Redpath Insights

Business Succession: Increase Your Enterprise Value

by Sean Sullivan

Business succession planning is most likely not one of the top “to-dos” on your list of priorities. But as a business owner working hard every day to run a successful enterprise, it should be. Whether you're considering an exit strategy today or further down the road, it's critical to properly position yourself and your business to maximize the opportunity. Waiting until you're ready or forced to sell is not a strategy—and creates the potential for leaving cash on the table. Poor planning and preparation could also mean working longer than you want or having a transaction fall through altogether.

In a seminar last year sponsored by Redpath and Company, with presentations from Paul Cronin of Cornerstone3 and Justin Besikof and Jake Fishman of Madeira Partners, it became clear that just thinking about selling your business is not a strategy. There are some vital steps, strategies, and metrics you can use to help ensure a positive and profitable transition.

Running a Business Is Hard. Selling a Business Is Even Harder.

Paul Cronin points out that according to the U.S. Chamber of Commerce, just 20% of companies put up for sale are sold—meaning 4 out of 5 owners walk away empty handed. An estimated 65-75% of would-be sellers never even make it to market.* And while those stats are sobering enough, only 1 in 10 owners received anywhere near the value they expected with the sale of their business.* The bottom line is that business owners struggle with creating a business that is attractive to a buyer.

The Levers for Driving Up the Value of Your Business

Cronin states that financial buyers (the most common type) are actually buying the predictability of your future stream of profit. Business owners have two “levers” to pull that can drive up the value of your company:

  • Amount of cash your company will generate in the future (PERFORMANCE/CASH)
  • Reliability of cash flow estimates (RISK)

As the business leaders focus on the performance of the enterprise while minimizing risk for the potential buyer, it’s easy to see how a valuation changes with the following formula: EBITDA (cash) x MULTIPLE (risk) = VALUATION. Increase performance and the valuation goes up. Minimize risk and the multiple goes up. Increase performance and minimize risk? Now you’ve positioned your business to be sold for its greatest value.

Business Succession

Don’t Ignore Your Barriers to Growth

Cronin identifies 4 barriers to scaling up: leadership, marketing, scalable infrastructure, and cash.

  • Leadership: Companies are challenged with growing leaders who have the capability to delegate and predict.
  • Marketing: As the company grows, leaders tend to lose focus on their marketplace and lose their competitive edge (differentiators).
  • Scalable infrastructure: Companies resist the need and importance of growing and changing systems, processes, and structures needed to handle complexities in communication and decision-making.
  • Cash: Companies focus on profits rather than cash. 10x growth sucks 10x cash and unfortunately, debt is used to address the problem.

Focus Your Efforts to Scale Your Business

In addition to the 4 Barriers to Growth, Cronin also identifies 4 areas you need to address in order to scale up your business. He states that scaling a business is about asking and answering great questions. Those questions and answers are:

  • In Leading People. Have a handful of rules (core values) that you are committed to and honor. Those values guide all your relationships, decisions, and systems in the company.
  • In Setting Strategy. Ask yourself the following questions:
    • Does what you do/offer really matter enough to customers?
    • Does what you do/offer differentiate you from the competition?
  • In Driving Execution. Implement these essential habits:
    • Set a handful of priorities.
    • Gather quantitative and qualitative data.
    • Establish daily, weekly, monthly, quarterly, and annual meeting rhythms to drive effective communication.
  • In Managing Cash. Do not run out of it! Pay as much attention to cash as you do to the P&L and balance sheet.

Preparing Your Business for Sale

Emerging trends in M&A indicate the current environment is highly competitive driven by easy financing, a glut of private equity groups, and cash-rich strategies. Valuation multiples are near historic highs for businesses that have explosive growth, proprietary products, and services, or niche positions in key industries.

To help you prepare for the process of engaging in a very complex and competitive M&A environment, Justin Besikof and Jake Fishman of Madeira Partners provide some insights to help you with the sale of your business.

First Steps:

  • Determine when and why you may be interested in a sale of your business— the timeline is critical to preparation.
  • Consult financial advisers regarding minimum after-tax proceeds necessary to achieve your family’s desired financial future.
  • Discuss estate planning and tax minimization strategies with an attorney well-versed in M&A.
  • Assemble M&A advisory team: investment banker, accountant, and attorney.

Financial Preparation

  • Long Term
    • Make efforts to boost or at least defend gross margins.
    • Reduce non-essential SG&A expenses.
    • Consider reviewed or audited financial statements.
  • Short Term
    • Create a rolling 12-month forecast backed up with data
    • Begin assessing potential EBITDA add-backs and adjustments
    • Clean up balance sheet—inventory, A/R, A/P, etc.

Operational Preparation

  • Long Term
    • Increase sales and marketing efforts.
    • Take steps to modernize ERP, CRM and accounting systems.
  • Short Term
    • Upgrade website and other marketing materials.
    • Identify growth opportunities that new owner could capitalize on.
    • Develop “stories” around the reasons for the sale and why it is the right time.

Management and Organization

  • Long Term
    • Determine any obvious holes in the organizational chart.
    • Ensure sales team is fully staffed.
    • Develop second-level management.
  • Short Term
    • Owner-driven businesses should begin delegating increased responsibilities to the management team.
    • Consider retention or transaction bonuses for key management.
    • Include trusted management in M&A planning process.

Due Diligence Preparation

  • Systematize and document your business operations.
  • Assemble all customer and vendor contracts—ensure all are current.
  • Compile copies of all HR files, employee benefit plans, insurance policies.
  • Actively track key metrics relevant to your business and industry.

Start Your Planning Now

It’s never too early to start planning for your own future, as well as the future of your business. With many short and long-term considerations, today is better than tomorrow to get your proverbial “house in order.” Of course, when things are going well, it’s fun to go to the office everyday—and it’s difficult to think about selling the business. But remember, that’s when your business is the most valuable as well.

Once you start taking some early steps to increase your enterprise value, you’ll be happy that you did so down the road. Companies that demonstrate steady, consistent growth dramatically outperform organizations that experience wild swings in revenue and profit. The company with a predictable, steady pace that is driven by a market-dominating strategy, scalable systems, and effective processes attracts the top talent—and creates products and services that satisfy their customers’ needs. And those are the companies that generate significant wealth.

*ROCG Survey of 502 business owners in U.S. and Canada.

Paul Cronin, Senior Business Adviser at Cornerstone3works exclusively with entrepreneurs and action-oriented business owners to eliminate frustrations, achieve breakthrough growth, and maximize the value of their company. He also works with exiting owners to plan their succession and help execute their business transition.

Justin Besikof, Founder and President of Madeira Partnershas spent his entire career successfully executing middle market M&A transactions, including sales to strategic and private equity groups, recapitalizations and buyouts.

Jake Fishman, Managing Director of Madeira Partnershas experience in mergers and acquisitions, private equity transactions, corporate finance, special situations advisory and financial restructuring.  Jake specializes in representing the sellers of closely-held, family owned and private equity sponsored companies.


Sean Sullivan

Sean Sullivan

Sean Sullivan specializes in both creative and strategic marketing initiatives. Key areas of expertise include lead generation and new customer acquisition, content development, project management, art direction, and multi-channel campaign implementation. A process-oriented strategic thinker, Sean is adept at translating ideas and key messages into actionable insights and effective customer-focused marketing communications. Prior to joining Redpath and Company, Sean served as a Marketing Account Manager at C.H. Robinson where he balanced a number of responsibilities including driving revenue growth, building brand awareness, utilizing multi-channel marketing tactics, and leading high profile, cross-functional projects such as brand integrations and global tagline development.