After years of building enterprise value an entrepreneur is forced to decide if and when they should realize on the value they have created.
Sometimes a buyer just appears and offers more than a business is worth. However, just in case no one shows up with a wheelbarrow full of cash you'd better have a plan for a sale.
To develop the most appropriate action plan for a sale, the owners of the business should first identify the true motivation for desiring a sale. They should also identify the motivation they will present to potential buyers, which might be very different.
The rationale for a sale, usually presented to buyers, includes the following:
· Lack of next-generation family members in management is a common problem. Interests and lifestyles, in a second-generation, are different.
· Estate planning, or rather, the need for cash to pay estate taxes.
· Cash may be needed for other purposes. These might include a charitable gift, investment in other activities and the like.
· The requirement for capital or other resources to scale or reach critical mass in order to seize a market opportunity.
· Closely related is the opportunity to dramatically impact the cost structure through consolidation of functions or facilities.
The last two, which are key “inflection points” in the life of the business, are the “best” reasons for a sale.
However, many companies offered for sale are driven by more troublesome reasons.
· Fear of the future. The buying habits of a major customer may change, technology continually evolves or actions by a major or new competitor may seriously disrupt the market.
· Inability to continue as an independent company. Bank lines may be expiring, bonding might be unavailable, working capital needs may have become unachievable and the like.
· As for value accumulates, owners become more risk adverse and may seek liquidity to protect years of work.
· The management team is tired and worn out.
The real reason for a sale should drive the timing and methodology for buyer identification selected by the entrepreneur.
We will look at alternatives to a sale in a future post.
Wednesday, January 20, 2010
Tuesday, January 12, 2010
Before you sell
Each year thousands of middle market companies are sold to other entrepreneurs, corporate buyers or buyout firms as they face succession and estate planning issues.
For most owners of privately held middle market companies selling a company is a once-in-a-lifetime event. Frequently, these owners do not fully recognize the value creating elements within a business enterprise. As a result, many of these companies will be sold for less than their potential value.
The valuation of a business is a complex issue. Scores of different factors influence the final value. However, I believe there are five key steps the owners of a privately held business can and take to dramatically improve the value of an enterprise in an eventual sale.
From the first days of start-up until the closing of a sale, the five key steps remain the same. These steps are:
1. Develop a defensible market position
2. Build a management team
3. Reallocate resources to the best use
4. Improve the skills and quality of the work force
5. Eliminate all contingencies
Each of these steps and related issues will be discussed in future posts.
For most owners of privately held middle market companies selling a company is a once-in-a-lifetime event. Frequently, these owners do not fully recognize the value creating elements within a business enterprise. As a result, many of these companies will be sold for less than their potential value.
The valuation of a business is a complex issue. Scores of different factors influence the final value. However, I believe there are five key steps the owners of a privately held business can and take to dramatically improve the value of an enterprise in an eventual sale.
From the first days of start-up until the closing of a sale, the five key steps remain the same. These steps are:
1. Develop a defensible market position
2. Build a management team
3. Reallocate resources to the best use
4. Improve the skills and quality of the work force
5. Eliminate all contingencies
Each of these steps and related issues will be discussed in future posts.
The purpose of this blog
Thank you for visiting the blog for Palladino Associates, written by Tony Palladino. Palladino Associates is a consulting firm dedicated to helping entrepreneurs and private equity owners, build and realize upon enterprise value.
The purpose of this blog is to discuss topics that entrepreneurs need to focus on, as they move from start up to sale of the business enterprise. The concept and suggestions discussed in this blog are directed to the environment in which these entrepreneurs typically work. These posts deal with business enterprises from the early start up days to the building of a mature and successful business enterprise.
Depending upon the nature of the business and the industry it serves, this maturity typically occurs at sales between $5 and $50 million. Many of the concepts discussed in this blog are applicable to any size enterprise at any stage of its development. However, a key assumption in most of these discussions is that the companies are privately held and not subject to public reporting considerations.
I welcome your comments and thoughts.
The purpose of this blog is to discuss topics that entrepreneurs need to focus on, as they move from start up to sale of the business enterprise. The concept and suggestions discussed in this blog are directed to the environment in which these entrepreneurs typically work. These posts deal with business enterprises from the early start up days to the building of a mature and successful business enterprise.
Depending upon the nature of the business and the industry it serves, this maturity typically occurs at sales between $5 and $50 million. Many of the concepts discussed in this blog are applicable to any size enterprise at any stage of its development. However, a key assumption in most of these discussions is that the companies are privately held and not subject to public reporting considerations.
I welcome your comments and thoughts.
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