Selling your business: Think Ahead
Maximize your company’s value with a comprehensive plan
Author: Jason Kwiatkowski
Date: March 2010
Publication: Canadian PLANT Magazine
Thinking about selling your manufacturing business and spending more time on your golf game: or perhaps pursuing other business interests? Start formulating your exit plan.
Consider that front-line baby boomers turn 65 next year. Among them are business owners who are driving the largest transfer of private wealth in history.
Forty percent of boomers with private family businesses intend to retire within the coming five years. Many are relying on the proceeds from the sale of their companies to fund their retirement, yet as more boomers put their enterprises on the market, the growing supply of businesses will exert downward pressure on sale prices. This translates to lower returns and more stress.
The number one reason business exits fail is lack of planning. Too many business owners are reactive - forced to sell because of burnout, health issues, marital problems or business conditions - and these types of fire sales leave too much money on the table. On the other hand, owners who invest time and make the effort to prepare ultimately sell their companies for a significant premium.
Control timing
If you intend to sell your manufacturing business in the coming decade, you need to prepare well in advance to control the timing of the sale and to maximize net proceeds. Here’s an approach that can help you do this.
First, planning should begin several years prior to a sale. In a Newport Partners survey of more than 100 Canadian business sellers, 62% recommended methodically pre-planning the sale of a business two to three years in advance. However, less than 25% actually did so themselves.
Properly preparing a business for transition begins with a formal exit plan. This document sets out the steps that must be taken to accomplish your goals, and addresses the business, personal, financial, legal and tax issues involved in transitioning your business to new owners.
The benefits to having a formalized plan include:
- Achieving your business and personal goals.
- Retaining control over how and when the business is exited.
- Maximizing company value in good times or bad.
- Minimizing, deferring or eliminating capital gains taxes upon the sale of the business.
- Reducing stress and tension among family members and employees.
To be effective, an exit plan needs to integrate these components:
- Goals assessment. Determining business, personal, and family/estate goals provides the plan’s direction and frame of reference. Each goal should be specific, measurable, achievable, realistic and time-framed.
- Financial needs assessment. How much money do you need to realize from the sale of the business to achieve your goals?
- Business valuation. An independent valuation conducted by a professional business valuator at least three years prior to exit will establish a current baseline for the company. This allows time to implement measures, such as growing revenues, increasing margins, strengthening the management team, diversifying the customer base, that may be required to raise the value of the business.
- Exit alternatives analysis. Assess the pros and cons of alternatives as they relate to your goals. Internal transition options involve a sale to family members, existing shareholders, management team or employees. Alternatives for external transfers include third-party sales, refinancing or going public.
- Net proceeds analysis. This is the amount you get to keep after selling the business and settling all liabilities, income taxes and other obligations. Thus net cash received upon sale can be significantly lower than the sale price. Conduct a net proceeds analysis for each relevant exit alternative.
- Action plan. Identify the specific tasks that must be carried out, such as obtaining appropriate insurance, completing tax and estate planning, finalizing a will, preparing a contingency plan and developing a strategic plan for the business. Identify the timing and priority of each task and the individuals responsible for them. And schedule regular meetings with those guiding and implementing the exit plan to ensure it progresses as intended.
Procrastination is often the key impediment to effective exit planning. Want to reduce stress and make money? Start planning your exit now.
For more information on our manufacturing services please visit: http://www.bdo.ca/industries/manufacturing/index.cfm
