CEO Advice

Tips for Selling a Privately Held Business for Maximum Value

Many mature, privately held businesses receive third-party advice on how to structure or restructure their companies for improved salability. In fact, 8020 Consulting frequently works with privately held companies across a wide range of industries to help them achieve what we’d call “optimal readiness.” What we’ve discovered, however, is that there isn’t a strict set of guidelines or road map to ensure maximum value and a seamless transaction. Selling a privately held business comes down to following good business practices, appropriate planning and diligent execution.

selling a privately held business practices

Well-Run Companies Will Receive Attention and Favorable Valuations

Potential suitors will be looking for many things when it comes to the purchase of a mature, privately held company, such as:

  • The quality and uniqueness of its products and/or services;
  • Consistent operational processes;
  • High employee engagement;
  • Strong brand equity;
  • A steady management team; and
  • A scalable business model.

They will also appreciate “clean” financial statements that include revenues, expenses, assets, and liabilities directly related to the business and its activities. Owners and executives seeking an active competitive bidding process and maximum value simply need to focus on running a great company. However, once a sale process is underway, there are several key aspects of a business that can be structured or restructured to maintain the momentum of a transaction. The following are some examples:

Evaluating and Updating Shareholder Agreements

Shareholder agreements should be drafted in a way that specify clear provisions for what happens in any type of a transaction. More specifically, owners need to:

  • Incorporate drag-along, tag-along provisions. This language ensures that minority shareholders are required to participate in change-of-control transactions on a pro-rated basis with the majority shareholder. This avoids the majority shareholder, or owner/founder, from being held hostage by minority shareholders when it comes to completing a transaction.
  • Implement specific buy-sell provisions. The buy-sell provisions in a Shareholder Agreement should spell out what occurs in the event of death or disability of an owner. For example, it’s a common best practice to state that shares would be purchased by the remaining shareholders in proportion to their ownership. There should be insurance policies for each owner that covers the purchase price of the business. Keep in mind that a company’s value will change over time. Shareholders should invest in annual valuations and update insurance policies accordingly.
selling a privately held business shareholder contract

Simplifying the Ownership Structure

A simple ownership structure minimizes the risk for ownership conflict when selling a privately held business. Consider the following:

  • Realize the risk of too many. There is a non-linear increase in the probability of shareholder conflict with the addition of each shareholder. In simplest terms, the fewer owners, the better. For example, let’s take the case of a two-owner company that adds a third. The arrangement may work at the time, but in the throes of a major transaction, there’s a greater chance for 2:1 ownership conflicts to arise and delay the deal.
  • Consider non-equity compensation options. One solution to keeping your ownership structure simple is to create a long-term incentive compensation structure that functions like equity for key employees. These “Phantom Stock” plans offer many of the ownership benefits without all the shareholder agreement issues that true equity may cause.

The Power of Perspective in Selling a Privately Held Business

Is there a transaction in your future? Business owners and executives of privately held companies often benefit from unbiased, third-party advice on their financials, agreements, ownership structures, processes, and business models. 8020 Consulting has many professionals with experience working with privately held businesses who can partner with your management team on a short- or long-term basis to move your business towards a successful future sale. If you’re looking for assistance or advice for your business, you can always contact us.

If you’re interested in learning more about best practices for consistent business processes, you can also download our free guide on building an operational review program. It takes an in-depth look into breaking down silos and creating traction toward organizational goals.

operational review program

Categorized in: ,

similar articles

Learn to think and approach problems like our financial consultants.

Financial Systems

Best Practices in Post-Acquisition Finance Integration

In my experience in a Fortune 500 company, the excitement around closing a “deal” and the public announcement that followed always created high energy and exciting times at the acquiring company. The flurry of activity ensuing in the Due Diligence phase is the precursor that kicks off the long and often arduous, complex, and sustained… View Article

December 12, 2019Chona Chua

Financial Systems

How Scrum Tactics Could Help Your Next Financial System Implementation

Scrum tactics are a great fit for a complex problem like a financial system implementation. Ultimately, Scrum seeks to uncover better ways to deliver a complex work product in a collaborative environment, in as short a time as possible. The ideal Scrum Team consists of 3 – 9 people, focusing on just one area of… View Article

December 10, 2019Casandra Escobar

Financial Systems

Key Questions When Implementing a Global Consolidation and Reporting System

This blog is based upon my previous experience managing the global roll out of SAP Business Process and Consolidation (SAP BPC) for a multinational company. The company I worked for was a $7B IT Distributor that was organized along four geographical regions: North America, LATAM, EMEA, and Asia Pacific. In our case, the company was… View Article

December 5, 2019David Krassin

See All