Get the Value You Want When It’s Time for Succession

By Amber Ferrie

If you want to ensure you get the value you want for your business, you must be proactive 

When it’s time to transition your family-owned business, many of the goals you have for the next chapter in your life will hinge on one thing—the sale price of your business. You may feel like you have a good idea of what your business is worth, but when it comes to the final sale price in a transaction, there are going to be many factors that contribute to that number. And who you are selling to – family or an outside party — can impact the process you use to determine it.

The Importance of a Strategic Succession Plan

Your exit plan should take into account your goals in a number of areas: business operations, continuity of culture, your retirement plans and your goals related to your wealth planning. The value you receive for your business will obviously have a direct impact on the last two, but these are all important and complicated topics. Yet it’s proven that a large majority – around 70% – of global family businesses don’t have a formal succession plan. Other research has shown that less than one third of family-owned businesses are successful in the succession wealth management process.

If you want to ensure you get the value you want for your business, you need to be proactive and strategic in your succession planning. That’s the best way to put your business in the best possible position for a sale.

Determining Value

When you want to sell your business can influence the method you use to determine what your business is worth.

 

Sale in Years

If you’re looking at a sale several years in the future, a business valuation from an independent third party is a good option. You will have time to look closely at the valuation and determine how you can maximize that number before the transition takes place. You can use this information to solve any management or operational issues that could be hurting a future sale, as well as set up any gifting or estate options that go with your succession plan. Identifying your key value drivers, risks and opportunities early will give you the best chance for a successful transition.

Even if your plan is centered around a transition to the next generation, an independent business valuation is important. An independent valuation can help create a fair starting point for all family and stakeholders, especially if you have to grapple with how to divide shares for the next generation amid both active and passive participants.  

Sale in Months

If you want to sell your business in less than a year, say six to nine months, then you’ll likely want to look at having a transaction advisor pull market multiples to show how your business’s worth across areas like revenue, industry and EBITDA.

A transaction advisor will research your industry and see what multiples other businesses have used in recent sales, including past growth and your potential for growth, as well as other factors that affect your market. They will also look at all the details in ensure you can ask for the highest multiplier and justify it.

Important Items That Could Affect Your Value

Even with a solid value established for your business, you’ll still have to contend with another important factor—your buyer, who also has a target number when it comes to value. To truly prepare for transition, you need to flip your perspective. Put yourself in the buyer’s shoes and consider what’s important to them when acquiring the business.

If you have to adapt your business to buyers’ preferences, it likely will involve formalizing and “professionalizing” your business – clearly defining roles, understanding margin drivers, relationships and investing in people, processes, and technology.

Here are some common family-owned business issues that don’t align with buyer values:

· The management team isn’t formalized.

· There’s a lack of investment in ERP systems and modern processes.

· The business owner operates from a cash basis versus the buyer-preferred accrual basis mindset.

· Contracts do not include documentation that guarantees transferability.

· The business doesn’t have a monthly financial package for review or an efficient monthly closing process.

· There aren’t any established, formal Key Performance Indicators (KPIs) or well thought out forecasts to measure performance from a financial perspective.

Critically important financial and operational issues will vary by industry. For instance, in the manufacturing industry, buyers want inventory availability and supply chain security to ensure they can continue the manufacturing process. They’re also drawn to achievable growth forecasts supported by supply chain and inventory capabilities.

In service and contract-based industries, on the other hand, revenue recognition for contractors and signed and transferrable contracts are most critical. Sellers should have well established accounting policies related to revenue recognition that are in accordance with GAAP. Transferrable contracts are attractive because, without them, the buyer must have customers re-assign contracts. This is tedious and runs the risk of customers dropping off or revisiting contract pricing and terms.

Proper Preparation is Key

Whenever and however you decide to transition your business, being prepared is the key to achieving the value you want. Sale opportunities can come at any time. With advanced planning, you can not only understand the worth of your organization, but also know how to answer should an option arise.

The help of an experienced advisor can be extremely beneficial in transition planning, and the earlier they are involved, the better. They can draw on their experience to help you see more of the buyer’s perspective, give next steps based on your timeline and have access to benchmarking tools that can help you understand where you are compared to competitors and what that means for a sale.

A clear vision of the value you want to receive for your business and the process to get there will help you build a roadmap to achieving your goals of success.

Amber Ferrie is the Partner-in-Charge of Transaction Advisory at Eide Bailley

Audio Sound Duration: 
00:00

Other Related Articles

  • NextGens to Watch 2022

    Rising-generation members who want to contribute to their family business need relevant education and experience, but that’s not all. They also must prove themselves as indispensable contributors to...

  • Compensation survey update

    Families, management and money

  • Chapter One: What's your story?

    When I was a kid, my mother told me stories about my grandfather, who was an NBC radio broadcaster during World War II. Later in his career, he went on to develop a children’s television show a...

  • Get the most out of your board

    The key to maximizing board value? Ask the right questions.