You’ve invested a lot in growing your business. If a sale is in your short-term or long-term plans, it is important to adequately prepare yourself and your company in order to get ahead of potential issues and maximize the value of the asset you have been building for years. Here are five areas to review when preparing to sell your business:
Understand the Value of Your Business
As you prepare to sell your business, it is important to develop a true understanding of what your business is worth and to set realistic expectations for yourself as you enter the market. There are multiple ways that value can be determined depending on the specific attributes of your business and its industry. A common method is an income approach where the business will be valued based upon a multiple of an income metric, such as EBITDA. Understanding how your business will be valued by an acquirer is important so that you can both develop realistic expectations for what you could be offered, and perform an internal evaluation of your company’s financial situation to make sure you maximize the appropriate metrics in the periods approaching a sale to drive the company’s value as high as possible.
Understand Your Potential Acquirer
When seeking a buyer for your business it is important to understand your options. Do you want to sell 100% of your business or keep some skin in the game? Do you want to keep working for the company after you have sold it or retire upon the sale? What are the growth prospects of your business – is it steady growth going forward or would an infusion of capital provide an opportunity for significant expansion? All of these issues are important things to consider when evaluating the type of buyer you are trying to attract. For some companies, selling to a strategic buyer makes the most sense, while for others selling to, or even partnering with, a private equity firm is the best option. Understanding the type of buyer you are trying to attract and what is important to them is crucial when preparing your company for sale.
Understand the Importance of a Strong Management Team
Having a strong management team in place is critical when preparing your company for sale. When a buyer is evaluating your business as a potential acquisition target, they will not only evaluate its financial performance but also other factors they will inherit upon acquisition; including the personnel you have in key roles. As you were building your business it may have been tempting to “wear many hats” and perform various functions which would normally be fulfilled by other management roles. While this strategy is great for reducing costs, a buyer may be wary of an owner who does too much. It is important to make sure the business is set up for success after you are gone, even if you intend to stay employed by the business subsequent to the sale. Having a strong management team in place will help alleviate a buyer’s concern that the business is too dependent on you and ultimately make it more attractive for potential acquisition.
Understand (and Maximize) Your Financial Metrics
Although maximizing your profits and other financial metrics has most likely always been important to you, as you prepare for sale it is more important than ever to ensure your business is showing the best financial results possible. Focus on analyzing your expenses and cutting any excessive discretionary costs that may depress your bottom line. Look for opportunities to create cost efficiencies as soon as possible to show consistently strong financial performance in the periods leading up to a sale. It is also important to understand other factors a buyer will evaluate when considering the earnings of your business, including your financial reporting procedures and controls as well as customer concentrations. Making sure you have an adequate system of procedures and controls is important for buyers assessing a company for acquisition as it provides additional comfort that the financial data they are receiving is accurate. Evaluating customer concentrations is also important; a business that is overly reliant on a few large customers may be less attractive than a business which is more diversified.
Buyers will typically have a quality of earnings analysis performed to provide an in-depth evaluation of your financial results. It is important to make sure your accounting records are maintained adequately to satisfy these procedures. It is also extremely valuable to identify any potential red flags before a buyer performs their own analysis so that you can proactively provide appropriate explanations and solutions. Accordingly, many potential sellers will have their own quality of earnings analysis performed prior to a sale.
It’s Never Too Early to Start Preparing
Even if you do not intend to sell your company any time soon, it is never too early to start preparing for an eventual sale. Understanding your business’s value and taking the appropriate steps to maximize that value in the years leading up to a sale can result in significant benefits both, financially in terms of the maximizing the final sale price and also reducing the added stress and potential complications the acquisition process can cause by being well prepared. Identifying the type of buyer you want to attract can help set the stage for what you need to do leading up to a sale and the sooner you start to focus on what is important to a potential buyer, including putting a strong management team in place and maximizing your most important financial metrics, the more attractive your business will be.
LGA has a diverse group of experienced professionals ready to assist you in preparation for the sale of your business and everything that comes along with it. Whether it be financial reporting and analysis, tax preparation and planning, business valuations or quality of earnings analysis, LGA has the resources necessary to get you ready for one of the most important transactions of your life. For more information, contact Frank Storniolo.
Written by Matthew Touma