Interest in merger and acquisition activity has remained strong, despite an uneven political landscape, and private business owners continue to be hopeful. However, owners looking to sell their businesses should still be cautious.
The M&A market remains ‘seller biased,’ but many businesses may not draw the high prices they expect. A business owner looking to sell must first take the time to assess their company’s market position and create a viable plan for the ownership transition.
Before business owners put their businesses on the auction block, I recommend taking some of the following steps:
Determine and prioritize your objectives
Are you looking solely at the economics, such as getting the highest after-tax value possible for your company? Are you willing to take less cash upfront if it means carving out a continuing role for yourself at the business? Defining your financial objectives and parameters for a sale before the process is initiated will increase the likelihood of a positive outcome.
Engage a personal wealth adviser
Selling your business will likely create a need to reevaluate your personal wealth strategy. It is important to engage with a personal wealth adviser that understands how the sale of your business will impact your broader wealth/estate planning strategy. In many cases, there may be the need to preemptively put in place various estate planning mechanisms to ensure the best possible after-tax outcome. A seasoned financial adviser with M&A transaction experience is invaluable for sellers with this important consideration.
Build company value
Taking time to strengthen company operations before hitting the marketplace will put you in a stronger negotiating position and increase your potential for a good sale price. For example, if your profits are lower than your market peers and compared to norms in your industry, you may be able to review and modify contracts that will cut ongoing expenses and improve your margins. You may also be able to shore up your client base and strengthen your revenue projections by reducing your reliance on a small base of customers and increasing diversity of revenue streams.
Obtain a Quality of Earnings review
Hiring an outside accounting firm to perform a Quality of Earnings report prior to initiating a sales process has become increasingly common. While prospective buyers will always hire someone to perform or review a “sellers” QofE on their behalf, a preemptive QofE helps sellers, and their advisers, get a firm starting point for valuation expectations and avoid unnecessary surprises. The QofE report serves as a mechanism to identify any financial reporting issues that would be best addressed before opening up the company to review by buyers and their advisers. This step can also improve certainty of closing by reducing the likelihood of surprises that can negatively impact valuation during diligence and negotiations.
Jeremy Eberlein is managing director of investment banking at Fifth Third Securities.
Fifth Third does not provide tax or legal advice. Please consult your tax advisor or legal professional before making any decisions or taking any action based on this information. Fifth Third Securities is the trade name used by Fifth Third Securities, Inc., member FINRA/SIPC, a wholly owned subsidiary of Fifth Third Bank, a registered broker-dealer, and a registered investment advisor registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Securities and investments offered through Fifth Third Securities, Inc.: Are Not FDIC Insured, Offer No Bank Guarantee, May Lose Value, Are Not Insured by Any Federal Government Agency, Are Not A Deposit.
