Exit strategies

Vistage / TEC member Carol Coughlin has developed a set of tips for business owners who are positioning their company for sale. Her advice is practical and to the point.

The bottom line: make sure that your financial house is in order.

Tip 1: Your books should be closed by the 15th of each month. That will give you ample time to spot trends from month to month. One of the most common bookkeeping errors to watch for is duplicate entries of revenues or expenses.


Tip 2:
Maintain your books and records according to generally accepted accounting principles. Many small companies, especially consulting/service businesses, use financial reports to primarily evaluate cash positions.

Obviously, cash is king. But when business projects receive deposits in advance of the work done or in varying amounts on an ongoing basis, the cash information can be distorted. Generally accepted accounting principles match revenue with effort, and this is a language that accountants, investment bankers and buyers understand.


Tip 3:
If you have non-recurring costs associated with a new business start-up, these expenses should be separately identified. Otherwise, they can easily become convoluted with your regular business expenses.


Tip 4:
Document your company’s current yearly performance with the results achieved last year. Pay particular attention to variances from budget and plan. Most buyers will ask for, as a part of their due diligence, a five-year historical record, in addition to a three- to five-year forward projection.

“Missing data” is one of the biggest problems buyers run into when looking for a history of results.


Tip 5:
Have benchmarks so you can compare your company’s performance to others in the industry. If you don’t have specific industry trade data, the Risk Management Association is a useful source.

RMA lists performance quartile breakdowns on a variety of income statement and balance sheet ratios. By comparing yourself against these benchmarks, you can work to correct any significant variances such as inventory turns that are well below the industry standard.


Tip 6:
Have immediate access to critical financial business information. At minimum:

  • Profit margins on each business line.
  • Start-up costs associated with each new business initiative.
  • Which products or services are winners and losers.
  • Which territories or geographical sales regions are winners and losers.
  • Detailed key account information (history, future potential, profitability, etc.)

Tip 7: Don’t accept mediocre performance. If your costs are out of line, get them in line. If your pricing is commodity-driven, find ways to make it value-added driven. Quality pricing catches a buyer’s attention because it says so much about the total business effort.

These tips relate principally to the financial side of your enterprise. But they only tell part of the story. Lessons we have learned from our Wisconsin/Michigan TEC members over the years tell the rest of the story. They include:

Competition

Know your competitive advantage. Be able to tell your buyer why you’re better than your competition, using data to back up what you say. The key issues seem to always be quality, service, performance reliability, problem-solving ability and pricing. Results from customer surveys or focus groups can provide the proof.


Market share

As GE researches have shown, there’s a direct correlation between market share and profitability. The issue is “relative” market share compared to your key competitors. If you’re above 10 percent, it should reflect in your overall profitability. Measuring market share is the challenge, especially in service businesses. You must determine the potential realistic market for each product or service line, and then estimate what your share is relative to your key competitors. Being able to specify market share objectives is a major plus to a potential buyer.

Human resources

The quality, experience and overall expertise of your employees always plays a critical factor in a purchase, unless the buyer is only interested in seeing your customer lists, product lines or market territories. And a record of ongoing employee development and training speaks strongly to your human resources commitment.

There are many other sub-issues that affect the quality of a potential sale such as patents, licenses, long-term contracts, proprietary products, intellectual property, and so on. Until next month, use the suggestions here as a first step to prepare your successful transition to a post-business life.

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