Selling your company? The importance of having both cake and icing

Posted on by Stanton Associates

In our prior blog articles, we have discussed the way business owners can achieve dramatic increases in the valuation of their companies by way of two factors: even a slightly higher EBITDA as a % of sales, combined with a higher multiple (the number of times EBITDA that a buyer will pay for the company). The combination of a company’s good earnings (industry average or above average gross margins along with reliable and predictable revenue) and a growth strategy that it is executing successfully make for a very nice cake that someone will buy for a lot of money.

So, what is the icing? And why do most “Exit Planners” focus primarily on the icing and not the cake?

The icing represents the list of things it is smart to do in anticipation of an exit; i.e., what the company and the business owner should do to be ready for the sale transaction. These things include, to name just a few:

  • Set personal and financial objectives. (For example, once you have sold your company will the sales proceeds after tax be sufficient to sustain the lifestyle you want for the hopefully long life yet ahead of you?)
  • Carefully evaluate, with your key advisors, the exit alternatives: transfer to the next generation; management buy-out; ESOP; dividend recap; sale to a third party; sale of the assets via an orderly close down of the company.
  • What provisions need to be made for family members – both in and not in the business?
  • What about key employees who may have been with the company for decades and who are really part of the extended family? As many of these people may lose their job on the closing of the transaction or within the following 12 months, should they get a piece of the sale proceeds and, if so, how much and how is that done?
  • How do you ensure key employees stay through the sale as it will obviously damage the valuation if they leave?
  • Tax planning – the amount the government takes from the sale proceeds can be minimized significantly but the work needs to be started at least one to two years beforehand
  • Estate planning
  • Select advisors: exit planning consultant; investment bank; wealth advisor; corporate transaction attorney; CPA firm
  • Audited financial statements
  • Financial model and forecasts that are reliable
  • Corporate clean-up and securing IP.

Reviewing the above, it is obvious the icing is very important. But, again, it is not the cake.

Also, Exit Planners tend to focus primarily on the icing and not the cake because of two reasons:

  • It is what they know. Usually they have accounting and tax, or legal, or valuation backgrounds. Sometimes their expertise is as a family therapist, which actually can make a lot of sense when there are competing family interests and difficult personalities to reconcile. Rarely, however, do exit planners know how to improve the cake.
  • It is what business owners know they don’t know, so they are open to these discussions. Whereas working on the cake requires business owners, and employees, to be willing to make changes to the business – the sorts of changes a Private Equity firm would make after they buy the business and double the value in three to five years. This takes hard work and commitment and, as we all know, no one likes change.

In summary, having icing on the cake is a really good idea. It will definitely increase the amount of money the owner gets for the company and retains after tax. However, please remember that the majority of the amount gained from selling the company is based on the cake: what is EBITDA and what is the company’s expected rate of growth?

I’d love to hear what you think about this issue. Please let me know in the comments section below.

LEARN MORE about our approach to helping business owners unlock the value of their companies.

About Stanton Associates

Stanton Associates is passionate about helping business owners unlock the value in their companies and keep it for themselves. We are different from most exit planners. Like others we help prepare the company for sale and guide business owners through the process. What sets us apart is our ability to drive significant value creation. It is our mission to ensure that business owners don’t allow to be stolen what is rightfully theirs. Members of the Stanton Associates team have been the CEO, CFO, COO, CMO and Head of Sales at many mid-market companies. We know what it takes to drive value creation prior to an exit.

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