Planning Your Exit On Your Terms – A Comprehensive Valuation Begins the Process

Many of our clients have prepared themselves and their businesses to be successfully marketed for sale.  The results proved the preparation to be worth the time and effort.  Unfortunately, we too often see business owners after they’ve already made up their minds that it’s time to sell their business, but without proper planning.  Why is this unfortunate?  Because the lack of planning results in leaving money on the table and having a business that presents challenges to market effectively.

This is a one-time event – get it right with developing a proper exit plan.  The first step in the process of building an exit plan is to figure out what you have and where do you need to finish.  A well thought out and comprehensive business valuation is the cornerstone to that process.  Components of the valuation should include a lot more than slapping a multiple against EBITDA.

To get it right, a team should be assembled to compile and review the valuation.  This team includes, at a minimum; an accountant, tax specialist, wealth manager/financial planner, and an attorney.

Here are the steps in preparing and analyzing a comprehensive valuation:

1. Review all financial information and recast to determine the actual business earnings. This step involves adjusting the Income Statement and Balance Sheet to eliminate any expenses not related to the operation of the business, including owner personal benefits and one-time expenses.   The adjusted earning, or Seller’s Discretionary Earnings, becomes the basis for valuation process.

2. Analyze the business from an operational perspective. This step includes performing a Transaction Readiness Assessment and Value Driver Analysis.  One of the models for valuing a business focuses on how the business ranks in these areas.  Some of the areas that impact value are:

• Owner’s role and responsibilities and “replacability”

• Strength of management team

• Strength of the employee group

• Are there any customer concentration issues

• Quality of earnings or quality of customers

3. Transferability is a key phrase we use in determining how ready a business is to go to market. The easier the transfer of the business, its employees and customers, the lower the risk to a buyer, resulting in a higher value and greater interest in the market.

If applicable, it’s also important to know the value of other business assets – equipment and real estate.

4. Once the valuation and appraisals have been completed the next step is a detailed analysis of the results.

• Analyze the “Most Probable Selling Price”

• Was the methodology sound

• Were all critical elements of the business taken into consideration

• Are the results based on a Buyer’s reality (for example, if a high multiple of earnings was used, does the estimated post-debt service cash flow make sense)

• Analyze the tax implications

• Model deal structures with the potential tax consequences

• Estimate post-tax net benefit from the transaction

• Meet with wealth manager

• How does the net cash benefit from the sale fit into the total investment plan

• Is it enough? If yes, it’s time to discuss the process and timing of confidentially marketing the business for sale.

• If not, determine what the “needed” price is and develop plan to achieve the investment plan

• If there is a gap between the actual value and wanted or needed value a plan can be developed to reduce or eliminate the gap

A plan is only useful if you know where you’re starting and where you want to finish.  By investing in a comprehensive business valuation a business owner will be gain the peace of mind that they are where they need to be or have a timeframe and plan to work on the value drivers that will close the gap.

For a confidential, no cost, no obligation meeting to learn more about how to develop an exit plan, contact Sunbelt Business Advisors at 937-866-4611 or dayton@sunbeltnetwork.com.

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