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Maximize Company Value at Exit


At some point in time, every owner needs an exit strategy.    For some, the family business will be gifted or sold to future generations. For others, however, they are counting on a fair price from an outside party for their years of hard work and dedication. If and when you sell your company, the difference between getting a great price and getting just a fair price may well be timing and preparation.

The best time to sell any business is when it is in an up cycle – volume is up, gross profit is up, bottom line is trending up. Why? Because today’s savvy buyers make offers that are based upon present net value of future cash flows. If trends are up, future cash flows will be up, which when put into an NPV model translates right into dollars. Therefore, the absolute best time to put your business on the market is when you think it is at or near its earnings peak.

But while timing is important, preparation is equally important and a key component to price. Sellers who receive top-dollar for their businesses usually started preparing their businesses for sale at least a year in advance with many savvy sellers beginning that preparation as much as three years before putting their company on the market. Why? Because most buyers like to see three years of financial statements.

To properly prepare for a sale that will maximize price, an owner should:

Seize growth opportunities. Sellers often stifle growth in the last few years before an exit, not wanting to take on additional responsibilities or risk. This inactivity is counterproductive to a maximum price. As opportunities arise for new business, seize those opportunities. Buyers like vibrant, growing businesses.

Reduce discretionary expenses. Most marketers are liberal with company expense accounts, not always observing the fine line between business and personal expenses. There may be children or spouse’s payroll, or boats, airplanes, trips, etc. in the business expenses. Especially in the year preceding the sale, don’t expense any unnecessary or non-business related expenses to the company.

If there are outside expenses that must be paid, and you must have additional compensation to meet those expenses, a better solution even though it means higher taxes, is to increase your owner’s salary and pay those expenses from personal funds.

The reason we suggest extra compensation, even with the tax ramifications, is that most buyers add back owner’s salary and bonuses to cash flow projections to determine price.  Providing a full list of the extra non-business benefits and discretionary expenses does not produce the same result. Buyers frequently ignore or challenge those expenses offering a lower price. You are much better off to stop charging discretionary expenses to your business.

Keep facilities, equipment and vehicles in tip-top shape. You wouldn’t try to sell your used car without a wax and polish job. Don’t sell your business without one either. The more turnkey an operation, the higher the offering price. Conversely, the more dollars a buyer must invest to bring a company up to his image standards, the lower the offering price.

Reduce payroll by encouraging early retirement. We often find sellers with long-time, very highly compensated (make that overcompensated) employees. Too often, these senior employees are marginally productive, and serve as a double liability to a future buyer. The double liability occurs because the selling company’s profits are lower than they should be which negatively impacts price, and a new owner knows they don’t want to keep that person on but gets concerned with the impact firing that person would have on customer retention.

The solution is to help them retire early. We often find that senior employees want to leave, but think they should help you by sticking it out until you sell. Early retirement is good for them, good for your bottom line, and alleviates a potential buyer concern.

Use RFPs and bids to lower major vendor costs. By the time many marketers get to retiring and selling, they are often tired of negotiating. The last three years in business, however, are the most important when it comes to cost reduction. Reduce as many costs as you can through Request for Proposals, bidding and negotiation. From employee benefits to office supplies, it pays to bid and shop. Lowering your ongoing expenses means achieving a bigger bottom line profit, which will translate to higher sales price.

Clean up your balance sheet. Don’t forget that selling is more than P&L profit maximization. Pay close attention to balance sheet management, putting your emphasis on receivables collection, inventory turn, and debt reduction. You’ll be glad you did, whether or not you sell!

Meridian Associates has been partnering with family-owned businesses for over 30 years to remove barriers, accelerate business growth, build their legacy, and reduce stress levels. With three, high-impact business events each year, The CEO Exchange, Women in Family Business, and The Family Business Intensive, we continually provide best practices & proven strategies that keep multigenerational businesses thriving. Discover how Meridian can help your business thrive through our combination of high impact business coaching, advisory, M&A, and precision company valuations by visiting or calling us at 817-594-0546.

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