Strategic Sale is Roadmap to Success

Strategically selling a business involves formulating a plan – often years prior to the sale- to find the right buyer and maximize the purchase price. The strategic plan or roadmap to a successful business sale should be specifically tailored to the individual business and its financial profile. A confidential and strategic marketing plan matches the business with likely strategic buyers such as competitors that would benefit from revenue and cost synergies. The business owner can prepare their business for a strategic sale by gathering an organized set of financial and business records, as well as other key data points that a strategic buyer will need to fairly value the business. Further, business owners should reduce the level of owner-dependency to the best extent possible well before the sale in order to increase the marketability and value of their business.

Transparent Financials

The best way to build trust with a strategic buyer is by having a transparent set of financial records so that a fair offer may be made on the business. The financial statement such as a tax return or profit and loss statement often needs to be adjusted by the business broker in order to portray the true level of economic profits derived by a working owner (or adjusted owner benefit). This is crucial since businesses are valued as a multiple of the annual adjusted owner benefit. The business broker must construct a clear and convincing financial reconciliation statement that matches each adjustment or add-back with the reported expense. Moreover, the business broker must explain to the buyer why some adjustments – such as the owner’s salary or expenses that are personal in nature – will benefit the buyer and should therefore enhance the valuation of the business. A transparent and logical financial statement will bring more strategic buyers to the table.

Create Compelling Narrative

A strong narrative or story of a business includes its history and background, reasons for why the owner is selling, description of the management and roles of key staff members, overview of the customer base, and a summary of the competitive advantages or ways in which the business differentiates itself in the marketplace. The business broker should create a strong compelling narrative in the listing package given to strategically qualified buyers. This will serve to justify the asking price by defining and clarifying the goodwill of the business, and how the goodwill and future cash flow will remain intact (or continue increasing) after the sale. The narrative should ultimately demonstrate how the business will operate without the long-term participation of the owner, as well as how the buyer can increase revenues or decrease costs to make the business even more profitable.

Find Strategic Buyer

The search for a strategic buyer of a business begins by examining the financial profile of the business in order to determine whether an acquisition is financeable for a qualified buyer.
Many buyers seek business acquisitions using external bank financing backed by the SBA (Small Business Administration).
The business must generally have transparent financials as well as sufficient company records (such as bank statements, payroll records, and customer invoices) in order to secure a successful bank appraisal.
If the business is a strong candidate for external lending, then the strategic plan should focus on SBA-qualified buyers in order to maximize the purchase price and terms.
Another type of strategic buyer is a local or national competitor in the same industry that will benefit from synergies such as market expansion, cross-selling, and cost efficiencies from the merger of the two companies.
Competitors should be identified and approached by the business broker in a confidential manner, and sensitive information about the business should only be disclosed after the competitor signs a Non-Disclosure Agreement (NDA).
Once the confidential information is disclosed, the business broker may show the competitor how the synergistic benefits of the two combined companies will increase the buyer’s future cash flow and thus result in a premium valuation.
Lastly, private equity groups use pooled and borrowed capital for the purposes of buying businesses, and frequently employ roll-ups or an acquisition strategy that purchases multiple smaller companies within a fragmented industry.
Businesses with a local dominant presence in a specific niche industry, recurring revenue, and relatively absentee ownership often serve as strategic acquisition targets for private equity groups.
Tailoring the confidential marketing campaign to strategic buyers increases the chances of finding a buyer who is the right strategic fit and willing to pay a premium valuation.

Prepare for Formal Due Diligence

Once a strategic buyer is found and a deal goes under contract by virtue of an accepted offer and deposit, the buyer may begin its formal due diligence or investigatory phase of the business. Business owners should be ready for formal due diligence by organizing their company records, financial records, key data points, employee organizational charts, and customer records based on the expected formal due diligence requests from a strategic buyer. For example, buyers seeking SBA-backed financing will need at least three years of tax returns, bank statements, and cash flow reports in formal due diligence. Strategic competitors or private equity groups seeking a roll-up in certain industries – such as pool service or landscaping routes – may focus more on the quality of customer accounts during formal due diligence and whether they will remain intact after the sale.

A strategic sale requires planning on the part of both the business owner and business broker to maximize the purchase price and effectuate a smooth sale. The business owner should try to reduce the level of owner-dependency, obtain an organized set of financial and company records, and increase profitability to the best extent possible prior to the sale. The business broker must create a compelling narrative about the business that justifies the asking price while tailoring a marketing plan to locate strategically qualified buyers who will benefit from the acquisition.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.