Business owners who intend to sell their company should operate with the goal of maximizing its value as early as possible in the business life cycle. By doing so, an owner can reap the benefits of the operational and cultural improvements, and have more control over how, when and to whom they sell their business.
Alternatively, those who wait to prepare their business for a sale will find it’s a lot of work to do in a short period of time. Catching up will tax an organization, distracting from its core business, likely leading to a decrease in potential market price.
Smart Business spoke with Jim Barney, President of Advisory Services, Clark Schaefer Hackett, about the ways owners can prepare their business for a sale.
What preparations should be made before putting a company on the market?
It’s important that prospective buyers walk away from diligence confident in the strength of the business, so they’ll want to see that all the standard information needed to examine the business is available and organized.
Buyers are looking for clean and consistent financials. Volatility in the balance sheet, such as frequent write-downs of inventory or receivables, shows a lack of control and could sink a deal or drop down the offering price.
Buyers also want to see stability. They’re looking for confirmation that revenues, as stated in the financials, are solid and sustainable. In particular, they will be looking at client relationships, types of customers, margin trends and competitive pressures. They’ll want to see contracts to get a clear picture of how business is transacted and how often terms will need to be negotiated.
There will also be considerable attention paid to the strength of the leadership team transitioning with the business. Buyers need to have confidence that they understand the capabilities of the leadership team in place that’s going to help the new ownership take advantage of the opportunity they just bought into.
What is the deal preparation process like for business owners?
There is a lot of material that has to be pulled together for buyers ahead of a sale. Business owners who, from the start of their company, preserve and organize critical information will have a much easier time assembling it when it comes time for a sale. And from the buyer’s perspective, well-organized information increases confidence that the owner has the appropriate controls and oversight, which could lead to a higher offer.
For smaller, personally run businesses, deal preparation can be very taxing for the owner, as well as the person in the company responsible for its finances. It’s a lot of work — sometimes as much as another full-time job — and it can really pull an owner in two different directions. If the preparation is lacking and buyers see the owner is stressed just to give them standard information, it will have a negative effect on the offer. So, the more time that can be given to preparation before the desired transaction date, the better the results.
Who can sellers work with to prepare their company for a sale?
Most owners can easily find and organize the information buyers want if they give themselves enough time to prepare ahead of a sale. But when time or resources are limited, owners will need help to gather and prepare information. Owners could start by talking with their most trusted professional adviser, such as their CPA partner. They should know the business and could help get information organized or recommend a firm that has more M&A experience.
A lot of work goes into making it easy for buyers to get the data they’re looking for. The smaller the company, the more difficult it is to put that information together.
By staying consistently organized and preserving relevant information along the way, a company is not only ready to take advantage of an unexpected sale opportunity, it’s also more likely to incorporate best business practices, improving the value of the business and driving up the price. Owners who try to rush to the finish line risk having a deal fall apart during diligence, and that can stress an owner, the organization and the company’s future value.
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