Preparing Your Business for Sale – Part 1
It is clear that deciding to sell is consistently one of the most important and gut-wrenching decisions of a business owner’s career. A business sale is a high-stakes transaction with far-reaching financial and emotional consequences for sellers and their families. In a perfect world the business owner prepares three or more years in advance, but in reality, most owners compress this timeframe to 6-12 months. Those who prepare early are rewarded in the end.
If you are thinking of exiting in the next few years, now may be the perfect time to focus on preparing your company for sale. Here are five proven areas of preparation that will increase business value and salability:
1. Financial Results – Buyers expect a return on investment. They will focus on the amount, trend and quality of sales, gross profit and normalized free cash flow (after reasonable owner/management compensation), and so should you when you’re planning to sell. In today’s market, quarterly and monthly trends are being watched more closely than ever. Every industry has its own set of key financial metrics (sales per employee, return on net assets, working capital turnover, etc.). Know your industry’s metrics, highlight your firm’s strengths and address its weaknesses.
2. Financial Records – Are your income statements and balance sheets so confusing that no one can understand or analyze them? Are profit centers clearly delineated? Do your tax returns map to the internal statements? Have your financials reviewed or audited, from a buyer perspective, and ‘cleaned up’ if needed. Upgrade your accounting as needed.
Three years of clean, consistent and understandable financial records can do more to sell your company and maximize your after-tax yield than any other tool. When buyers can’t understand your financials or find problems with them, they begin to suspect every other piece of information, their perception of risk increases and the price they are willing to pay decreases, or they lose interest altogether: Clean financials establish confidence and an immediate trust factor between you and buyers (and their advisors and financial sponsors).
3. Scalability and Growth – Buyers buy for future financial returns. Are there attractive and realistic growth prospects for your business, considering the investments required and the risk of meeting projections? Be able to convincingly quantify and communicate growth strategies; and better yet, set the business on that trajectory now.
4. Tangible Assets – Evaluate your company’s fixed assets and inventory. For 2-3 years, optimize your inventory to maximize turnover and minimize excess or obsolete items. Buyers won’t spend money on such inventory. Is your inventory management system adequate? Catalog your major equipment and review each item’s age, condition, maintenance records, remaining life, fitness for use and adaptability, efficiency, capacity, replacement cost and liquidation value. Non-contributing assets have negligible impact on future operating profits or enterprise value and make the business look less efficient, so you are better off liquidating them (turning them into cash) in an orderly way before you sell the business.
5. Facility / Lease –Is the present location right for your business long term? If so, is the facility up to date and is there room for business expansion? Premise leases and landlord reasonableness are almost always hurdles for the buyer, so ensure that leases don’t expire or require additional negotiation. Scrutinize your lease for market rent, rent escalation, term, renewal options, hidden costs, etc. Now may be the time to lock in favorable te1ms.
If you own the real property, there are additional factors to consider. Review environmental contamination, easements, zoning changes, etc. If a buyer looks at the real property and immediately sees hurdles, it can be difficult to sell the business. Depending on the cash flow of the business and the highest and best use of the property, it may be advantageous to sell the business and property together or separately, concurrently or in sequence. It is important to understand the underlying value of both components, since that’s how buyers, appraisers and lenders will look at it.
Remember, you have one chance to sell your business right, and the stakes are high. The earlier you start preparing, the more marketable your business will be and the happier you will be with the results.
Al Statz is President of Exit Strategies Group, Inc., a business brokerage, mergers, acquisitions and valuation firm serving closely-held businesses in California.