William Webster, a seasoned CPA with over a decade of experience in the PE and VC ecosystem, is dedicated to helping companies achieve the best returns when seeking to cash out. His insights are not just based on years of experience, but also on a deep understanding of the macroeconomic climate and prevailing trends. Read on to discover the five key considerations when planning for your business’s sale.
Ensure you value your business as per market value.
It’s essential to ensure that you maximize the price you get for your business. After all, it’s the monetary value of your years of hard work. To do so, follow the market to track what businesses in relevant industries are selling for, ensure you have your financials in order, and know that legalities must be taken care of. A well-planned exit is sure to result in a better sale price.
Expert take (William Webster): Any valuation goes beyond comparing comparable deals in the public domain or other M&A activity. The baseline for any valuation in the PE world is EBITDA. Most of the time, small and family-owned businesses operate on a shoebox method of accounting (literally filling a shoebox with receipts and bills to tally later). I can’t count the number of times I’ve seen business owners run non-business expenses through the P&L or create dummy liability accounts on the balance sheet. Converting to a GAAP basis will ensure you know your company’s fair market value before hitting the market.
2. Assemble the right team.
Selling a business requires cross-functional expertise to ensure that legal liabilities are mitigated and you’re set up to succeed post-transaction. The right team should include a financial advisor, a tax expert, a legal team with M&A experience, and potentially a business broker or intermediary. Escalon has teams that will provide financial reporting in order. However, GAAP compliance is one of many needs privately held businesses eyeing an exit need to consider.
Expert take: First and foremost, ensure you have a solid legal team with M&A experience. Too often, business owners try to rely on their general counsel or existing external counsel. Although they trust them – they may not have the expertise to negotiate a letter of intent with the PEG’s legal counsel.
3. Spell out your reason for the sale.
Are you looking to retire? Move? See the world? Make a change? Whatever the reason, it’s essential to know your motivation for cashing out and then share it with the team. It’s always good to understand your motivation as it helps the team assisting you to work on cracking the best deal.
Expert take: Are you looking to spend more time with your grandkids? Or are you hungry for another bite at the apple? Understanding your end-game is crucial before you embark on an exit. You will likely need to stay on for 2-3 years post-exit to help shepherd your company through its next milestone. Now is an excellent time to speak with a financial advisor who is savvy in exit planning/tax mitigation and capital preservation – post-sale is too late. Alignment with your potential buyer/capital provider is crucial, as we often see claw-backs of the purchase price.
4. Assess the business’ performance.
Selling a business on an upward trajectory will be much easier than selling a stagnant one. Similarly, are you the only supplier for a particular product? Or in a particular geography? Knowing what to play up is essential, but ultimately, numbers will determine the price and potential, so know that a well-run business matters most.
Expert take: You have to have accurate financial accounting and reporting on an accrual basis before you can understand business performance. Cash in the bank account is not net income. Understanding working capital is table stakes before entering a transaction. Once you understand those basics, you can consider intangibles that create value.
5. Consider the tax implications.
Selling a business requires careful tax planning, so discussing the tax implications with a CPA before looking for buyers is a good idea. After all, there’s no point in selling the business only to see then a majority of the gains go toward.
Expert take: There are a few tax loopholes business owners can take advantage of. If you are considering divesting real estate – think of a 1031 exchange to defer taxes. Depending on what industry you are engaged in and if you are a C-corporation, a qualified small business exclusion is available under IRC 1202 that may allow you to exclude up to 50% (up to $10M) of the gain.
Consult a tax expert before making a decision.
The final word
Selling a business is more than finding a buyer and agreeing to a price. To gain the most value and maximize your benefits, working with an experienced team to ensure you and your company sell on the best possible terms is best.
About William Webster
William Webster started his career working with a boutique firm serving family offices in Kansas City and has spanned stints at companies like Ernst & Young, PitchBook Data, and Tegus. He’s passionate about ensuring that small business owners can achieve the dreams they’ve set for themselves as they grow their companies. Further, his experience ensures that he has the interests of everyone, from business owners to investors to intermediaries and service providers, when doing deals.
