The Fifth Ingredient to a Successful Exit - Net Proceeds Analysis
Takeaway: When you sell your business, you need to know what the net proceeds will be. The purchase price is fine, but the net proceeds is ultimately what you need to know. In this article, we discuss how to compute these net proceeds.
The net proceeds analysis involves determining how much the business owner will "pocket" from the sale of the business after settling all liabilities, income taxes and other obligations such as sales commissions and professional fees. Some business owners may not appreciate that the actual net cash received upon sale can be significantly lower than the agreed upon purchase price. This analysis should be conducted for the relevant exit option(s) and under various assumptions regarding the value of the business.
A good starting point is to estimate the net proceeds assuming a sale price equal to the current value of the business determined under Step 3. Certain assumptions with respect to sales commissions and professional fees will be required.
Does the resulting net proceeds meet the financial needs determined under Step 2? If yes, then great, we are on track! If no, then further analysis and action is needed. Specifically, the sale price that provides net proceeds equal to the financial needs must be determined and the value enhancement initiatives that will increase the value of the business to that level must be identified and implemented.
It is vital to conduct this analysis 3 to 5 years before the intended exit in order to allow sufficient time to implement the value enhancement initiatives that will enable the business owner to meet the financial needs and achieve the goals.
Whereas the seller is interested in net proceeds, buyers are generally interested in a company’s enterprise value (i.e. value of the operations attributable to both debt and equity holders). In order to reconcile the two, enterprise value is increased by the company’s redundant (i.e. non-operating) assets and decreased by the interest-bearing debt outstanding, closing costs and taxes to be paid on the transaction. Redundant assets are not required to generate operating cash flows and generally not sold as part of the business operations. Examples include excess cash, marketable securities, real estate and related party loans.
With respect to transaction structure, the business owner may prefer a share sale to realize the benefit of the capital gains exemption. A purchaser, however, may prefer to purchase assets to avoid undisclosed liabilities or to take advantage of the tax benefits from "stepping-up" the cost base of certain depreciable assets. Transaction structure is often a key agenda item in negotiations between the buyer and seller. As such, the seller should understand the implications of both an asset sale and a share sale.
A Professional Accountant, Certified Financial Planner or tax lawyer can assist with calculating the net proceeds under various scenarios, including: different exit options, different sale prices, and different transaction structures.
Once you know what the net proceeds would be with the various scenarios, you are ready to develop and execute your action plan. This is the sixth and final ingredient to a successful exit.
Join thousands of others with our weekly newsletter
- Oct27 How to Establish Yourself as the Go-To Exit Planner
- Nov09 How to Use the Value Acceleration Methodology
- Nov10 5 Things You Need to Prepare for Your Exit
- Dec07 M&A Source: Exploring Transaction Liability Insurance Products to Improve Deal Certainty and Enhance Transaction Values
- Dec08 9 Ways to Leave Your Business
Deal Source Mandates
Vitamins & Supplements eCom - 50% Recurring Revenue - 100% Growth!
- Revenue - $9,266,000
- EBITDA - $3,474,000
Industrial Parts Distributor of International Capital Equipment
- Revenue - $4,000,000
- EBITDA - $1,125,000
Heavy Equipment Rental & Sales Company
- Revenue - $5,000,000
- EBITDA - $2,000,000
Established ISO Certified sheet metal fabrication company. Company has established clients and dedicated management and employees
- Revenue - $6,000,000
- EBITDA - $1,000,000
Innovative Industrial Technologies Producer
- Revenue - $1,000,000
- EBITDA - $200,000
- Manufacturer of Technician Tools and Instruments Seeking Add-on Acquisitions
- Seeking Acquisitions of Energy Services Companies in Texas or California Providing Oil Well Stimulation, Secondary Oil Recovery, or Oilfield Environmental Services
- Seeking Acquisitions of Energy Services Companies in Canada Providing Oil Well Stimulation, Secondary Oil Recovery, or Oilfield Environmental Services
- Private Equity Firm Seeking Utilities Services Companies in North America
- TEXAS Deals - Established Service Business w/ Retiring Owner
Genius is one percent inspiration and ninety-nine percent perspiration.
Thomas A. Edison