What is your exit strategy? Optimizing the asset value of your business
May 13, 2013 by Susanne Radek
Bottom line, optimizing the asset value of your business requires thoughtful planing. It requires financial, managerial and marketing acumen, and it is never too early to start.
“When you’re dying of thirst, it’s too late to think about digging a well.” — Japanese Proverb
This quote is particularly appropriate for business owners who may at some point look to exit from their enterprise. You may not have an immediate interest to sell your business; however, everything you are currently doing will ultimately drive the value you can derive later. So, if you think an exit is likely in the next three to five years, you should be asking yourself: “What can I do now to ensure I optimize the business value tomorrow?”
The following are the five most important drivers of value for any insurance-centric business:
- Revenue growth, preferably double-digit
- Increasing profits, ideally 10 percent to 15 percent compound annual growth rate
- Strong profit margin, 25 percent to 35 percent
- Customer diversification — spread of risk
- Proprietary intellectual property
If you are unsure of the current value of your business, it may be worthwhile to establish a baseline. Having a valuation completed will establish what your business is worth today and will enable you to create a road map for value optimization. It will help you pinpoint areas on which you should focus your efforts.
There are, of course, some basics on which you can focus right now, as they will all be needed for a future due diligence effort with any buyer at some point in the future:
- Ensure you have written contracts for all important business relationships, and that these contracts are accessible, accurate and reflective of the true context of your current relationship (producers, brokers, carriers, suppliers, vendors, licensors, key employees, clients, loans, benefit plans, etc.)
- Ensure key employees have non-disclosure, non-compete agreements executed with your firm (if they do not already have a separate employment agreement which includes these components).
- Establish an ongoing audit procedure to ensure all contracts are maintained and kept current.
When you decide to sell your business, there are important considerations to keep in mind:
- Be aware that the decision to sell should not be easy.
- Examine financial and non-financial objectives that are driving you to a potential sale.
- Define your professional and personal goals.
- Decide what you are going to do after you sell.
- Be ready for change.
- Fully understand tax ramifications.
- Do your homework — understand current market conditions and trends in pricing and terms; understand who are your likely buyers and what cultural differences you may face
- Never, ever underestimate the emotional aspect of this decision.
When you begin interacting with potential buyers, it is helpful to have a sense of the types of questions they will be asking you (and you should be fully prepared to answer). The following is a sampling:
- Why are you interested in selling?
- What is the carrier breakdown of your business?
- Are there any cases that represent more than 10 percent to 20 percent of your business?
- What is the company structure?
- Are there commission splits with any employees?
- Who are the key employees and how will they be affected by a transaction? Would they be interested in retaining their positions post-transaction?
- Are there any unique services you provide to clients?
- What are your goals post-transaction? Do you want to be involved with retention of the business?
In addition, you should have many questions to ask the potential buyer. It is imperative you conduct your own due diligence to ensure a buyer is legitimate and the right fit for you and your enterprise. A few “food for thought” questions follow:
- What is the track record of the buyer/acquirer?
- What deal structure do they utilize? How are payments structured?
- What is the stability of the company?
- How will your clients be impacted?
Bottom line, optimizing the asset value of your business requires thoughtful planning. It requires financial, managerial and marketing acumen, and it is never too early to start. An experienced advisor can also make the process less intimidating, easier to navigate, and will often ensure that you maximize the negotiations in your favor.