Just like when you embark on offering a new product or service, you prepare the plan and muster the resources required for success. Similarly, a key element in obtaining a high purchase price and reaching your transaction goals is preparation. You can take a number of preparatory actions that will significantly and positively affect the outcome of a sale transaction.
1. Put Yourself In the Buyer’s Shoes
As you prepare, put yourself in the buyer’s shoes. Remember that anything you can do now that will elevate a buyer’s impression of the business will benefit you. Attracting buyers and closing a transaction is difficult, so upfront preparation is crucial for making the company as inviting and understandable as possible as well as reducing transaction risks.
2. Perform a Strengths, Weaknesses, Opportunities, Threats (SWOT) Analysis
A SWOT analysis is a helpful assessment tool, identifying and evaluating the company’s strengths and capabilities, its competitive market position and its future potential. By working through each of these factors, you as the seller can be much more deliberate about how to best position the company. Also, this assessment exercise helps you refine and clearly articulate these items to a buyer. Additionally, the buyer will often use a similar analysis.
3. Build a Capable Management Team
A company with an experienced management team is worth much more than a business that is reliant upon the owner. One of the most valuable areas on which to focus is building a tier of management that can sustain the business and can survive your absence. Buyers generally want the owner to remain for at least some transitional period, but they also want to know there is competent talent that can assume control.
4. Obtain an Audit
An audit prepared by an objective, third party accounting firm provides a high level of credibility to your company’s historical financial performance. It provides a level of confidence to the buyer and reduces the buyer’s fear that what he is buying may be a fiction. It also provides a seal of approval to the buyer that you manage your company with sophistication and have the appropriate level of financial and accounting policies and procedures in place. Also, given disclosure and compliance requirements, such as Sarbanes-Oxley, for publicly traded companies, an audit is sometimes required before a public company will make any purchase. Although, an audit costs, think of it as an investment that will pay off by providing credibility, reducing time related to buyer due diligence, providing a credible financial basis for valuation.
5. Favorably Recast Financials
Since so much of the ultimate purchase price is based on historical and future financial performance, it is crucial to credibly, clearly and understandably present the company’s financial situation to the buyer as positively as possible. Most owners operate their business to minimize taxes, rather than maximizing earnings, and run a number of expenses through the company for their own personal benefit. Therefore, recasting the financial information making various adjustments and add-backs will aid in showing the company’s true earnings generating power.
Note that if a buyer purchases the company for a multiple of six times its operating earnings, any additional dollar you can demonstrate relates to six times that dollar in purchase price. Properly documenting the company’s finances, including any adjusted numbers, is important. The buyer will not purchase something that the seller cannot document.
6. Clean the House
Just like preparing to sell a house, there are a number of housekeeping items that should be cleaned up prior to marketing the company for sale. Note that a buyer will send in his due diligence team to review these items. Better for you to deal with them proactively and get your business in order now instead of having to deal with them during a transaction. Below is a brief list of the ones that occur most often:
- Accounts Receivable – Write-off stale receivables that have little probability of collection.
- Inventory – Write-off or mark down old, slow moving or obsolescent inventory.
- Personal assets – Remove personal assets not germane to the business from the balance sheet.
- Capital Equipment – Ensure that equipment has been well maintained and maintenance records are in order.
- Facility – Clean the physical plant, repaint, organize the yard, make any significant repairs.
- Environmental, Employee, Tax and Legal Matters – Ensure records are properly documented and resolve any material outstanding issues.
7. Hire Your Team Of Experienced Advisors
Buyers are experienced and sophisticated, typically having purchased multiple companies. As an owner, you have been focused on operating and growing your company, not buying or selling businesses. Therefore, assembling a team of experienced transaction advisors that can be on your side is important. Typically, these advisors include an investment banker, corporate securities transactional attorney, accountant, tax advisor and a wealth manager.
Selling a business is complex. You would not perform surgery on yourself or represent yourself in court. Why risk jeopardizing something as important as selling your business? Assuming your team has a good track record, the value these advisors contribute will be far greater than any fees paid.