Magic 8-Ball: A Great Toy, But Not Great for Selling Your Business
by Rachel Boynton, MBA, CM&AA, Managing Director
Volume 6 Issue 8, April 23, 2019
If you’re like most entrepreneurs, you start your healthcare or human services company giving little to no thought about how you may one day sell it. Who has time to think about the end when you don’t even have a beginning?
Instead, you focus on building what you love to do. You launch a company that you believe will succeed and provide you with income. Your early goal is simple: grow. You probably imagine that someday, many years down the road, you will pass the company — and your legacy — off to your children or someone else who truly loves the business as much as you, but an exit plan is never really in the equation.
If all goes well, time will pass, and you will discover that your vision for the company has become a reality. You achieve a strong, growing, and successful business! You feel great pride in what you built but know that you can’t continue to do this forever. It’s time to think about the future — for yourself and the company.
There’s just one problem: You find that those people in your life you believed might want to continue your mission have embraced other ventures. The exit strategy you loosely envisioned is not an option. It only makes sense, then, to cash in on the value that you cultivated.
Signs Point To … Regret
You may have heard that a competitor made millions in a sale or that another received very little. How do you know what your company is worth? Will you get an appropriate return on all of the time, money, and energy you invested over the years?
What you will quickly learn is that the value of your company is directly tied to numbers — more specifically, your bottom line and quality outcomes. It doesn’t matter how wonderful you believe your company to be. You discover that you didn’t monitor your financials closely enough and there are probably some significant changes you should have made long ago. You also didn’t know that anyone would care about the poor state compliance review reports, believing that what ultimately mattered was your ability to continue delivering services.
Disappointment may quickly set in. The fate of your company now feels like it’s out of your control, and there’s no Magic 8-Ball to change that reality.
Controlling Your Future
The good news is that if you plan wisely, you can avoid such a scenario and not need to rely on luck to secure a fair sale price for your business. Here are nine steps I would advise you to take instead of leaving the value of your company to chance.
1. Create an exit plan. Determine what you believe is a likely exit date and start planning for it in advance. Develop financial and strategic benchmarks that will help best position the organization for sale. Set objectives for development, standardization, and compliance. Create budgets to assess growth, goal accomplishment, and areas of need. Begin discussions with an experienced mergers and acquisition (M&A) lawyer and accountant about the legal and tax implications of eventually selling your company.
2. Speak with a trusted M&A advisor. Learn the key value drivers prospective buyers will likely look for. Learn what other companies in your industry sold for and what qualities companies that couldn’t sell — or sell for as much as one might have expected — had in common. Ask about other M&A trends in your industry and what you can expect when you finally decide it’s time to sell.
3. Get your financial house in order. Engage a certified public accountant to audit your financials and ensure that you are following generally accepted accounting practices. Update your internal finance processes to create effective and efficient financial reporting that management can review and be held accountable to.
Contact your M&A advisor to conduct a comprehensive financial assessment to identify improvement opportunities and worthwhile, long-term objectives that will help maximize your sales opportunity in the future.
4. Read profit and loss statements with a buyer’s eyes. Take a fresh look at your company’s financial performance, focusing on what will likely matter most to prospective buyers. Don’t only focus on the bottom line. Closely examine spending and determine if there are expenses that can be eliminated or reduced. Evaluate your staffing and pursue untapped efficiencies.
Finishing each year in the black is great, but to attract the right buyers, you will need to raise the bar. What avenues exist for you to increase the value of your company? Buyers are looking for revenue growth and a healthy profit margin, which translates into a higher purchase price. Also, make sure your financial statements are accurate.
5. Diversify funding. Only billing one funding source for one service line is risky. It’s possible to lose everything if that funding source suddenly dries up. Many buyers are more comfortable with making an investment if there are multiple funding streams. This might mean expanding into additional regions or states and/or providing different services.
6. Delegate responsibilities. Entrepreneurs often put themselves in a position to be the final word on many decisions — often too many. While you may still want to provide input and possibly sign off on the big decisions and spends, begin empowering others to make decisions and take on greater leadership responsibilities. This should alleviate some of your stress. It should also allow you to focus on the most significant issues while strengthening your team and making the business more desirable to buyers.
7. Get accredited. Although the accreditation process is often costly and time consuming, going through it will help identify the areas of your agency most in need of improvement. It will also highlight the strengths and selling points of your company. Accreditation provides best-practice policies and procedures and helps professionalize your business. This can elevate your agency from basic to extraordinary, which should translate into higher purchase multiples.
8. Clean out the closet. During the due diligence process, a buyer will pull back your company’s curtains and look into every closet for skeletons. Make sure you deal with any debts, lawsuits, and compliance issues promptly. No buyer wants to inherit these headaches, and how you handle them speaks volumes about your competence and culture.
Buyers know that such issues are commonplace for any business. Be upfront and honest with your M&A advisor so that each can be evaluated and presented in the most positive light.
9. Surround yourself with smart people. Even if you are the most competent person at what you do, it’s unlikely that you also have the skills to be an effective lawyer, accountant, and M&A advisor. When you bring your business to the market, you will want to represent your organization in the most impressive manner possible. This is best accomplished with knowledge.
You’ll want each of the individuals filling critical positions on your planning team and representing you at the negotiating table to accentuate your professionalism and the strength of your organization. The team you put together will help ensure you receive the best value and identify the buyer most suited to achieve the desired vision for your organization’s future.
Most companies sell for a multiple of cash flow. As such, think about the notion that every additional dollar of cash flow creates a multiple of dollar value (sale price) for your company. I did not understand this concept until I started selling companies. I now understand the money I left on the table when I sold my company because I failed to properly prepare. Thankfully, our due diligence process went smoothly since we had undergone accreditation and knew we had no skeletons in our closet.
The key takeaways: Adequately preparing your business for sale is a large project. If you approach it as a methodical process, it will happen more naturally and effectively. The process will also strengthen your organization and ultimately make it a better place for you to work during your final years with the company. By performing the tasks described above, your chances of receiving the highest value for your company should greatly improve. There will be no need for a Magic 8-ball since you’ll be armed with knowledge and not counting on chance.