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Preparing
Your Business For Sale
Careful
preparation and advanced planning can significantly increase
the likelihood of a successful business sale and have a
positive effect on valuation. The following are proactive
steps a business owner should take prior to beginning the
business sale process:
Recasting Financial Statements
Recasting
Financial Statements Financial statements of privately held
companies typically are prepared with a view towards minimizing
the tax burden. This purpose tends to be at odds with what
a business owner wants to show to a potential buyer in the
context of a business sale. To enable a potential buyer
to "read between the lines," the financial statements
must be "recast" or "adjusted" to reflect
the true profitability and discretionary cash flow that
would be available to a new owner.
This
recasting involves identifying the owner and certain family
member salaries, any perquisites or fringe benefits that
owners of privately held businesses customarily make available
to themselves, one-time or extraordinary expenses, current
expenses for future expansion that have not impacted historical
sales, non-cash expenses and other expense items not likely
to recur or be applicable to future ownership. An important
step in this process is to thoroughly analyze the general
ledger to identify all expense items that can be restated
or adjusted and thereby maximize the price a seller will
receive for the company.
Independent
Valuation
An independent valuation enables a business owner to get
a sense of a realistically achievable value and confirm
in advance whether or not it makes financial sense to sell
the business given current market conditions. If the lowest
price that a business owner would be willing to accept for
the company is well above what a potential acquirer would
realistically pay, it is essential to be aware of that information
in advance of trying to sell the company. This step can
eliminate time wasted on the business sale process that
detracts from the business owner's focus. Properly understanding
valuation at the outset will also prevent "leaving
money on the table" by undervaluing the company or
losing qualified acquirers by seeking an unrealistic price.
Tax
Implications
It is crucial to understand the tax implications of a sale
in advance. This will provide a realistic picture of the
net after-tax yield and help to determine the most advantageous
way to structure the sale for tax purposes. For example,
advance recognition of the tax implications of a "C"
corporation requires that negotiations be positioned toward
a deal structure that would minimize a sellerŐs tax exposure.
Appraisals
For equipment intensive businesses or transactions in which
real property will be included in the transaction, independent
appraisals of the equipment and/or the real estate prior
to beginning the sale process is highly recommended. Appraising
these assets will help in the valuation and planning process
prior to going to market. The buyer will likely need to
have these assets appraised and being prepared will ensure
integrity by presenting these assets with accurate market
valuations.
Growth
Plan
A well thought out and realistic plan for growth can greatly
enhance the value of a company. It serves as a road map
to expansion opportunities that a new owner could exploit
with additional capital or other resources that it may bring
to the table. The plan should assume that significant capital
resources will be available after the sale and identify
areas where historic sales were constrained due to capital
limitations. It is likely that the acquirer will be better
capitalized than the current owner and have enhanced capabilities
to act on these opportunities. Whether it is limited desire,
burn out, or lack of capital resources holding the business
back, it is critical to develop a well-defined plan that
identifies the most realistic expansion opportunities. The
more untapped expansion potential, the greater perceived
value the business will have to an acquirer.
Tackling
"Deal Killers" Early On
If there are issues that may potentially jeopardize a transaction,
a seller is ill served by hiding his or her head in the
sand. Eventually these issues will surface and it is far
better to be prepared and address them during presentation
from a proactive viewpoint, rather than have to take a defensive
posture when they are independently discovered.
Such
"deal killers" may include a lease that needs
to be negotiated, property to be cleaned up, equipment to
be replaced, financials to be revised, pending litigation,
key employee retention, customer retention or concentration,
etc. Addressing these issues in a timely and forthright
manner avoids spending months identifying qualified acquirers
only to have the deal "crash and burn". There
are a variety of ways to disclose, present and/or remedy
these issues prior to or during the initial marketing phase.
Buyers have a greater willingness to proceed with the deal
if they feel the seller has been honest in disclosing the
"skeletons in the closet" from the outset. The worst situation
is for a potential buyer to discover these issues on its
own and wonder what other negative surprises may exist.
