Steve Sink is the founder and managing partner of Phoenix Affiliates Ltd.
What is your company worth? The answer is a function of many factors, including historic and future financial performance, industry risks, market timing, method of sale and the nature of the buyer.
Value becomes an absolute only at the very instant a knowledgeable buyer under no compulsion to purchase, authorizes the wire transfer of funds to the bank account of a knowledgeable seller under no compulsion to sell. Otherwise, different people with different needs, resources and limitations will perceive value of the same asset in differing ways. As the business owner, you can use this knowledge to your benefit by specifically grooming the business to fit the probable requirements of the eventual new owners. History indicates that value runs from lowest multiples (sale to insiders) to the highest (sale to outsiders).
Sale Options include:
Sell to Employees
Sales to employees usually are at market value and require Seller financing because employees tend not to have enough for a down payment or the Seller feels guilty. The key is to have a number of key employees who are trained and capable of running the business.
Sell to Relatives
These sales generally provide the Seller with the lowest sale price and the potential for the most problems. Sellers must be very careful to remove themselves from the sale process and future entangling obligations, while insuring that they will receive all payments due to them.
Put the Business on the Market
A sale to an outsider typically will be a negotiated transaction. The deal structure usually requires performance payments to ensure a smooth management transition and full transfer of customer and vendor loyalties. Other value drivers include a strong management team, disciplined internal and financial controls, and solid vendor and customer relationships. Patents and/or proprietary products or other barriers to entry are a big boost to value, as is the absence of customer concentration. Curiously, “curb appeal” and good housekeeping are also very important in making a solid first impression, as most corporate-trained buyers regard this as a quick indicator of sound management practice.
Sell but Stay
This type of deal allows for the transfer of ownership but the Seller stays. In this situation, the Buyer wants the Seller to facilitate the transfer of ownership and success of the acquisition. This is a great exit strategy for the Seller who is not ready to retire but wants to secure their financial future. A typical buyer in this situation would be larger company seeking an add-on acquisition. In addition, the Seller will retain an equity position which should have a significant upside.
Value is driven by process, perception and facts. Sellers should determine what the goal is for their exit strategy (charity, gifting to family, sale to employees, maximize value, etc.) That, in turn, will point them to a category of buyers (insiders vs. outsiders), value and deal structuring expectations. Those buyers’ probable requirements will suggest how best to groom your company for sale. Your preparedness for sale and prevailing market conditions will dictate when you should undertake the process.
Steve Sink, CBI, M&AMI