For many business owners, selling the company is a once-in-a-lifetime event that they are not properly prepared to handle. What’s often missing is effective planning – laying the groundwork that can create value and help ensure that the owner clearly sees the current and future situation and creates succession strategies accordingly.
To gain insight, we spoke with John Stewart, Director of Merrill Lynch’s Private Sales Referral Network. This merger and acquisition service (for businesses with a minimum value of $10 million) provides introductions to independent boutique investment firms with regional and industry expertise.
Q. Why don’t business owners plan effectively for ownership succession?
Stewart: Many owners don’t look at their business as an investment. They’re too emotionally involved, and that makes it difficult for them to understand the value of the company and to plan for how to maximize the financial payback.
Q. Is there a right time to start planning for ownership succession?
Stewart: A business owner should always be planning for succession. If a business owner treats the business as an investment, planning for the liquidity of that investment is always prudent. Advance planning opens up your options and lets you make smarter decisions regarding the value of the company.
Q. What should planning entail?
Stewart: The key decisions and key initiatives should be geared toward improving the company’s value and its marketability. An early question you should ask yourself is, What is the market for this type of company and what do I need to do to capitalize on this market. Unfortunately, many business owners are too keyed in to the daily job function and don’t focus on building value. So that makes this planning more difficult.
Q. What are some basic things you can do to increase the value of your company?
Stewart: You need to look at your business by considering what is salable. Investors are always concerned with the transportability of the business – can they operate it as effectively as the current owner. This is one of the most crucial areas.
One of the best things you can do is build a strong management team under the owner, which will broaden the market for the company. You need to show that the business can carry on without you while keeping cash flow predictable. You won’t have a lot of potential buyers if you don’t have a management team that can keep the purchaser’s investment stable. The deeper the bench, the less concern the buyer will have regarding this.
Along the same lines, as they get nearer to selling the business, owners should make themselves as unimportant to the daily business as possible. Put others in charge of daily operations and customer relationships. Again, this is a way to create a portable business.
Q. Is there a professional you should hire if you’re thinking about fielding offers for your company?
Stewart: We recommend that our clients work with an investment banker with specific industry expertise. This allows them to understand what drives value in a certain industry and they can communicate the unique value of the client versus other players in the industry. They will know which investors or buyers are seeking positions in the industry, and they may be familiar with certain buyer tendencies. They can identify these issues much better than a generalist can.
The Merrill Lynch Private Sales Referral Network is a service through which Merrill Lynch clients are referred to independent third party investment banking firms.