"Luck is what happens when preparation meets opportunity." -- Roman philosopher, Seneca
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In my work selling and appraising privately held businesses across many industries, 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 six to 12 months. Those who prepare early are rewarded in the end. If you are thinking of exiting in the next few years, especially given that today’s economic uncertainty is creating a scarcity of buyers for what appear to be risky, illiquid, time-consuming investments, 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 advisers 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 two to three 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.