While some entrepreneurs think it’s unnecessary to write a business plan—especially if outside financing is not needed—I strongly disagree.
The disciplined process of business planning helps owners and managers foresee both opportunities and problems before they arise.
In short, it’s just good business.
For most, regular updates can help refresh once-forgotten goals and missions, as well as help reiterate accountability for specific employees.
It’s as true in business planning as it is in life: The dullest of pencils trumps the sharpest mind.
Regularly updated plans can help paint a picture of where the business was, how the plan helped take it to where it is now, and what the future holds.
With historical financials, corporate organization charts, and general industry and customer information, a business plan (especially a current plan) will help in the preparation of an investment banker’s pitchbook or other confidential marketing materials.
In many ways, general business planning is one of the best precursors to business exit planning. Unfortunately, completing regular plans and plan updates is a discipline few companies adhere to.
Consequently, many are left scrambling when it does eventually come time to sell, working to find information that otherwise would have been readily available.
Worse still, value is often left on the table—a result of years of failing to plan—as well as the inability to fully take advantage of finding a buyer willing to pay a premium price for the company.
The best time to prepare for the sale of a business is from the beginning.
Doing so requires keeping a pulse on your market and adjusting your business plan accordingly, eliminating or diminishing any internal issues or skeletons in the closet, preparing for due diligence, and applying principles for business value maximization.
Stay abreast of the market
The savviest business owners have both broad and deep knowledge of their given market.
Macro and micro factors are typically tracked religiously, and owners know and anticipate the moves of both competitors and some of the larger players in the industry.
Staying abreast of current market conditions helps management foresee both opportunity and trouble, but not only that—it also helps owners foresee the writing on the wall.
Perhaps shifting industry trends point to consolidation. When consolidation does begin to occur, understanding and keeping current will help in the navigation process.
For instance, knowing larger players in the market and understanding their intentions can be invaluable. Understanding business valuations, including typical company multiples, can help keep valuation expectations in check—especially when the market begins to froth.
Staying current and keeping fresh are all part of the “soft” metrics of planning for the exit, but are still important when it comes to not leaving money on the table. In addition, knowing trends can help in the decision and preparation of when the company should go to market.
In a world where macro factors dictate and where timing is everything, knowing when to strike while the iron is hot can have a direct dollar impact on the final valuation of the business.
Keep an eye on skeletons in the closet
A big—and often forgotten—component of planning for a business exit is the house cleaning that should occur prior to taking the company to market.
The H-E double L’s of litigation and liability in a business are sadly not the only skeletons in the closet that may require housekeeping; cleaning up the current and past books will be paramount.
A complete and accurate current and historical view of both the company’s income statement and balance sheet will be necessary. Any adjustments to the bottom line should be reasonable and to typical market standards.
In addition, all HR, legal, and operational issues should be dealt with so as to prepare the business to become as turnkey as possible, and to avoid any potential items a buyer may deem as “red flags” that could kibosh a close.
Some issues like managing culture and employee expectations can play a bigger role than originally anticipated. Employees may feel a sense of anxiety, wondering whether they will have job security after a transaction is complete.
Whether the seller would like to admit it or not, there is almost always an element of uncertainty, as buyers may have their own intentions after they close a deal. Managing expectations with both the buyer and the employees early and often will at least help the company maintain status quo and not put earnings at risk of decline.
Proper planning in this regard typically means bringing management and employees into discussions when appropriate. The decision to delay announcements of this type are often well-advised as employees—regardless of how they will be handled post-close—will likely be distracted by the flurry that will follow.
If the business is a well-oiled machine with all the right cogs performing at their optimum, any such announcement is likely to have less-severe of an impact on operations.
Create a business and a team you can be proud of, and the business will be prepared for sale when the time is right.
Plan for your buyer’s due diligence
Once all interested parties have been vetted and the final buyer has been selected, the real work begins.
The buyer will dig deeply into every aspect of the business, wanting to understand every nuance and ensure no rock remains unturned. In most instances, buyers use due diligence to ensure against the downside risk. With some more nefarious buyers, they’ll be looking for excuses to find a way to renegotiate the terms of the deal.
In planning for due diligence, sellers should understand there is a large time commitment which will likely eat up internal resources.
During due diligence, controllers and internal office managers will likely be completely overwhelmed by the sheer amount of requested data. Sellers and their intermediaries can help alleviate the pressure before due diligence begins by beginning the data gathering process before the items will actually be needed.
In many instances, buyers will request items that sellers do not even have and will likely need to produce, and it can take days and weeks to procure this material. Anticipating these items beforehand can help save time and could likely mean the difference in thousands or more.
In short, plan for due diligence many months prior and the closure process will be much more smooth and much less stressful for all involved.
Focus on value maximization
Cash-flowing businesses are great in that they regularly produce on-going income for both shareholders and founders.
But, the most important and lucrative sale an owner will ever make in the lifecycle of the business will be the business itself.
Ensuring that this process is executed flawlessly is more important than nearly any other deal the company has seen or will yet see.
True value maximization has a sustainable focus. That is, the value paid for the business is expected to last years into the future.
The antithesis of value maximization—when speaking of deal making—is often couched in the idea that the seller will provide mark-to-market “add backs” to the bottom-line, including things like personal expenses, draws, or above-market salaries for management.
While certainly warranted and necessary in the business sale preparation, they don’t provide value enhancement that a buyer would be willing to pay a premium for.
No, value maximization involves key company components that make the business a 2 + 2 = 5 scenario for a willing, strategic buyer.
Things like intellectual property (or other legally protected position), market leadership within a niche, higher willingness to pay, brand strength, or other goodwill items are paramount to receiving a premium above a typical industry-standard market multiple.
Thinking about and implementing some of these sustainable value-adding features to your business, coupled with the right sell-side M&A auction formula, will yield maximum results when it comes time to divest.
When entrepreneurs build companies, they often fail in the preparation the matters most: Preparing for the exit.
Seeing the end from the beginning is very difficult, especially as plans change, companies pivot, and the customer base expands.
Morphing the comprehensive plan to match the business growth and exit goals will ultimately yield the greatest value for shareholders.