Looking to get top dollar? Prepare to sell to a strategic buyer

Preparing to sell a business means more than simply sprucing up its operations. To get the highest and best price, there are a number of steps a seller needs to take well in advance of approaching prospective buyers.

Sometimes referred to as an "exit strategy," it is a long-term plan for transferring the ownership of one's company to another.

The characteristics of a "long-term plan" means it is conceived before it becomes desirable or necessary. This is what distinguishes exit strategies from more abrupt actions such as selling out or selling short.

Although preparation may seem time-consuming, many owners find that implementing an exit strategy not only improves their management practices, it can improve the attractiveness and the value of their business as well.

Yet research shows that 70 percent of business owners don't have an exit strategy. Simply put, they may be missing the boat, and may have to settle for a standard financial price at the close of escrow.

Let me explain.

Many small or medium sized companies are sold for prices expressed as a multiple of seller's cash flow or earnings. Each industry has a rule of thumb and an expected multiple that buyers will pay. You probably have heard multiples of this sort: "2.3 to 2.7 times seller's discretionary earnings." Sales at prices based on these sorts of multiple are characterized as "financial sales."

Sometimes however, a larger company will buy a company for reasons other than its profits or cash flow. They want some particular element of the business, not for what it generates in your business, but for what it does to their business that can enable them to make money from integrating the acquisition into their company.

For example, you might have a product line they can easily and profitably be sold to their existing customers. Or you might have a technology that they can use to cut their own costs. You might have all sorts of things they can profitably deploy in their business - geographic reach, certain large, prestigious customers, key employees or a good brand name, just to name a few.

These elements of your business - the ones that have unusual value to certain buyers - are characterized as "strategic assets." And the buyers of interest are viewed as "strategic buyers."

In order to become a "strategic sale," you must have strategic assets that are not easily replicated, and are considered significantly valuable by multiple strategic bidders. In other words, they increase significantly the buyer's return on investment from the acquisition.

In a strategic acquisition, the buyer's return on investment is typically far higher than in a financial acquisition. As a seller, that allows you to negotiate a much higher price when you sell your company.

The reason strategic buyers are willing to pay so much more for your strategic assets is simple to understand. If they purchase your business they can afford to pay a certain amount based on the return on investment the business generates by itself. But if they get strategic assets that also help them increase their existing revenues or decrease their existing costs, then they can afford to pay more, often much more.

For instance, my firm, The Liberty Group of Nevada, LLC, has been certified to provide ExiTrak services to help our clients prepare their company for a strategic sale. Whenever we can help assist our clients with preparing to sell their business, it creates a win-win situation for all our stakeholders.

ExiTrak is a proprietary methodology where a team of top professionals a) assess a business' current situation and current strategic potential, b) do extensive research (personal interviews) into what the strategic buyers in their industry will value most highly, and c) help our client build and implement a plan to develop the company into a valuable strategic acquisition candidate.

Beyond the steps outlined above, sellers need to consider what happens during and after the sale. Beyond the operational strategies outlined above, there are concerns associated with the actual transition, taxes, estate planning, key personnel, contracts, etc. which can impact the amount the seller's will net at the close and, most importantly, your after-tax proceeds from the sale.

As a result, business owners should not only involve long-time trusted advisors such as accountants, but also a knowledgeable business broker to keep them focused on their business. They can't afford to let their business' performance decline because they're too focused on its sale.

Susan Sidwell is a business broker with The Liberty Group of Nevada LLC in Reno. Contact her at 775-825-3948 or ssidwell@TheLibertyGroupofNevada.com.