When it’s time to plan an exit strategy there are many options. To keep or sell a business is often an emotional choice, and it’s never easy. Here are five logistical things to consider when the time comes:
Stock market and interest rates: Even if your company is private, the stock market will play a role in the price you can expect from its sale. Public and private company valuations are correlated. Interest rates also play a factor in the cost of capital. As interest rates go up, valuation typically goes down. Interest rates are now historically low, which is one of the reasons why your business has a historically high valuation. In the next two years, if interest rates or your revenues increase, you may expect your business to be worth the same as it is now.
Understanding your business’ value: A business is valued when it is for sale on a different basis than when you value it as assets less the company’s liabilities (or “book value”). Values today are determined by current multiples of the company’s earnings or annual revenue. Additionally, the appropriate multiple for any company is determined by the current average multiple paid by buyers in each industry and the size of the company. These industry average multiples are available in proprietary databases where actual transaction information for both private and public companies are available to subscribers. It is always best for business owners to consider overtures or offers to buy their company from outside buyers as “teaser” offers. Real market value is only derived from an examination of the price at which companies in your industry and in your range of annual revenues have changed hands in the past.
Feasibility: The first thing to consider is the valuation of your business. Once that is established, you need to determine if the after-tax price paid will sustain your future spending. Conversations with your financial advisor, accountant, family members and advisory board play a role in determining if selling is the right decision, and if it is the right time to sell. Once a business is sold, you can no longer take advantage of it for a company car, country club membership, business travel or customer entertainment.
Pre-sale planning activities: It is very important for you to know in advance the structure of the transaction best suited to assure you the most tax-efficient outcome. There are several structures that can benefit you, such as a sale of assets, a leveraged recapitalization with a one-time dividend, an installment sale or the use of trusts, to name a few. Investment bankers will run an after-tax model scenario for each structure.
The investment banker’s role: The investment banker will first help conduct an offering price analysis of your business. In coordinating the efforts that lead to the sale of your company, the second task would be to create a teaser and confidential information memorandum (known as “the book”) to market the business. The banker will help you determine the best route to take, which could be selling to a strategic buyer or private equity firm, creating an employee stock ownership plan, going public, selling to management or, perhaps, not selling at all, but transitioning it to the next generation. The banker should list the pros and cons of each of these avenues, help negotiate the best outcome for you and structure the deal.
