by Dylan Stuart, Sunbelt Business Brokers Atlantic
For most entrepreneurs’ strategic acquisitions and planned exits are at the forefront of the entrepreneurial journey. When purchasing a company, you are looking for something with efficient operation, satisfactory financials, and the ability to hit the ground running, something that shows the potential of a smooth transition. On the other hand when selling a company you are looking to maximize profits and find the right buyer that will continue to nurture your prized possession. Some strategic planning will prove to be of upmost importance for both buyers and sellers.
New business through acquisition comes with its advantages, expanding market share, diversifying products and services, and gaining new competencies, but how can you identify the right business for you? Does this business align with your strategic goals? does it fit in your “wheelhouse”? Is there room for growth and expansion? What about the financial health of the company? These are all important questions to ask when considering starting out in business or expanding your current operations. A potential buyer will want to delve into the state of the business, its clientele, employees, market share, and above all else the financials to better understand both the values and risks associated with the potential purchase.
Once the due diligence has been completed the potential buyer will have a better understanding of the current state of the offered business and whether it will work for them. But what is a fair price? There are a few factors at play, revenues, expenses, profitability, potential for growth etc. Often a business broker will work as your advisor assisting you through this process as well as a legal representative.
When financing an acquisition there are a few options, traditional banks, private lenders, and business development banks, but most of the time you will only be able to garner 50%-60% of the required purchase price. The remaining investment will need to come from your personal or existing business accounts. Often sellers will “hold paper” meaning the seller will finance a portion of the deal directly. This works for both parties as it increases the salability of a company, assist the buyer with funds for the purchase, and the seller will typically charge an interest rate on their loan increasing their net profit.
When a business owner is preparing to exit, they need to show their company in the most attractive way possible. Strong financials, solid customer base, good employee retention, and show that it is scalable for the new buyer. Just as important are both the market conditions and timing. For a lot of companies Covid was hard on the financial statements and their markets. We are just beginning to get a clearer picture of the actual state of these companies now that we have a couple years of post pandemic data.
Often business owners are wondering which exit strategy is best for them and their companies. Whether it be selling to a third party, management buyouts, passing the business to a family member etc. The idea is to make the transition as seamless as possible and incurring the least amount of cost during this time is also an important consideration. Inevitably the exit strategy will be a decision made by the owner that will work in their best interests.
To enhance business value the seller should have the financial statements recast. This is a good idea for any seller to have done as this will show your company in the best light possible. Do you have nonrecurring expenses, vehicles, boats etc, kids cell phones, family members on payroll? These expenses are not pertinent to the day-to-day operations of the business and should be excluded from the actual financials that buyers are going to be working from. Are there ways that you can increase profitability? Streamline operations? Strengthen customer relations? These should all be considered when preparing to exit your business.
Valuing the company, marketing the company, negotiations with buyers, and closing the deal are often done with the help of a business broker, and legal assistance. Often, I see that sellers are reluctant to share important details to buyers, there is a lot of passion and sweat equity involved and is often best to have a third party assist in the process to ensure the proper steps are taken and sales prices are maximized.
At the end of the day acquisition and exits are fundamental in the success of both buyers and sellers. The deal needs to work for both parties. I would recommend all investors and entrepreneurs to contact a business broker for assistance in this process. A percentage of the sale price will be spent on the brokers assistance, but this is often offset with an increased purchase price, industry knowledge and market reach. Entrepreneurs now a days need to think long term and the exit strategy should be a part of the planning from the very start of the acquisition.