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Addressing
Key Dependencies
Reducing key dependencies in a business will serve to increase
the marketability and value of a company. Three key areas
include customers, vendors and employees. Customer dependency
exists when a high percentage of the company's revenue is
derived from a few large customers. Vendor dependency results
from difficulty finding comparable vendor replacements,
if needed. Employee dependency exists when the business
is highly dependent or held hostage by key employees or
the existing owner, whose departure could severely impair
the business. These dependencies create significant risks
for an acquirer and can have a negative impact on valuation.
With advanced planning and focus, the negatives associated
with these dependencies can generally be mitigated.
Environmental
It is the responsibility of the seller of a business to
obtain required environmental clearances prior to the closing
of a business sale. This generally applies to businesses
subject to environmental scrutiny such as manufacturing
businesses or firms routinely dealing with hazardous substances.
If a company's standard industrial classification (commonly
called the SIC code) triggers the need for this clearance,
it is essential to understand in advance the presence of
any existing issues. This can be accomplished by hiring
an environmental consultant to perform a Phase One study
that will identify any environmental concerns. Given that
environmental due diligence is a requirement, it is best
to address it early in the process. The absence of advanced
planning could lead to months of unnecessary delay that
can jeopardize deal momentum and ultimately the deal itself.
Third
Party Financing
It is important to ascertain the likely level of financing
available to an acquirer in advance. This will help qualify
potential buyers as serious prospects and determine if the
necessary capital will be available to consummate a transaction.
For
example, assume an acquirer will need $1.5 million in available
cash for the initial investment and working capital requirements.
If it is determined that a bank is likely to lend a reasonably
qualified buyer $600,000, then a buyer must be identified
with at least $900,000 in available capital and good credit.
If a bank is only willing to commit $300,000, it will be
necessary to find a financially stronger potential acquirer.
Not being armed with this knowledge in advance leads to
wasted time and jeopardizes confidentiality with unqualified
acquirers.
Carve
Out Excess Assets One method of increasing a
sellerŐs total financial yield from a transaction is to
identify excess assets that can be converted into cash prior
to a transaction, without adversely impacting the business.
For example, assuming a company has accumulated $450,000
of inventory but only requires a $250,000 level. The seller
can generate an additional $200,000 by converting the "excess"
inventory to cash prior to the closing.
Likely
Acquirers
Advance research within an industry can determine if it
makes sense to approach companies in a related business
seeking additional sales, territories, capabilities or complimentary
revenue centers. These "strategic buyers" may
have a strong desire to acquire a similar or related business
as a means of growing through acquisition or because they
may recognize the synergies that will result from the combination
of the two companies. By identifying likely prospects, the
search for an acquirer can be more tightly focused in a
direction that can maximize the overall deal value.
Team
of Professionals
Before entering the uncharted waters of selling a business,
it is imperative to select the right team. This includes
a qualified CPA, an attorney with a background in corporate
transactional work and an experienced M&A intermediary.
Ideally, all of these parties should have specific experience
with the business sale process. All parties should meet
in advance since their efforts will need to be coordinated
later in the process. This will ensure that all team members
are on the "same page" and have a clear understanding of
the goals and expectations of their mutual client.
Current
Sales Performance
An often overlooked area that has a major impact on marketability
of the business is the company's current financial performance.
The 12-month period during which the sales process is taking
place is a decisive one. If sales performance deteriorates
during this period, marketability and value will be negatively
impacted. Current performance often has greater significance
to a potential acquirer than the previous 20-year track
record. The business owner must focus his or her efforts
on whatever can be done to maintain consistent (or improved)
sales, margins and profits during this period.
Working
with a qualified M&A intermediary to manage the sale process
is a vital component of the sale process because it allows
the business owner to maintain focus on the business at
hand. An experienced intermediary will handle the time consuming
intricacies involved in the proper packaging, presentation
and negotiation of a business sale transaction.
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