Software Council of Southen California

Wouldn't it be nice if life provided us with easy answers to some of life's more difficult questions: which house to buy, which job to take, when to get married, when to sell your business to make the most amount of money? And if life wasn't tough enough, now we are forced to operate in an undefined and changing world.

So, how do you determine the best time to sell? It may help to evaluate the following questions:

Take heart; you are not alone. Some of the biggest questions facing privately-owned middle market companies are "How do we know when it's the right time to exit?", "How do we cash out the equity we've built up in the company and maximize shareholder value?", and "Who can help us find the answers?".

One of the first steps I recommend is obtaining a valuation of the company. With this overview, company owners have a base line to determine the best path to follow.

Valuing a company requires taking an objective, broad view that is often difficult for company owners to do themselves. Deloitte's Corporate Finance Group looks at the company, as well as completed transactions in its industry and the price/earnings multiples of similar companies that have sold recently. We arrive at an estimate of value and discuss with the owner whether this is enough to meet his or her retirement or other personal goals. If so, we can work with the company to find potential buyers and structure the transaction.

If the valuation is not high enough to justify selling at the current time, the company should consider developing a plan for the future that includes one or more exit strategies. Begin with the end in mind. Whether you decide to sell the business, buy another company, or raise additional capital-what's at the end of the path guides you. We can help companies to create a road map to a cash exit that includes consideration of financial, tax, estate planning, and operational issues.

Equally important are interpersonal issues. A middle market company is likely to have family members or partners at different stages of their lives. The key is to bring the different perspectives, goals, aspirations, and lifestyles together into one workable strategy. That road may change, we may take other paths to get to the end, but we need an initial focus.

Typically, a specific event signals the need for strategic planning. It could be financial (a cash crunch) or operational (reaching facility capacity). A strong market can lead to thoughts of selling the company. Competitive and market changes and personal difficulties, such as illness, death of the owner, or partner problems, are other indications that it is time to reevaluate the company's exit position.

Often, these events arrive suddenly and catch the owner unprepared. Most companies don't realize that they are at this decision plateau until it's too late. Owners are so focused on operations that they lose sight, or do not have time, to focus on the exit. With a long-term plan in place that includes a realistic exit, the owner can feel secure about the future. This plan should be a dynamic document that top management reviews regularly and modifies as the company and its business environment change.

You may want to bring in an outside consultant to help sort through the company's options. Your advisors should be familiar with your industry and sensitive to interpersonal issues. Organizational behavior, people skills, and psychology are critical factors in the planning process. Family businesses often involve different generations with conflicting goals. For example, the founder may be nearing retirement and ready to cash out. Growing the business, not retirement, may be foremost in the minds of children in their 30s or 40s.

From the outset, a good portion of time should be spent interviewing a company's owners/top management. Before suggesting alternatives, it's imperative to have an understanding of what they are doing in their current positions and what they want to do after the exit. Understanding their personal financial situations and risk profiles is also important.

Once you have several possible strategies, you should analyze them from different angles. For example, corporate structure may be an issue. Many smaller private companies are S-corporations, and the owners may be drawing above-market salaries to minimize taxes. Before selling the company, it may be advisable to recast the financial statements eliminating market components of salaries and other nonrecurring events to present a more realistic financial picture.

Because taxes can drive any transaction, they become one of the most important considerations during the strategic planning process. I find that company owners don't give enough weight to tax issues when structuring transactions. Take the sale of a company: If the public markets are strong, a stock transaction will generally produce higher value to the owners than a cash transaction. However, the absolute numbers aren't the whole answer here. You have to look at the after-tax proceeds to know whether to sell assets or sell stock. The difference could run into millions of dollars.

In addition to pure tax issues, the owners' personal financial situations come into play. Do they need the cash now, or can they take equity and hold onto it for a while? Estate planning is another major planning area. How much money will the owners need in five years--$1 million or $10 million? What form should this take to minimize estate taxes?

Companies should also develop sound financial policies and procedures. To sell to a larger company, you'll need audited financial statements and good financial systems and controls.

Developing a successful strategic plan in today's highly competitive market takes more effort and creativity than ever before. Its benefits-a clear set of objectives and a plan for your business's future-are invaluable, and well worth the time.

Kimberly Valentine is a partner in Deloitte & Touche's National Corporate Finance/Mergers & Acquisitions Group. She can be reached at (714) 436-7048 or via kvalentine@deloitte.com.