Business owners/investors and management are often so consumed with operating their businesses day to day they do not adequately prepare their company for sale. When owners finally decide to sell all or part of their businesses, they may miss opportunities to maximize the value of their company. Deficiencies in key areas can discourage potential buyers from bidding for the company, delay the transaction (which increases the chances it will not close) or lead to a lower purchase price. Similarly, unaddressed problems can result in greater retained liability of the seller or reduced payouts on earn-outs. The expense of trying to resolve the issues while in negotiation often far exceed the cost a seller would have spent fixing them before the transaction arises. Poorly prepared companies may even face a lack of buyers for the company.
Potential buyers for a company generally look hard at certain aspects of a business, and vanish if they do not like what they find. Fortunately, the same practices that will help you run the business more efficiently and effectively on a daily basis will also help you position it for an advantageous sale.
Buyers will scrutinize the company’s contracts, customer correspondence, organizational documents, minute books, accounting, tax and financial records, patents and similar rights and other important documents.
Sellers should evaluate whether key personnel need incentives to remain with the company during and after a sale. Employees react differently to change, and the loss of key personnel during a potential sale can adversely impact the proposed transaction. Sellers should not assume that the transaction process can be consummated in secret, and employees often know or suspect a transaction is in process long before management discloses the prospective transaction.
Companies should assure that appropriate policies and agreements are in place to protect its trade secrets, patents and other intellectual property. It is often difficult to implement those policies while trying to consummate a transaction, especially if the parties are trying to maintain confidentiality. Buyers will also review other company policies, plans and procedures to evaluate their sufficiency.
Litigation and Other Known Problems
Most companies have some problems, such as ongoing litigation, customer claims and similar issues. Appropriate resolution of those items can help maximize a company’s value, but doing so often cannot be achieved prior to entering negotiations with the buyer. The advisory team can help guide the seller to the best method of presenting the matter to the buyer, as well as to help negotiate the impact of those issues on the proposed transaction.
Revenues and Sales Programs
Buyers want to purchase—and are willing to pay more for—companies whose revenues have been increasing year after year because continually improving sales indicate that a company is well run, both operationally and financially. In other words, revenue growth shows a buyer that the company’s products are selling and that there is a high probability of recouping the purchase price.
Buyers are not willing to pay for a business with flat or decreasing year-to-year revenues, poorly run operations, and weak financial information and infrastructure. Accordingly, a strong sales program is critical. It should include maintaining or growing sales throughout negotiations with a serious prospective buyer to ensure that sales do not fall before the deal is final. And, it should involve concentrating on increasing revenues in every sales channel you use—domestic, foreign, special, and licensing-related—both before you put the company on the market and during negotiations with potential buyers, a process which might take 18 months or more.
Keep in mind that concentration issues related to customers, products, accounts receivable, inventory, or sales channels increase the buyer’s risk factors and reduce the value of a business.
The business should pay as much attention to producing good financial information as it does to producing good books. Proper financial practices and statements will help the business run on a daily basis while they validate its value for potential buyers. Sloppy financial practices will cost your business money every day, up to and including the day it is sold.
Buyers want to see financial information that is meaningful, accurate and timely. It must be up-to-date and easily accessible. Audited statements are the gold standard here. Audited financials give buyers a high comfort level. When outside accountants have verified the account balances, financial due diligence for the sale of the company can often be streamlined.
Specifically, buyers want to see that the company they are considering has a budget as well as financial and operating metrics that it is using to help manage and direct its business. This means that you should review all accounts on the profit and loss statement and balance sheet with an eye toward what can be improved—paying special attention to accounts receivable and inventory. And, you should ensure that payroll and business taxes are always current.
Properly-run operations provide measurements of key operating data and help a buyer understand the costs of running the business. Buyers can use this data to determine how much additional margin they might obtain under various scenarios and will factor that calculation into the purchase price they offer.
The disciplines and focus needed to achieve successful sales transactions are the same as those needed to effectively manage the ongoing operations in a way that maximizes value. The failure to take the necessary and sometimes very tough steps to increase profits, cash flow and working capital will result in the business owner/investors paying a buyer via purchase price to do the things they could not or would not do. Harvest CFOs can bring valuable insight to growth and middle market companies to enable owners/investors to get in place the financial and operational disciplines needed to increase profits, cash flow and working capital which ultimately leads to greatly improved business values.