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The most important document you need when selling your business

Avoid overly optimistic projections and unclear company storyline

The Denver Post |  BUSINESS

Gary Miller, staff photo

By GARY MILLER | GEM Strategy Management

POSTED November 19, 2017, at 12:01 am

It was late on a Saturday afternoon when Don and his management team were finishing up an internal review of their company operations. The company had been on the market for 18 months without much interest from potential buyers. Don wanted to know why. At the end of the day, Don, the founder,  and majority shareholder,  gave up as he and the management team could not reach consensus on the reasons there was such little buyer interest. Don was beside himself since revenues were strong and earnings had continued to improve over the past five years.

The following week Don asked our firm for help. We agreed to conduct a business review and analysis of his company to determine what the company needed to do to attract potential buyers. After an exhaustive review, we found a glaring void in his management systems. There was no strategic business plan — only a hodge-podge of numbers, schedules, and projections that made little sense.

We met with Don and his team (all shareholders) and explained that without a solid business plan, no potential buyer would seriously entertain purchasing their company. We advised that a formal business plan was critical to the process of selling Don’s company.

Writing a strategic business plan can take weeks, even months of intense research, writing and rewriting – particularly if you have never gone through the process before. So you might ask, is it worth it? Absolutely. First, you’ll have a better understanding of your own business as well as your industry. More important, you’ll have a set of clearly articulated goals. This will help you organize and manage your business and give you a benchmark against which you can measure future performance.

Before you can begin to put the plan together, you will need to gather solid information about your industry. Every claim your plan makes will have to be supported by authentic sources and accurate information. Information sources include trade associations, magazines, newsletters, industry research reports and annual reports from publicly traded competitors.

Your plan will include your company’s past financial records, including a quality of earnings report from an outside accounting firm. Your financials should be audited or at the very least, reviewed by an independent accounting firm. Also, your business plan should include marketing plans and statistics from competitors so you can compare your numbers to firms of similar size in your industry. You will need research to identify who is buying products or services like yours and what current trends might be changing buying patterns and behavior. Compare this information to who is buying your own products and services.

In addition, find out who finances companies like yours and the details of the loan structure. Also, identify the kinds of companies buying businesses like yours.

Passion and enthusiasm for your company’s storyline is important for the sale of your company, but your target audience will see through hype and sales speak. Instead, strive for clarity, simplicity,  and thoroughness. Here are guidelines you should follow:

  • Don’t exaggerate
  • Make your sentences short and factual
  • Guide the reader with bulleted lists, numbered sections and clearly named subject headings and subheadings
  • Do not clutter the text with small details that will slow the reading process. Refer the reader to the appendix for more detail
  • Provide a table of contents so readers can skip to relevant sections they are interested in
  • Keep the plan to about 20 to 40 single-spaced pages, plus the appendices. The appendices can be as long as necessary to include significant detail

After you’ve completed this work, you can begin filling in the various outlined sections of your plan. Regardless of your industry, at a bare minimum, your plan should include a table of contents, executive summary, company/product/services analysis, competitive analysis, investment/purchase opportunity, industry analysis, market analysis, marketing plan, operating plan, manufacturing plan, management team, human resource plan, integration plan guidelines, financial plan and projections, buyer’s exit plan and appendices. More may be required depending on your industry.

I have read scores of business plans of companies and I’ve found the same mistakes over and over again. Here are some mistakes to avoid:

  • Rose-colored glasses
  • Unsubstantiated claims
  • Overly optimistic projections
  • Unrealistic cash flow projections
  • Numbers that don’t add up
  • Not understanding the entirety of the plan
  • Not proofreading the plan
  • Unclear company storyline

After all the work you’ve invested, make sure you don’t shoot yourself in the foot with spelling errors or incorrect grammar. Double check the numbers again and again. Produce a professional-looking document.

Remember, you never get a second chance to make a good first impression.

