Free Advice

Originally published in "Capstan," the American Boat Builders & Repairers Association newsletter, August 2000

In the late 1990's and into the 2000's there is an unprecedented wealth transfer occurring in this country. For many business owners their company is a significant part of their retirement. Preparation can increase the price received and make a deal easier to structure.

The first step is simple. Ask yourself who, what, where, when, why and how is all this going to come together?

Who is your most logical buyer? Is it family, employees, an individual from outside the company or a firm in the industry, be it competitor, supplier or customer?

What are you selling? Are you selling a proprietary product, a complete business (a model of operation including management, systems and people) or perhaps just a customer list?

Where will your buyer come from (geographically)? Is your business manageable from a distance, as a branch office?

 When do you want to sell? If the answer is "yesterday," your emphasis should be on how you present your company to buyers. If you want to sell in the next few years, your emphasis needs to be on planning and preparation.

 Why are you selling? This question that can make or break a deal. Crafting an answer is one of the most important things you can do, especially if your industry or business has been rocky lately.

Finally, how do you plan to be involved? This is a three-part question referring to your involvement:

During the sale (will you do it all yourself, have someone do it all for you or work with an intermediary for the best of both worlds).

During the transition.

After the sale. Do you want to divorce yourself completely or stay on in sales or management.

There are three types of buyers:

Financial buyers - Usually an individual or another small business. This includes family and employees. They are buying a business to earn a salary, make profit and to build net worth.

Strategic buyers - Generally a company larger than yours. A company that sees synergy and the elimination of duplicate overhead. They want profits and believe they can make more profit with your company than you are making.

Foreign buyers - They acquire a company to achieve residence status.

How you prepare your company for sale depends on who your buyer is. If you are selling to a financial buyer you need to emphasize the ability to earn a fair market salary and have profit adequate to pay off the acquisition debt.

They are concerned with customer relations, employee relations, management, financing, competition and similar factors. You have a stronger exit strategy if you diversify your customer base, build responsibility and loyalty with your employees and be able to demonstrate profitability.

A strategic buyer may be more interested in sales volume and gross margin versus the bottom line. Their objective is to eliminate overhead, lower margins and improve efficiencies.

If you target a strategic buyer make sure you have systems in place, high sales volume and growth, and confirm there are players in your industry who will be interested. Management structure is very important to all buyers, but more so to a strategic buyer.

It's never too early to think about exit strategies. Good planning will make a business more valuable to a buyer and give you more freedom of choice. If you’re not ready to sell now but would like to know where you are, a business valuation may be a good solution.

© Copyright John Martinka 2000. All rights reserved.