Planning for the Future of Your Business
Planning for the Future of Your Business
Business owners are often so consumed with the challenges of running their business that they have little time to plan for the ultimate future of the company they have built. For most founders, the majority of their personal net worth, along with much of their sense of self, is tied up in their business. It takes thoughtful planning and evaluation of alternatives to determine the right transition path for each business owner. Options may include a generational succession, moving towards a family office model, a management team buyout, transition to ESOP ownership, partnering with a private equity sponsor while staying on or selling outright to a private equity or strategic buyer. The important thing is, it takes planning to ensure your business continues beyond your active involvement and goes on supporting your employees, vendors, customers and community.
For any transition strategy, strategic planning and preparation with a partner who has been there and done that will clarify the process and yield the best results. The road to a founder's exit should ideally be five years or more, with the last year focused on specific preparation steps that will maximize stability and value and minimize pain and pitfalls.
If selling your business is the route you believe you might want to take, it pays to understand the details of the process before you start. While far from complete, a representative checklist and timeline of a formal sale process is outlined below. Even with sell-side representation by a business broker or investment bank, a knowledgeable and dedicated quarterback on your transition team can provide guidance that makes this process easier, less stressful and more successful, particularly for first-time sellers.
Tune up Your Business Engine
Long before you are ready to start a sale process, it is important to start running your business with a plan to build transferable value:
- Based on your personal post-transition goals and a complete personal financial plan, understand your target valuation and what it will take for your business to support that valuation.
- Set your timeline to achieve that goal. Commit to it (but be flexible).
- Implement a formal strategic planning process if you don’t have one. EOS and Scaling Up are great ones to consider.
- Develop and track performance against financial targets. Develop long-range (5 year) plans.
- Get audited or reviewed financials for 3 to 5 years. Ideally follow GAAP or address non-standard items.
- Clean up your inventory. Sell or waste slow and non-moving items.
- Start digitizing records in a searchable system. Corporate documents, contracts, leases, tax returns and financial compilations are just a few of the items you will want to be able to share.
- Develop and track KPI’s - visually if possible.
- Ensure you have an adequate finance team - Controller or CFO depending on size and complexity.
- Develop your leadership team. Clearly identify weaknesses and address them. Consider growth and profitability-based incentive plans for key players but keep it simple.
- Reduce customer and channel concentration.
- Evaluate growth initiatives. If possible, prove their feasibility with a limited trial.
- Consider pruning non-performing lines.
- Identify, manage and protect intellectual property.
- Ensure partnership alignment and clarity of equity ownership. (IE do all partners want to sell, or can the controlling partner force sale?)
- Get educated on important financial concepts such as EBITDA, adjustments to EBITDA and leverage.
- Start to identify potential strategic acquirers - likely to be competitors or businesses you encounter at trade shows/conferences.
Begin Planning Your Route
When the business is running well and you are a year or so from your target exit date, you will truly begin preparations to sell:
- Identify and confirm your post-transition leadership team. Fire and hire where necessary.
- Clarify your own post-close role and compensation expectations. Be realistic about who should best lead the business.
- Transfer and document your knowledge - prepare to prove that the business is not “in your head.”
- Track EBITDA. Get educated on current multiples in your industry.
- Consult with financial planning, estate planning and tax professionals.
- Realistically look at likely selling price range. Confirm you (and partners) are on board with selling and set price floor.
- Update your 5-year plan. Articulate your growth opportunities. Identify growth capital needs and projected impact.
- Aggressively clean up your balance sheet. Scrutinize your inventory again. Collect or write offbad debts. Get reasonably current with vendors.
- Clean and spruce up premises. Learn and employ Lean 5S. Get fresh eyes in to look at the business.
- Begin to network in your local deal community.
- Evaluate potential selling representatives - investment bankers or business brokers.
Fill the Tank, Check the Oil
Six months out, you will start the process in earnest.
- Select your sell-side representative and agree on terms.
- Share the history of the business, brand story, SWOT, team, sales projections, hidden issues, development.
- Begin to build the “data room” - online digital repository of key company information.
- Help prepare Confidential Information Memorandum or “CIM” and “Teaser.”
- Address weaknesses they identify and develop explanations.
- Review and contribute to target list of potential acquirers - both strategic and financial. Your sell side partner will help.
- Decide on your internal approach - full disclosure or select participants.
- Consider the need for transaction bonuses to retain key personnel.
Start the Drive
Time to go to market!
- Selling team sends Teaser to target list and follows up with candidates.
- NDA’s will be exchanged with targets before providing CIM.
- They will possibly schedule “fireside chats” or early looks for particularly strong potentials.
- Receive and evaluate “Indications of Value” - nonbinding purchase offers.
- Downselect to list for management presentations.
- Schedule and strategize management presentations. Plan and practice!
Coffee Up!
The last month to six weeks of marketing the business is intense and tiring!
- Conduct management presentations - on site for open process, or off for confidential. On-site far preferred to show business best.
- Answer questions - LOTS of them – and provide additional diligence materials! Your representative will assist by organizing questions and providing answers to questions already answered.
- Receive “binding” Letters of Intent or LOI’s. These are firm offers but an accepted offer can still be rescinded based on diligence findings. Your representative will help you and evaluate offers.
- Select and sign an LOI!
- Set target closing date – usual goal is 45 days, which typically stretches to 60.
Drive to the Finish
You thought you were there but you’ve still got hours of driving:
- Respond to due diligence - an endless proctology exam with dozens of hired hands poking into every single aspect of your business trying to find things wrong: finances, tax returns, legal agreements, regulatory compliance, HR compliance, benefits compliance, environmental risks, customer concentration, brand reputation,
- Negotiate sales agreements, restrictive covenants, net working capital requirements, etc. etc.
- Close! Pay your sales team and legal bills and taxes and enjoy your next chapter!
Avoid the Potholes!
Many things can throw a deal off track. Know these potholes and avoid them:
- Unrealistic price or multiple expectation – a common issue now due to rising interest rates and more risk-averse investors. (Just because your golf buddy says he got 10x doesn't mean it's likely now.)
- Messy financials.
- Lingering legal issues.
- Partnership lack of alignment.
- Business too reliant on founders.
- Unrealistic or unarticulated strategic growth plan.
- Inconsistent financial performance, or downturn not yet reversed.
- ANY decline in sales, margins or prices.
- Lack of differentiation.
- Weak post transition team.