Proper preparation will greatly increase your chances of maximizing the net sale proceeds when you sell. Although preparation takes time, effort and attention, the benefits of planning far outweigh the costs.
"Built to Sell" author, John Warrillow, discusses two such benefits in his recent blog entries (www.builttosell.com/blog/). A takeaway from reading John’s recent articles is that proper preparation will greatly improve your chances of: i) selling for a significant premium; and ii) avoiding buyer trickery. Let’s consider at each of these in turn.
Selling for a Significant Premium:
According to Mr. Warrillow’s recent research, companies that scored over 80 on The Sellability Score received an offer for the business that was 70% higher in value than the average offered to all companies. John refers to this as the Sellability Premium.
The Sellability Score is an online questionnaire that provides a business owner with a report containing an immediate score of between 1 and 100 for the business and detailed information on the eight key drivers of sellability for your business.
Based on nearly 7,000 completed questionnaires over the past year, John’s research team found that the average valuation multiple offered for all businesses was 3.6 times pre-tax income. Those businesses that scored over 80 on the Sellability Score, however, received an average offer of 6.1 times pre-tax income, or 70% higher.
Taking the Sellability Score 3 to 5 years before you plan to sell allows you to see where your business stands today. You can identify areas for improvement to increase the value and salability of your business with enough time to implement the necessary initiatives before you put your business up for sale.
Avoiding Buyer Trickery:
Knowledge is power and being aware of the techniques used by buyers to acquire businesses on the cheap can enhance your negotiating strength and help you maximize your net proceeds on the sale.
A summary of ways to defend against 5 common buyer strategies, according to John’s recent article, is summarized below:
The inflated working capital adjustment – after agreeing to an offer price, the buyer proposes a punitive working capital adjustment, forcing you to leave more of your money in the company. You can defend against this by having the buyer spell out their proposal for calculating the normalized working capital before you sign the Letter of Intent (LOI);
The proprietary deal – the buyer gets you to sign an exclusive deal before you are able to create a competitive market. You can defend against this by not signing an exclusivity agreement until you have shopped your company to a shortlist of strategic buyers;
The bait and switch – the buyer agrees to purchase your business for a certain amount but then drops the agreed upon price after the due diligence period when you are emotionally drained and already committed to the sale. You can defend against this by assuming up front that the buyer’s price will drop 15% during due diligence, so only accept a LOI if you could live with selling for 85% of the original offer;
The 100% vendor take-back – the buyer agrees to your price but insists you finance all or most of the sale. You can defend against this by insisting on at least 50% of the proceeds in cash so the buyer has something to lose if they can’t make a go of your business; and
The earn-out – the buyer agrees to a valuation for your business that includes an "at risk" portion of your proceeds in the form of an earn-out. If your targets aren’t reached, the earn-out disappears. You can defend against this by expecting an earn-out, but treating it as gravy. Only sell if you would still be happy with the deal if the earn-out never materialized.
A very successful scientist, inventor and innovator once said "Before anything else, preparation is the key to success." I believe this to be true and preparing to sell your business should involve taking the Sellability Score at least 3 to 5 years prior to the sale.
I also believe that adequate preparation involves obtaining an independent business valuation 3 to 5 years prior to sale. This will help manage your expectations on price and identify areas that need improvement to enhance the value of your business prior to sale. Contact us at jason@vspltd.ca or www.vspltd.ca to speak with a professional business valuator that is also trained and certified in the area of exit planning.
