Don’t Lose Your Leverage, Control the Sale of Your Business

By: John D. Poppe, Jr.

When it comes to selling your business, you want to be sure you are prepared. A business exit should always be a well-strategized event, structured to help you get the highest return on all the time, energy, and money that you have poured into your business over the years. The process of selling your company needs to be intensively planned to ensure that the entire organization and all its internal and external stakeholders are aligned for sale with intentionally and strategically pre-determined terms. Having the luxury of time allows you to choose the ideal buyer out of multiple offers.

But what about when the sale of your business is not planned?

The truth is that you may not always know when it’s time to sell your business. And, many financial advisors will suggest that timing the market is not the best of investment strategies. However, certain circumstances that are typically out of your control can disrupt, stress, or even force a sale of your business. These circumstances could lead to the devaluation of your assets, talent, trade secrets, real estate, everything . A pressured sale could cause you to lose your leverage in the sale and force you to sell for a lower valuation – that is, if you aren’t prepared.

What Could Cause a Forced Sale of Your Business?

We call them D- risks. These are risks that are a part of everyday life. Owners manage business risk very well, but D-risks are usually curve balls that owners may have a blind spot to. When they occur, D- risks can have a detrimental impact on the value of your company and, in some circumstances, may cause you to have to sell your business. Some D-Risks to highlight include:

Death – If an owner passes suddenly, without proper estate planning and managerial preparedness, an owner's heir(s) may rush into a sale, especially if they are not able to assume management of the company. If the owner, as is often the case, is the "face" of the company, significant concern about the longevity of the business may be perceived.

Disability – If the owner or other “key person” are unable to perform the duties of leadership due to sudden and catastrophic illness, concerns about the stability of the company may develop. As valuations reflect both historical and projected performance of a business, this could pressure value of the company at an ill-opportune time.

Divorce – A marital breakdown can force an urgent sale of a business, compounding an already personally and financially stressful time. This can happen if the spouses own the business together, or if one spouse owns a business and a legal mandate is made to equitably divide assets. Buy-Sell, Prenuptial and Postnuptial agreements potentially mitigate these risks, but the emotional toll on an owner may reduce focus on the business and result in underperformance that could pressure valuation.

Disagreement – If partner owners of a business are dead-locked in conflict, a company can stagnate, reducing value in the process, and potentially the only way to resolve the dispute may be to sell the business and divide the proceeds.

Disillusion – Sometimes years of building a company just take its toll, and unexpectedly an owner loses their zeal for the business. Maybe it is an interesting new industry or development that catches an owner’s eye. Or, it is a life event, such as the passing of a loved one or friend that makes an owner assess life. Or, it is just time. Unless a succession plan has been established, selling a business with one eye towards the next chapter usually results in a suboptimal outcome.

Disruption – How long before technology changes a traditional industry structure and, in the process, establishes new winners and losers and respective valuations? With artificial intelligence infiltrating so many aspects of life, predicting the future of an industry is rife with speculation. A company can become shackled by a development or an event out of their control that makes it difficult to continue its productivity (such as a technological challenge, an industry-wide supply shortage, a widespread pandemic, etc.) and be forced to look for strategic alternatives for its survival – not a strategy to optimize valuation.

Departure – When a key member of an organization unexpectedly decides to leave to pursue other interests or moves on due to disagreement over a myriad of potential issues such as compensation or strategic vision for the business, a company could be greatly impacted and, in extreme cases, ownership can be forced to sell the business.

As you can see, many circumstances can lead to a hurried sale — and this isn't even the only possibility. While you ideally want the sale of your business to be planned and formulated to create the best possible terms for all stakeholders, we can see from the examples above that sometimes that may not be the case. A catastrophic event can cause you to drastically reduce control over your business and exit planning.

This is why you need to plan for the sale of your business. Even if the thought of selling your company is far on the horizon – be prepared for the unexpected and protect your business.

How Do I Plan for the Sale of My Business?

Being proactive and well-informed is crucial. You don’t want to wait until you have to sell to get started. Working with an investment banker to obtain an up-to-date valuation for your company that incorporates your strategic outlook can help prevent you from being forced to sell your business for less than its worth under strict timelines. You have the opportunity to identify growth opportunities, areas to strengthen or improve, and to align all stakeholders with a well-thought-out strategy to sell the company on your terms.

What Are the Benefits of Hiring an Investment Banker to Sell My Business? 

As discussed, it’s a good idea to meet with an investment banker to get an updated, improved valuation for your company. Investment bankers use your accountant’s financial statement as a starting point, as it only reports historical results and develops transactional value for your company. The transactional value incorporates factors such as your company’s strategy, recent investments, new service or product expansions, changing cost structure, market trends, and how your company mitigates D-risks. Armed with this transactional value will enable you to be prepared to proactively sell your business and minimize value destruction that could occur from some of the D-risks highlighted earlier. There are many other benefits to having an investment banker involved in the process of selling your business.

Investment bankers are typically heavily involved in the selling process and can help negotiate complex deal terms on your behalf. They can also help facilitate the due diligence process and work extensively with your accountant and attorney on optimizing a transaction for you.

Equally as important, working with a financial advisor like an investment banker can help you plan what to do with the profits after you sell your business. Taxes and inadequate planning can take up a large portion of your proceeds from the sale of your business. Having a team of qualified financial advisors, such as estate, trust, and wealth advisors, can help you strategize to avoid massive financial mistakes and reduce tax liabilities.

Bottom Line

Even if you have no plan to sell your business in the near future, meeting with qualified investment banking firms, like MidCap Advisors, can help you stay in control of the sale process when the time is right and be prepared for any of the unexpected D-risks. You don’t want to wait until you are forced to sell your company immediately to start strategizing your exit plan.

If you are looking to protect your best interests and prepare for the sale of your business, our team would love to set up a call to ensure that your company is in good hands with a well-structured exit plan in place.