previous periods, making it challenging to gauge growth.

How preparation affects the sales price

Get an Audit for the Prior Five Years

Buyers will expect to see several years of audits performed by a public accounting firm. An audit further lends credibility to our company’s financials and decreases the likelihood that a generally accepted accounting principle issue will be uncovered in due diligence proceedings. This type of finding could cause an investor to lower their purchase price.

A Strong Management Team

Companies with strong management teams are generally valued higher than those without them; private equity buyers, in particular, value strong non-owner teams. Since it takes time before new hires begin to contribute to a company’s financial performance, the sooner gaps are filled the better.

It is clear that the preparation for making the business attractive to prospective buyers requires effort. It is an effort well worth while as it will ensure a prompt sale at a high price.

See here : Diagnostic to assess your preparedness for exiting

and here How preparation affects the sales price

If Prepared the Sales Price Will Be Higher

Posted on October 13, 2018 by Aron Brajtman

Winners and Losers

There may be a large difference in the price obtained between the Losers (owners who continue to manage their business as before), and Winners,(those that consciously prepare it for sale).

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How To Prepare the Business for Sale

Preparing a business for sale has four components:

Timing the sale during high growth or early maturity period
Managing for cash
Managing for growth
Managing so as to earn a higher multiple of earnings

Timing the sale during high growth or early maturity period

Every business will go through four stages of a life cycle. Please see the graph below.

The smart time to sell is when the business has completed its growth stage and is beginning to mature. At this point the business will realise its maximum value.

The high growth and early maturity stages are the ones that will bring the highest selling price. Consequently, this is the period we should be in at sales time.

Managing for Cash

A seller has some time to prepare the business and its elements prior to the sale.A business that generates more cash flow will bring a higher sales price than one that does not.

A qualified finance or accounting professional may be of assistance here. Among the options one may have:

Faster turnover of working capital
Divesting low return assets
Making the operations more efficient
Increased margins

Managing for Growth

Future growth will require strategies and executions that yield the following results: A buyer will be looking for a business that is:

Achieving a strong cash position
Achieving above-average profitability (in terms of return on capital invested)
Obtaining rapid growth in revenues by targeting attractive, market segments
Developing a strong brand
Competing on non-price issues (e.g. quality, service, functionality)
Achieving highly consumer centric behaviour
Offering a strong value proposition to its market
Developing a strong team with high-grade staff & good people

Each of the above will raise the value of the business and will bring a better price at sale.

Grow the Multiple the Buyer Will Pay

You have probably heard investors talk about the P/E ratio. The ratio also called the multiple is the result of the price that the company is worth (P) divided by annual earnings (E).

The multiple is the kind of return the buyer will want on their investment. For instance, if the multiple is ten, the buyer will pay ten times expected annual earnings. If the buyer can expect the annual income to be $100,000.00 the buying price will be one million dollars.

The lower the multiple, the less the buyer will pay. A multiple of five means the buyer will pay five times the expected annual earnings. The seller want the highest multiple, whereas the buyer will want the lowest multiple.

Again here with proper professional help you can increase the multiple a buyer will pay for the business.

Preparing a business for sale is no trivial matter. We have covered the timing of the sale and the preparations we can make to get the best price.

The vast majority of owners don’t plan for the sale of their business, and as a result they don’t take any steps to maximize their return on their years of investment.

That’s a symptom associated with owners that spend too much time working IN their business and not enough time ON their business. These owners don’t think in terms of selling their business at some point in time. Frequently, they view the business as a vehicle that provides them with an income and there is a rather fuzzy thought or picture involving a sale to fund their retirement.

This article served as an overview of the factors required to obtain a high return on the investments made in creating and managing a business.