Baby boomer entrepreneurs are reaching retirement age, and many of them are selling their private businesses at very high prices. It’s not just Silicon Valley tech startups that are cashing out. Just about every industry — health care, manufacturing, biotech, retail and software, to name a few — is finding buyers anxious to invest. Naturally, you may be wondering how you can sell your business for top dollar.
According to PitchBook, an international research firm for Private Equity and Venture Capital, mid-sized U.S. companies commanded an average of 10.7 times their earnings in the first half of 2014, up from 10.2 times in 2013 —the highest prices since 2005.
The research firm also reports that private equity firms, which are big buyers today, are sitting on a lot of cash and looking for solid businesses to buy up. In most cases, strategic buyers and private equity firms want businesses with an enterprise value of at least $10 million. Enterprise value is an assessment of a company’s worth to a buyer, taking into account the debt and cash within the company.
While prices remain high today, it may not always be that way. Demand for good businesses is outstripping supply, and current low interest rates are helping to finance the deals. But interest rates are expected to rise and, if demand weakens, prices will fall as more sellers compete for fewer buyers.
Creating an exit plan
So, what are business owners doing today to command such high prices for their firms? A lot of it comes down to how they go about selling. Selling is complex, but if done right, you’ll get the terms you want for your business. Here’s how to begin your exit plan:
Get an initial valuation
With an initial valuation you’ll see if a business sale will support your retirement. This is also the place to begin analyzing the tax impact of various exit strategies. It’s important to get a market valuation from someone with expertise in business transactions, such as an investment banker or accounting firm with a specialty in mergers and acquisitions.
The next step is to enhance the value of your business. Activities that reduce cash needs, expand sales opportunities, reduce expenses, reduce the cost of debt or increase cash flow are all ways to enhance value.
Get in touch with an investment banker with expertise in working with firms of your size or industry. They’ll know what buyers commonly find attractive and what they expect to see when they evaluate your company.
Perhaps the most challenging part of a successful exit plan is carrying out a succession plan, or preparing and transitioning to a new management team. This is often the longest and most complex part of an exit plan because you don’t want to lose customers or alienate employees in the process. This can damage or even sink a firm after your exit, potentially costing you money in the way of lower earnout payments or even lawsuits from your buyer.
Shop the business around
A professional business broker or investment banker will shop your company around with potential buyers. Make sure you listen carefully to the feedback you receive so you can refine any areas of your business and make it more marketable to other potential buyers. When you make your pitch to potential buyers, make sure you show them the revenue growth potential after they buy your company, not as a standalone company.
If you’ve done your homework, you’ll be courted by several buyers.
Plan for Retirement
In parallel with the selling process, you’ll want to determine how much you need to retire comfortably. Once you sell your business and you’re on your way to retirement, you don’t want to find out that you don’t have enough money. Considering inflation, it’s surprising how much an active lifestyle costs over the course of two to three decades. A financial planner can help you create a retirement plan to calculate how much you need.
Selling a business is a complex process. Done haphazardly, you could end up doing serious damage to it. Done carefully, you’ll get top dollar and smoothly move into the next chapter in your life.
Gary Alt is a partner with Monterey Private Wealth in Pleasanton, and is a member of the Exit Planning Institute