The future is now: Optimize the value of your business for that potential sale

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U.S. Treasury Secretary John W. Snow, right, gets a tour from Mike Rebick, owner of Copy Systems Inc. before a meeting with Arkansas small business leaders Thursday morning June 3, 2004 at Copy Systems Inc. in Little Rock, Arkansas. Photographer:Benjamin Krain/Bloomberg News

"When you're dying of thirst, it's too late to think about digging a well," goes an old Japanese proverb.

Business owners who may at some point look to exit from their enterprise should pay close heed to that Japanese saying. While you may not have an immediate interest in selling your business, everything you are currently doing will ultimately drive the value you can derive from your enterprise in the future.

So if you think an exit is likely in the next three to five years, you should be asking yourself now: "What can I do now to ensure I optimize the business value tomorrow?"

The five most important drivers of value for any insurance/benefits-centric business are:

  1. Revenue growth – preferably double digit
  2. Increasing profits – ideally 10% to 20% compound annual growth rate
  3. Strong profit margin – ideally 25% to 35%
  4. Customer diversification – the spread of risk
  5. Proprietary intellectual property

If you are unsure of the current value of your business, it may be worthwhile to establish a baseline. A completed valuation will enable you to create a roadmap for value optimization. It will also 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 be needed for a future due diligence effort with any buyer. First, 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 relationships, be they producers, brokers, carriers, suppliers, vendors, licensors, key employees, clients, loans, benefit plans, etc.

Also 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.

Finally, establish an ongoing audit procedure to ensure all contracts are maintained and kept current.

Internal audit

Then, when you decide the time is right to sell your business … pause. Take a step back and make sure you’re making the decision at the right time and for the right reasons.

  • Examine the financial and nonfinancial objectives that are driving you to a potential sale.
  • Define your professional and personal goals.
  • Ask yourself: What are you going to do after you sell?
  • Be ready for change.
  • Understand the tax ramifications fully.
  • Do you homework — understand current market conditions and trends in pricing and terms; understand who your likely buyers are and what cultural differences you may face.

And lastly — never, ever underestimate the emotional aspect of this decision. The decision to sell should not be an easy one.

Meeting the new you

When you begin interacting with potential buyers, it is helpful to have a sense of the questions they will likely be asking you — ones you should be fully prepared to answer.

For instance:

  • Why are you interested in selling?
  • What is the carrier breakdown of your business?
  • Are there any cases that represent more than 10-20% of your business?
  • What is yours current 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?

You, in turn, should have many questions to ask the potential buyer. It is imperative that 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:

  • What is the track record of the buyer/ acquirer?
  • What deal structure do they utilize? How would payments be structured?
  • What is the stability of the company?
  • How will your clients be impacted?
  • Can you speak with any firms that the buyer has already acquired?

Bottom line, optimizing the asset value of your business requires financial, managerial and marketing acumen — and it is never to early to start. An experienced advisor can also make the process less intimidating, easier to navigate, and will often ensure you maximize the negotiations in your favor.

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