Although a business owner may not be planning to sell his or her company now, Rick Parent, vice president of Gumbiner Savett Inc., an accounting and business advisory firm, says owners should always operate the business as though they are.
“Everything is for sale at the right price,” says Parent. “I’ve seen many instances where business owners say that they are not going to sell. ‘This is always going to be a family business, even when I’m gone.’ But at the right price, everyone’s mindset changes.”
To make sure owners are prepared to sell when a buyer approaches them with an offer, Parent says businesses should build a solid foundation with a strong infrastructure, implement internal controls, establish sound policies and procedures and prepare a business plan with financial projections.
“Businesses that don’t have a strong infrastructure leave a lot of money on the table or can kill a sale because buyers generally do not feel confident about the integrity of the numbers when they question the way the business is run,” he says.
Smart Business spoke with Parent about how to prepare your business for sale.
When is the best time to sell a business?
The best time to sell a business is when the owner can obtain the best price. This sounds simple, but a business needs to be achieving maximum profitability and the market conditions need to be favorable for a sale. Those factors in place will allow for the highest rate of return for owners.
How can owners maximize the value of their business and its attractiveness to potential buyers?
Most well-run businesses go through the internal process of developing three- to five-year business plans. If a business owner envisions selling in the next few years, a business plan and financial projections are necessary for a prospective buyer. Once a business plan is created, it is best to have the financial statements audited or at least reviewed. Unless required by lenders, many companies do not have their financial statements audited or reviewed.
However, most buyers of businesses will require that historical financial statements be certified by an auditor to validate the reported historical earnings, which are typically used for deriving a purchase price. This will allow for a maximum purchase price for your company because critical financial data will be in the format needed for proper due diligence in establishing the value and price.
It’s very important to have good advisers — an attorney, an investment banker and an accountant — usually obtained through a referral from a trusted friend or business associate. These advisers need to understand the business and be positioned to provide the necessary level of service for the business profile. Using an investment banker as an example, you wouldn’t necessarily want to get the biggest investment banker and end up being a small fish in a big pond. Rather, you should find a banker who specializes in your industry and who’s best suited for your business.
Once advisers are in place, how will they help the business?
Advisers will help owners refine their business plan and get the financial statements in place. You want to create a situation where, when a prospective buyer expresses an interest in the company, the buyer’s due diligence process is seamless and, in a sense, turnkey. Having everything ready for a buyer — the analyses and historical as well as forward-looking statements — can create more value.
Businesses with good business plans, projections and audited financial statements, as well as solid internal controls and procedures, generally receive the highest sales offers.
How will sales contracts add value to a company?
Long-term customer contracts can be a value-add for a prospective seller. Termed ‘backlog,’ the value of the backlog (total contractual revenues) validates the revenue projections. Customer contracts are typically found in industries such as software, contractors and entertainment.
How will employees help an owner prepare for a business sale?
A business owner should invest in qualified personnel to manage the various departments. Their worth to the company is invaluable, not only during a sale but on a regular basis. Many entrepreneurs underplay the importance of hiring a professional financial staff. The CFO or the corporate controller is the linchpin to establishing and monitoring internal controls. He or she is responsible for ensuring that policies and procedures are properly documented, that there is segregation of duties and that key controls are in place to prevent fraud. A business owner should include the key department heads in the sales process and financially reward them from the success of the sale.
Knowledgeable, qualified department heads, along with a solid foundation and the right advisers, are key to preparing a business for sale. The amount of the sale price is likely to increase if owners invest upfront in establishing this infrastructure.
RICK PARENT is vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or firstname.lastname@example.org.