Whether you plan to sell your company this year or in 10 years, there are five things you can to do put more money in your pocket when the time comes. Each item is important, and each, if not addressed, could derail your future transaction.
1. A Clean Income Statement
Buyers will expect detailed forecasts, budgets based on those forecasts, and a quality of earnings report that validates your calculation of Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, which is a view of a company’s profitability often used to compare one company with another.
At a minimum, you’ll need to clean up your income statement. For instance, you’ll need to remove any personal expenses that have been running through the company such as cars, boats and summer homes. For you, these expenses may have helped lower your tax burden. But when it’s time to sell, they will lower the value of your business.
Financials that are in great shape will keep the sales process moving smoothly. However, if your books are in disarray, it could delay the sales process significantly, and that can reduce, if not eliminate, your chances for a successful closing.
Buyers will want a lot of information so they can decide whether your company presents a good opportunity for them. Often they want to examine each individual product or service and calculate its contribution to your bottom line. Unfortunately, many companies just don’t keep records in that level of detail. My advice is that you look at your financials through a buyer’s eyes, and make sure that you collect and analyze data in the way an acquirer would.
2. A Solid Management Team
Some sellers think that because the buyer is taking ownership, there will be no need for them to continue their management roles. Not true.
Financial buyers, such as venture capital funds and private equity groups may send in seasoned business managers to help you run a tighter ship. But they will want your institutional knowledge, at least for a certain period. After all, you’re the one who built the business.
Strategic acquirers feel the same way. They need your current management team to help integrate your company with theirs. You may want to provide cash incentives to keep your current team in place. Buyers will be attracted to a company that has a deep bench of managers who work well together and know the business exceptionally well.
3. A Clear Strategic Focus
Does your company have a clear business strategy, along with leaders and employees who are focused on that strategy? If you do, the odds are high that you have been outperforming the competition and will continue to do so. It’s also true that yours is the type of company buyers love. They love to see companies with a strategy that has been successful over time and positions the company for success in the future.
4. A Broad Customer Base
My heart sinks when a company owner shows me great numbers and then tells me that 90 percent of his revenue comes from one contract. Even the most risk-tolerant of buyers will lose interest in a company whose revenue could virtually dry up overnight. If more than a third of your profits come from one customer, or one closely related group of customers, you need to diversify your customer base before you try to sell your company. For your efforts, you could receive a dramatically higher valuation, when it’s time to sell.
5. Know Your Personal and Financial Goals
Suppose that out of nowhere a buyer offers you a check for $42 million. That’s a huge amount of money, but is it really the best offer your business could attract? What if a similar company just sold for $53 million? With that context, the first offer no longer seems so great.
That’s just one reason you should sit down with a skilled M&A advisor to help clarify what you want from a sale. Is there a yacht or vacation home that you’ve got your eye on? Do you need capital to start your next company? Or do you wish to set up trust funds so that your grandchildren will be able to go to the college of their choice? Only when you’re clear on what you hope to achieve will you be truly committed to a sales process for your business. And that can make all the difference as you and your M&A advisor pursue a successful sale.
At Allegiance Capital, we want you to know what you’re getting into when you sell your business. We view educating prospective clients as one of the most important things we do.
We like to begin our process by offering a free book called Street-Smart Moves for Selling Your Business by Joe Aberger. It’s brief, well-written, and addresses 29 topics that are critical to selling a business like yours. Be sure to Sign Up Now.
And, in the meantime, if you have questions, feel free to call me at (214) 217-7732.
About the Author
David J. Mahmood
Founder & Chairman
Phone: (214) 217-7732