Gary Miller is CEO of GEM Strategy Management Inc., which advises middle-market private business owners how to prepare to raise capital, sell their businesses or buy companies.  970.390.4441     gmiller@gemstrategymanagement.com

 

 

 

To maximize the sale of your company, build business value

The Denver Post | BUSINESS

Gary Miller, staff photo

By GARY MILLER | GEM Strategy Management

October 15, 2017, at 12:01 am

It can take two to three years to prepare a business for sale

Imagine sitting at your desk and reading a registered letter from a potential buyer. The letter states that the buyer is retracting its offer to purchase your company as a result of the due-diligence review and analysis the buyer just completed.

This happened to Nathan White, owner of a small uniform manufacturer serving clients throughout the U.S. This was the second time in two years that a potential buyer had withdrawn its offer. Nathan was discouraged.

Nathan called me to see what he could do to sell his company. His story was one I have heard many times before. Nathan’s company suffered from poor exit planning, a checkered record of revenues and profits, a weak strategic business plan, inaccurate books and records, and the loss of two major clients. As a result, the potential buyer believed that the business was overpriced relative to its business value, therefore, the buyer could not justify completing the transaction.

For many owners, the last 10 years have been a difficult period for growth and profitability. Other companies, however, have done extremely well. What is the difference?

Owners do not plan early enough to sell their businesses. Since many owners have never sold a business before, they fail to realize that it takes time and careful planning to optimize the business value in order to maximize the sale price. As a result, they try to sell their businesses before they have maximized the enterprise value of their companies. This situation leads to a lower purchase price from a buyer, or worse, no sale at all.

The process of selling a business has become more complex as buyers today are more cautious and much more rigorous in their due diligence efforts due to the Great Recession.

Regardless of your personal goals, there are some key issues every business owner must address in order to be ready for a business transaction. The business landscape changes every three to five years, and your company’s exit plan needs to keep pace.

The key to increasing business value is to understand how a potential buyer views your business. Here’s what I recommend to my clients: First, obtain an independent professional valuation from an accredited valuation firm. Next, engage an objective business adviser to conduct a business audit and assessment revealing the strengths and weaknesses of the business.

The adviser can help you pinpoint the value drivers and ultimately increase your business’s value and sale price from 10 percent to 35 percent or more. If the assessment reveals that some of your business drivers are weak, prioritize them and begin work immediately to correct or improve them. Once you understand the current value of the business and the value drivers, you can identify tactics to increase its value.

Key business value drivers may include sales growth trends, balanced and growing customer mix, strength of sales backlog, strength of the market niche, strong products and services brand, highly skilled, efficient and loyal workforce, solid vendor relationships, product differentiation, product innovation, strong management team that can transition to the new owner, up-to-date technology and modern work-flow systems and processes, strong management information systems, continuous growth in profitability, barriers to competitive entry, strong company culture and loyal customer base.

At least two years will be required to increase and improve the value drivers of your business. During this time, you will be able to correct minor cosmetic issues to help build incremental value.

Company culture and existing customer relationships are two critical areas that concern most buyers. Here is where you can add business value. If a business is sold, it is important to ensure that employees will embrace the culture of the buyer. Both these buyer concerns can be mitigated if the seller stays on as an employee or consultant for a reasonable period of time.

After two or three years of focusing on value optimization, your business worth should increase in the eyes of potential buyers. Understanding your company’s value and building upon it leads to a larger sale price and maximizes the wealth transfer to the business owner. If the business value process has been carefully carried out, the added value will stand up under the most rigorous buyer due diligence.

Continued owner involvement and the development of a strong management team have become even more important to buyers in today’s merger-and-acquisition environment. As earn-out requirements are commonly integrated into a sale price, performance stipulations tied to profits and revenue are frequently included in the sale contract to obtain the full purchase price.

If you are considering selling your company, act now. You must allow sufficient time to prepare for a transaction to correct any issues and build incremental value in your business. While the market is strong now, strong markets do not last forever. Time is of the essence. Remember, poor exit planning can erode the value of a lifetime of success.

Gary Miller is the CEO of GEM Strategy Management Inc., which advises middle-market private business owners in preparing to raise capital, selling their businesses or buying companies. He can be reached at 970-390-4441 or gmiller@gemstrategymanagement.com.