With a long history and deep expertise in the mid-market segment, including in the M&A space, BDO is uniquely positioned to advise owners on successfully selling their businesses. After working with thousands of small and mid-market clients on a wide range of business issues, we understand the unique challenges and opportunities faced by families and entrepreneurs in the day-to-day operations of their businesses and when going through major decisions.
Published: June 06, 2024
Updated: June 06, 2024
When the time comes to sell, most owners have a goal to extract the optimal value out of the sale. To achieve this, before going down the path of selling your business, it is important to take a step back, stand in the shoes of a potential buyer, and ask yourself: what can I do to improve the value of my business?
Successfully selling your business requires preparation, as there are many considerations and decisions to make, as well as opportunities to increase value. Some of the key items that buyers will focus on are your level of digitization or the state of your IT infrastructure, strength of your management team and succession plan, and expected future growth for your business.
Prioritizing opportunities
Where should you invest your time and resources before selling, and how do you even get started? There are many things you could do, but only a limited amount of time to realize results. Understanding opportunities, their potential impact, and the level of effort required can be challenging, but you don’t have to figure it out on your own. Sellers can benefit from external help that brings knowledge and experience, assisting with identifying and prioritizing improvement opportunities to best position your business for a successful exit.
Some business owners might feel that they don’t have the capital to invest in their business, or that it doesn’t make sense to spend the money if they are selling. However, there are often changes that require minimal investment and can result in significant benefits, such as switching to a cloud accounting platform, which usually allows for better financial reporting and better decision-making. Overall, efforts to digitize any aspect of the business usually have positive returns, and owners can take advantage of government grants and incentives to do so. For example, the Digital Modernization Adoption Plan (DMAP) offers up to $15,000 in funding to drive productivity increases and company growth through technology.
When prioritizing opportunities, owners should consider a few key variables:
- Degree of change involved
- Time required to implement
- Level of investment or spend
- The potential expected impact
While addressing lower performing areas of the business can often achieve noticeable results, it is important to evaluate against other options to maximize value creation prior to sale. Once again, thinking like a buyer, ask yourself: where can I get the bigger, longer-lasting profit bumps?
Key opportunity areas to consider
The following are three key areas that owners should pay particular attention to when contemplating a sale. We often see a need for improvement in these areas for our mid-market clients. These are also items where planning ahead is important since they may require time to address.
We often find that business processes at many companies are still highly manual, and buyers—especially private equity firms—want to see more modern, efficient technology in place. Obsolete or antiquated technology reduces the value of a business since the buyer will most likely have to invest time and resources in updating the digital architecture.
In addition to being more inefficient, relying on manual processes to accomplish tasks—for example, using Excel to do finances or manage inventory—exposes you to disruption caused by employee turnover. High reliance on manual processes is a common reason why buyers apply discounts to company valuations.
Having a clear succession and transition plan in place is critical when preparing to sell your business. Potential buyers prefer businesses that are able to function independently from its owners, or where the owners are significantly involved, that there is a clear plan to transfer knowledge and transition responsibilities with a specific timeline.
Owners need to be honest about where the business relies too much on themselves, and work to address gaps prior to sale. Likewise, it should be clear to buyers what the owners’ role will be after the business is sold. Understanding key personnel gaps and addressing them with enough lead time is a proven way to achieve a higher valuation in the eyes of potential buyers.
Business owners are often focused on day-to-day issues of running the business with limited capacity to reflect on future growth potential. Taking the time to understand market trends and opportunities, including how best to capture them, well in advance of a sale will better prepare you to address questions from buyers on business expectations and future profit potential, which can weigh heavily on perceived value. Owners that are well informed, have a clear perspective on future growth potential, and have a strategy in place often have stronger engagement from sophisticated buyers.
Planning for an exit
Ideally, we recommend that owners start planning an exit two to three years in advance of going to market. As mentioned earlier, some initiatives do require a longer lead time to execute, and ideally the benefits of implemented initiatives should be demonstrated with at least 12 months (or more) of improved performance. For example, replacing a manual accounting system with a new, more automated cloud-based system can take up to six months, depending on the complexity of the business. Additionally, you need at least 12 months of successful operation under the new system prior to going out to market, making it an 18-month initiative from inception to demonstrated results.
Similarly, when hiring a new employee to address a gap, especially at more senior levels, it can take time to find a suitable candidate with the appropriate credentials. Once hired, it usually takes at least six months to a year for the new hire to develop the institutional knowledge to be successful in the role and reach the expected level of performance. This translates into a timeline of at least two years from the moment the opportunity is identified. So again, starting early when preparing for an exit is the way to go to maximize value.