Typically, most small to mid-sized business owners are so focused on operating and growing their business, they do not adequately prepare their company for sale. This lack of preparation can cause business owners to miss opportunities to increase the value of their company, costing them significant dollars at the closing table.
If you are considering selling your company in the next five to 10 years, now is the time to begin preparing by identifying and quantifying issues and exposures that could adversely affect a deal.
The following objectives will help you develop and implement a strategic plan that can increase the value of your company. Please note: These ideas are not listed in order of importance; there are many additional ways to increase company value.
-
Form a Multidisciplinary Team of Advisors – Choosing the right investment banker is one of the most important decisions you will make in enhancing the value of your company. This advisor will manage the transaction from start to finish, helping the process run smoothly and allowing the owner to focus their efforts on managing the business. In addition to the investment banker, a solid team of advisors—including a CPA, financial advisor, merger and acquisition attorney and estate planner—is needed.
-
Mold a Strong Management Team – If buyers view your involvement as vital to the success of the business, you could be forced to stay on after a sale or the value of your company may be reduced. Identify key employees and groom them to take over the business when you depart.
-
Reliable Financial Statements – Reliable financial statements allow management teams to identify areas of concern prior to the sale process, reducing the chance of a surprise during negotiations. Having the company’s financial statements professionally audited or hiring a firm that specializes in sell-side due diligence to review the financial statements not only provides the buyer a greater sense of comfort but also helps reduce the chances of issues during due diligence, which can be costly—and perhaps fatal—to a transaction.
-
Invest in the Future – While having your expenses under control are very important, bypassing needed improvements, upgraded IT systems or new equipment purchases can negatively affect value.
-
Customer Concentration – Some companies rely on a few significant customers, which buyers may view as risky. If diversifying is too difficult or not possible, or if obtaining sales contracts or agreements is not feasible, then demonstrating how the customer depends on your company can help mitigate the potential buyer’s perceived risk.
-
The Balance Sheet – Cleaning up the balance sheet by removing nonoperating items will reduce confusion about which assets and liabilities will be included in the transaction.
-
Controlled Ownership – Buyers prefer to deal with a small number of like-minded owners when purchasing a company. If buying out minority shareholders is not feasible, having their agreement to sell along with the majority owners can ensure a smoother transaction.
-
Pruning – While diversifying your customer base is important, consider “pruning” unprofitable customers or products. Most transactions are priced on a multiple of cash flow; eliminating items that might decrease earnings can pay off multiple times.
-
Think Like a Buyer – Put yourself in the buyer’s shoes. If you were buying your company, what would concern you? Looking in the mirror can be an enlightening experience, as most company owners focus on day-to-day operations and may not think objectively about their company.
-
Timing – Timing significantly impacts value. Too many company owners decide to sell based on their age or an unexpected event, rather than the overall business climate. Having an experienced intermediary can keep you informed about industry and market conditions and when it is the right time to sell.
For most owners, selling their company is a once-in-a-lifetime opportunity. You want to be fully prepared when the day comes to sell and receive top dollar.
Contact Tony Giordano at agiordano@bkd.com.
------
This information was written by qualified, experienced BKD professionals, but applying specific information to your situation requires careful consideration of facts and circumstances. Consult your BKD advisor before acting on any matter covered here.
Article reprinted with permission from BKD, LLP, bkd.com. All rights reserved.
