Succession Planning
Identify your number. A seller should first identify the amount of funds necessary to live the desired lifestyle after the transaction. This would be an amount that can be quantified by your financial planner. The planner will forecast the remainder of your life based on life expectancy and what you would like to will to your family and charities. Therefore, a good financial planner is an important professional to assist with the beginning of this process. They will also be important after the transaction assisting with investing your funds and having the appropriate trust accounts created through with legal counsel.
However, this may not be the final chapter. This exit plan could merely be a stepping stone for the next venture. The industry could be experiencing a peak level for valuation purposes, and it may be a good time to sell. Being prepared at all times is critical to timing the market. The remainder of this blog will define transaction readiness.
Legal audit: You should engage legal counsel to review your charter, bylaws, operating agreement, all contractual agreements, leases, employment agreements, and correspondence files to ensure you have a sound foundation. Your legal structure should also be reviewed for liability purposes, tax ramifications, and Nexus issues. Legal counsel will also assist with the letter of intent and purchase agreement. They will be primary providers in the overall negotiation of the transaction.
Clean up your financial information: This can be a very time-consuming process if you have never used your financial information to help navigate your business. The financial information must survive the due diligence process. The buyer’s counsel and consultants will attempt to use disorganized financial information against the seller in an attempt to lower the purchase price. This is a company-specific risk factor that can have a material impact.
The financial information must be organized at the boundary levels. This is where the flow of information is originated. The information must have underlying documentation to support the information collated in the general ledger system. The general ledger is where information is compiled to generate the financial statements.
Most purchasers are expecting financial statements prepared in accordance with generally accepted accounting principles (“GAAP”). This is an accounting convention that requires proper cut-off, accruals, deferrals and the use of the matching principle (revenues and expenses reported in the same accounting period) To restate the financial statements from either the cash basis or a hybrid basis of accounting to GAAP is typically very timeconsuming. This is where transaction readiness at all times is very important.
Processes and procedures: You should have a road map that identifies your entire operational and financial infrastructure. This will provide clear expectations for all parties involved in the transaction. Most importantly the seller should have a well-operated business that the integrator can manage effectively. The processes and procedures should identify all information flow and human resource functionality. The purchaser would like the processes and procedures reduced to writing.
Identify human capital needs: A company organization chart should be created identifying who is responsible for each job function. This is a systematic method to determine human resource voids in the overall company infrastructure. This is also a good method to determine how many functions the visionary is performing that should be replaced by a C-level employee. Before entering a transaction, the seller should be aware of gaps in the human capital that will create company-specific risk factors. Alternatively, if you are going to execute a strategic transaction, some of the C-level human capital will already exist with the purchaser. In this case, you will have a normalization adjustment that will increase your adjusted EBITDA.
Company-Specific Risk: work on company-specific risk to increase your multiple (credit risk – customers and vendors, dependence on the owner, production limitations, capacity issues, key employees under non-compete agreements)
This is an area that only a valuation analyst would typically understand. There are defined areas in your company that can be improved to increase value without increasing revenues. The improvements will reduce the capitalization or discount rate, therefore increasing the business valuation. This will basically increase the valuation multiple that is applied to adjusted EBITDA.
Embrace technology: look for methods to utilize innovation to increase the effectiveness of product or service delivery, human capital utilization, or cost reduction measures. This does not necessarily have to be related to the digital world. There are more innovative techniques to drive your business to operate more efficiently and create a higher level of overall effectiveness in the organization.
Update all equipment and properly collaborate existing equipment: this is also part of the embracing of innovation. Having a modernized facility will always drive value. The purchaser will not have to be concerned with capital improvements. The seller should have a more effective operating infrastructure as a result of having a modernized facility with collaborated equipment.
Updated clean facility: you only have one chance for a first impression. The appearance of your facility can have a positive effect on the purchaser. This cleanliness, well organized, modernized, and capable of increasing capacity. Marketing program to broaden business base: a marketing plan that identifies your customer and how you plan to penetrate the market.
Estate planning: if you plan to take care of your family it is important that your estate plan is constructed correctly to avoid losing over 50% of your wealth to the U.S. Treasury. Also, you can set up irrevocable trusts to ensure your estate is distributed correctly. This includes a dollar amount, identified beneficiaries, and timing of wealth transfer. An irrevocable trust can also hold life insurance to pay your estate taxes.
Identifying your financial needs and ensuring legal and financial readiness are key steps in preparing for a business transaction. Whether it's the final chapter or a stepping stone to your next venture, being prepared is essential.
For expert guidance in planning your exit strategy, contact us at info@exitadvisors.com.
