FirstList - The M&A Spotlight Newsletter

This column will be devoted to the enhancement of the value of a business as it relates to a future sale or some type of change in ownership. Discussion will be based on the writer’s 25 year involvement in mergers, acquisitions and divestments as well as strategic planning and general business management. We also welcome questions and comments from readers, including other points of view. The subject has sufficient complexities that no one has a corner on the wisdom and experience to cover all eventualities. There is always something new and different just around the corner.

With that introduction, an overview is in order. The writer’s experience is with sale and purchase of private companies with values over $1 million and that will be our arena. It is apparent that such private company owners should start planning for eventual change in ownership many years before the target date for that change. Five years is not too long in most cases. There could be circumstances requiring earlier planning and initiating of certain actions.

THE PLAN:
We are not talking merely about "Preparing the Business for Sale," although that is part of a total plan. A private owner (or owners) should coordinate several aspects to maximize their net benefit from a sale. These should at least include:

Increasing the value of the business operations
Owner exit planning
Succession planning
Estate planning

INCREASING BUSINESS VALUE:
Most of this column in the future will be devoted to the many ways in which the value of a business can be enhanced in the eyes of a buyer. For example, these will include financial factors, operating issues, personnel, market factors, assets and other areas. In this category will also be the actual preparation of a business for sale.

EXIT PLANNING:
A private company owner should have an idea of when he or she would like to exit the business. Obviously, this needs to be somewhat flexible to accommodate cycles in the economy and the industry, the owner’s health and family issues and other factors. Also, an owner may have preferences as to who a Buyer will be. For example, it might be a child, a second line manager, an ESOP or a family trust. Each of those could have an influence on the rest of the Plan and the Value Enhancement priorities.

SUCCESSION PLANNING:
Most private business owners do not have a good succession plan in place. This can be disastrous if something happens to the owner. The disaster would be to the business as well as the owner’s family. Insurance would not cover all the bad consequences of a lack of such planning. Further, if there is no back-up management, at the top or middle, buyers can well consider the company too risky and either (a) reduce the offering price or (b) walk away.

ESTATE PLANNING:
The sale of a business can suddenly dump significant liquid assets into the hands of an owner. If there is no plan in place as to how to handle this, there can be unwanted consequences. One could be a higher tax load than necessary, so tax planning needs to be part of this. Other consequences could be hurried and poor investment decisions, family disagreements and a future estate tax that is higher than necessary.

The owner’s team should therefore include good estate planning resources, with an estate attorney, a financial planner and an accountant familiar with the tax angles of estates. These talents might be combined in less than three persons.

CONCLUSION:
Most private company owners need to be reminded of all the aspects they should deal with in planning for a sale. The intermediary has an opportunity to do this at the outset of the relationship with the seller. This will enhance that relationship and get the confidence of the seller in the future handling of the sale.

About the Author: Donald Richter, Ph.D., is a Sr. Vice President of Corporate Finance Associates, a nationwide network of M&A offices. He is located at 5699 Whispering Way, Springboro, OH 45066 and can be reached at E-mail: donrichter@cfaw.com Web site is www.cfaw.com.

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