Maximizing Your Company’s Sale Price

With a troubled market, device companies looking to sell should take steps to ensure the price is acceptable.

Beau Fisher

October 1, 2009

8 Min Read
Maximizing Your Company’s Sale Price

Beau Fisher

During the current recession we have seen the collapse of Lehman Brothers, the sale of Merrill Lynch, the rise and fall of oil, major stock market indices slashed, housing prices plummet, credit markets freeze, government bailouts and stimulus packages, companies going out of business, and unemployment at 25 year highs. During this volatile recession, the majority of business owners in the middle-market (companies valued between $5,000,000 and $100,000,000) have seen a significant reduction in their companies' value. Business owners' most valuable possessions—the businesses—are not worth what they once were. Even though owners have seen business value erode, it is important that they understand that there are methods to minimize the damage from the recession and ways to maximize a company's sale price.

Company Sale Prices Drop
In general, a company's sale price is established by using a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). This multiple of EBITDA has been dropping during the current recession. To illustrate this, we will use the example of an average company classified as light manufacturing. An average light manufacturing company might produce electrical components or metal fabrication. It often has a staff of factory workers, administration staff, sales people and executive management. Over the last few years before the recession, such a company had an EBITDA multiple ranging from 6 to 10. But from mid 2008 to early 2009 this multiple has dropped between 0.5 and 1.5, and is expected to drop an additional 0.5–1.0 by the end of the year.1 Even if a company has been able to keep a constant EBITA through the recession, the drop in multiple has a significant effect on the sale price.

Table 1. The decrease of EBITDA multiple has considerably influenced the value of companies during the current recession.(click image to enlarge)

Table I shows the drastic decrease in a company's sale price from the drop in EBITA multiple during the recession. However the reality for the majority of the country's businesses is that EBITDA itself has not remained constant as shown in Table I. A more realistic analysis is to reduce overall EBITDA along with the drop in the EBITDA multiple. These two reductions result in a negative compounding effect on a company's sale price.
The combined effect of a dropping EBITDA and a dropping EBITDA multiple is particularly difficult for business owners that have seen a significant drop in EBITDA. If a business's EBITDA dropped by 33%, the potential company's sale price drop would be more then 50%. A company once worth $36,000,000 is now worth only $18,000,000.
Unfortunately this isn't the end of the bad news for business owners trying to sell their businesses right now. Those owners taking their company to the market for sale will find fewer qualified buyers than in the last few years due to the tight credit markets. Even if they can find a qualified buyer, there are new roadblocks to a completed sale. Buyers have lengthened the due diligence process, more frequently are asking for assistance in the purchase, and are more likely to pull the offer later in the process.
This is the reality for the majority of business owners,. However, some industries, such as healthcare, have insulation from both the lower EBITDA and from tight credit.
Good News for the Healthcare Industry
The healthcare industry is among the leaders in a group that has not seen a decrease in EBITDA multiples. Call it the Boom factor (the aging baby boom generation), call it the Granny factor, call it what ever you want. The fact is, in general, business valuations in the healthcare industry have been insulated from the effects of the recession.1 That means that business owners in the healthcare industry have in large part escaped exposure to the negative compounding effect of dropping EBITDA multiples.
However, even though EBITDA multiples have not dropped for businesses in the healthcare industry, owners should not be overly confident that selling their business will be as easy as it has been over the last few years. At a minimum they should expect a lengthy due diligence process; and although the sale price may not be significantly lower, they may be asked to finance more of the purchase price than before. If a business plans well in advance, and pays attention to a few key items, it can maximize proceeds from the sale.
Maximizing Sale Price
Focused exit planning years in advance of a sale often will lead to a higher sale price. Trailing performance will always be a factor in a company's price, so the years leading up to the actual time of the sale can be as important to the sale price as the year in which the company will be sold. Therefore, even when the sale of the company is not imminent, one of the best ways to maximize a company's future sale price is to run the company as if it were for sale today.
Many business owners do not fully understand the significance of the due diligence process in the sale of a business. Business owners think that due diligence is a formality that they must go through to get the price in the Letter of Intent (LOI). However, the buyer may have motives during the due diligence process that go beyond formality. Although due diligence conducted by a buyer is generally thought of as a process to confirm certain assumptions regarding the business, it is more often used by the buyer to reduce value and the associated purchase price. Therefore if a selling business owner does not correctly plan for the due diligence process it could lead to a reduction in the sale price and be a costly mistake.
Eric Clarke, a partner at the law firm Hanson Bridgett LLP specializing in corporate law and M&A, believes that there are core principals that can help a business owner increase a sale price and minimize this due diligence effect even during tough economic times. These core practices are as follows:
Maximize cash flow and reduce costs. Although it may seem obvious, cash flow certainty is a premium in difficult economic times. Buyers are increasingly focused on historical stability as an indicator of future performance. Taking steps to increase cash flow means increasing revenue and related business margins while reducing or streamlining operational expenses. Companies should identify underperforming assets and aged inventories, and if prudent liquidate them. Aggressive steps should be taken well in advance to minimize aged accounts receivable and other bad debt.
Organize historical financial records. Compile a minimum of 3 years of financial records including applicable tax returns and related extension filings, P&Ls, and balance sheets. Sellers should anticipate working with the respective CPAs to back out personal expenses and answer other financial expense questions.
Document material contracts. Clean up and document customer contracts, material third party vendor agreements, license agreements, and leases. If a buyer understands and is confident about both ongoing revenue and expenses of a business it will have less need to hedge against unforeseen financial events.
Document internal employment and consulting agreements. Buyers want to be assured that the core employment talent will remain with the company when it is sold, or at the least, the talent will not disclose core technology to others. Each employee and consultant should have executed an appropriate nondisclosure agreement and inventions assignment.
Demonstrate ownership of intellectual property. In addition to clarifying ownership of intellectual property, personal assets, and diminishing or removing any encumbrances to such assets, businesses are advised to undertake applicable U.S. and foreign registrations for any patents and trademarks used in the operation of the business.
Maintain confidentiality. Sellers often make the mistake of disclosing to customers, suppliers, and employees that they are planning on or attempting to sell the business. This type of disclosure can result in a direct loss in business, key employees, and revenue, which in turn can result in a reduction of the buyer's confidence and by extension, the sale price.
Although the current recession has drastically reduced company sale prices across the country, the healthcare industry has been one of the few industries that can demand a fair price. Owners in this industry are likely well positioned to receive a fair value for their business. With planning and some focused effort, owners can maximize their sale price. However, a small oversight or mistake could drastically damage the financial outcome in the sale of a business. For most business owners, selling a business will only happen once in their lifetime. So unless they are proficient in the due diligence process, tax planning, financial and estate planning, and investing, they should seek expert advice and counsel long before selling their business.
Beau Fisher is managing partner and owner of Fisher & Wiens Wealth Management. He is a certified financial planner and specializes in financially advising executives and business owners in the biomedical industry. Fisher is a registered representative with and securities are offered through LPL Financial, member FINRA/SIPC. He can be reached at [email protected].

© 2009 Canon Communications LLC

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