By Kresimir Peharda, partner
Business owners know their businesses better than anyone else. What they don’t know is how to prepare for a sale and how to obtain the best price from a buyer. This is where a process based approach can be very helpful. Performing the following will increase the likelihood that the business is sold at high end of the value range.
Hire a team
Assemble a team of professionals to assist with transaction planning. The team may consist of the following:
- CPA well versed in M&A transactions, if your regular CPA firm is not equipped
- Personal tax expert
- Estate planning attorney
- M&A attorney
- Business broker/investment banker
- Business consultant
The team will be able to create a written plan that will set out the steps, tasks and responsibilities required to get to the finish line-the sale. Individual team members will help with certain tasks. This may include changing the form of legal entity, gifting assets to children, forming subsidiaries, adopting a stock option plan, changing operations, etc.
You need to give yourself and your team time to consider, adopt and execute an exit plan that fits your situation. Most owners underestimate the amount of time it takes to work through the steps of an exit plan. Give yourself a minimum of 18-24 months to get ready for an exit. More time will create even more options that your team members will have in preparing the company for sale.
Lastly, you may need extra time to address the issues that a due diligence review uncovers. Common issues include customer concentration, seasonality, and dependence on a single supplier/vendor.
Hire and train a right hand
Buyers are interested in buying a self-sustaining business. This means a business that can operate without the owner being present. That is why having a second in command is critical to achieving the highest price on sale.
Titles are not important but authority and an understanding of the business are. If you do not have someone already in place who fits the role hire a COO or President from outside of the organization. Most importantly, train that person so that they can replace you after the sale and be a part of the transition team during the sale process.
Clean up your financial statements
Sophisticated buyers will expect to review audited financial statements for at least two years. If you plan to sell to such a buyer then you need to make sure that you have audited financial statements well in advance of the sale.
Some owners believe that they can save money by not paying for an audit until the sale is imminent. That is rarely a good idea because you have no idea what will be uncovered and there will be little time for fixes. Even if you are not selling to a sophisticated buyer having compiled or reviewed financial statements from a reputable CPA firm that regularly provides financial statements in sale transactions is a wise investment.
Prepare to present your business in the best light
This is an area where your team (especially your business broker and investment banker) can help tremendously. In preparing to present your business consider the financial drivers of your business, the growth plans, industry trends and the risks. Have your advisors play the role of an interested buyer to practice answering questions. With practice you will be ready for the most common questions likely to come up during discussions.
Most importantly, if there is a significant risk that is outstanding address it upfront with the buyer and explain why you think it is not as big of an issue as it would seem.
Get a valuation
Most owners have no idea what their business is worth. Obtaining a valuation can be a tool in your arsenal to inform yourself before you even begin discussions.
The tendency will be to obtain a valuation from the cheapest firm that shows the highest number. Going for cheapest and highest is not always the best option. You would be better served in getting a valuation from a well-respected valuation firm that is likely to be accepted by third parties.
Perform due diligence on yourself
Buyers are scared of all of the unknown risks and buried bodies they might find 13 months after closing. As a result, they perform due diligence on your business in order to reduce this anxiety. For many businesses buyer due diligence is the first time that someone will really dig into its operations, record-keeping, policies, documents and data.
To avoid uncomfortable conversations and unpleasant surprises as the owner perform a due diligence review on your company. You team, especially your M&A attorney and investment banker, can provide you with a due diligence request list. Use this list to uncover issues that need to be addressed before the other side, the one writing the check, uncovers them.
In summary, follow these steps to achieve the highest price upon exit:
- Hire a team
- Plan ahead
- Hire and train a right hand
- Clean up your financial statements
- Prepare to present your business in the best light
- Get a valuation
- Perform due diligence on yourself