Looking to Sell Your Business? Read This First

August 16, 2019|Brock Childers

Thinking about selling your business? With the number of exit options and decisions you have as a business owner, the process can feel overwhelming. However, planning ahead can drive the most economically beneficial and stress-free transaction.

Imagine you have two neighbors that need to sell their homes. The first neighbor, a couple nearing retirement age, understands that the proceeds from the sale will provide the foundation for their post-retirement life and have taken the necessary steps to increase the value of their home. They have maintained their home, made necessary improvements and are in no hurry to sell. Naturally, they are unable to address specific items such as paint color. In such cases, generic changes are made in order to appeal to a wider range of buyers. The second neighbor, a couple with young kids, needs to move immediately. The selling price is important to them, but they have rushed the sale process and have not taken the steps to add value to their home. Prospective buyers will likely consider that their investment will require time, money, care and attention after closing.

Business owners should take similar preparatory steps when selling their business. Some business owners meticulously plan their sale and spend years preparing for it. Other companies without much planning or preparation. Below are some common actions business owners can take prior to a sale to increase value.

Strong management team - Having a strong management team in place prior to a sale can add significant value to the business. It provides the buyer assurance that the business can run effectively without the owners. This is especially important if one of the owner’s goals is to retire at or shortly after a sale. If a company does not have a strong management team, the owner might want to consider partnering with a strategic buyer. Strategic buyers often have the resources available to fill roles in the management team. If a seller does have strong management team in place, the Company may want to consider a sale or recapitalization to a private equity firm. Partnering with a private equity firm might require an owner’s involvement post transaction, but it often presents itself as an exciting opportunity to grow the business, roll over equity and have a “second bite at the apple”.

Financial statements - When buyers are contemplating the purchase of a business, the seller’s financial statements will be a top due diligence item. It is important that sellers have clean and accurate financial statements, which give the buyer confidence in the seller’s financial performance and reporting. If a business owner is anticipating a sale within the next two to three years, engaging an accountant to audit or review the financial statements is a great step to take. When the time comes to sell, the buyer will be able to review multiple years of financial statements with increased confidence, moving quicker to an ultimate close. If no audit or review of the financials statements has been done and the seller is looking to go to market sooner, a quality of earnings report could suffice for this comfort.

EBITDA adjustments - Businesses often have discretionary owner expenses or one-time expenses that would be important to point out to a buyer to normalize earnings. The addback of these expenses then increases the seller’s profitability and correspondingly the overall value. During the sale process, buyers will generally accept the addback of these expenses if reasonable and supportable. It is also important to identify and disclose one-time revenue items. If there are significant one-time revenue items, the seller’s earnings may be overstated, which may be uncovered as a problem during the due diligence phase.

Determine areas of growth - When preparing for a sale, it is important to identify areas of growth. Past performance provides buyers with a good base, but they will always want to know how to grow the business and take it to the next level. Identifying areas of growth and developing detailed plans (and costs) to execute on growth initiatives can generate excitement around the company. During this exercise, owners might also discover growth initiatives that can be implemented immediately.

Think like a prospective buyer - Viewing the business from a buyer’s perspective is one of the most effective ways to prepare for a sale. While performing this exercise it is important that the seller approach it on a “no holds barred” basis. The seller needs to be honest, non-defensive, and strategic when thinking like a buyer. A good starting point for a seller is to ask themselves what buyers may discover during the due diligence phase, what value drivers buyers will see and how the sale of the company solves a problem (e.g. capacity, capabilities, etc.) or creates an opportunity for a buyer (e.g. growth, cross-selling or synergies). This process will help the seller uncover key value drivers, determine any necessary changes that need to be made prior to sale and assist in determining how to position the company in the market.

Identify and select a transaction team - Once a seller makes the decision to sell, identifying and selecting a transaction team is one of the most important steps a seller should make. The seller’s team will help the company prepare to go to market and strategize to maximize value, create the offering memorandum, identify appropriate buyers, market the business, negotiate offers, mitigate any legal risks and understand tax implications. At a minimum, a full team includes an investment banker, an accountant and legal counsel. It is important the seller’s team understands the goals of the transaction because they will be working together during the transaction.

If you’re thinking about selling a business, it is important to define what goals you would like to achieve. Defining your goals will help determine the preparation that is needed. Properly reflecting on the business prior to the sale (oftentimes in conjunction with advisors) can benefit owners to make the appropriate changes and, most importantly, drive value.

 

 Taureau Group’s dedicated team has completed hundreds of successful transactions. Contact one of our experienced professionals today for more information or to schedule a confidential consultation.

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