Prepping Your Company For Sale
A blueprint for selling your company and managing the common issues.
Third in a series on acquisition preparedness
In the article Positioning Your Company For Sale published in the July issue of PPB, Jeff Meyer, MAS, CEO of Certified Marketing Consultants, discussed a variety of key factors buyers look for in a company they want to acquire. In the subsequent article published in the August issue, How to Determine What’s A Good Deal, John Schimmoller, COO of Certified Marketing Consultants, discussed the common points that arise when negotiating a deal. Both articles serve as a guide to maximizing value both before and during the process of selling a company. This third and final article in the series will discuss the common do’s and don’ts when selling a company and how to guide your company to a successful closing.
DO know your company’s value. This doesn’t mean that you should assume your company will sell at the same multiple as your friend’s company, and it doesn’t mean you should Google “company value” and use an online formula to try to figure out what your company might be worth. It does mean you should gather up your information and find someone who understands your industry to place a value on your company. In fact, don’t wait until you are ready to sell to go through this process. Your company is quite possibly the most valuable asset you own and taking the time to understand and maximize its value will only benefit you—especially if the long-term plan is to sell your company.
DON’T tell everyone you are thinking of selling your company. If word gets out that you are thinking of selling your company it can be bad for business. Keep this very confidential matter private. If you have a trusted group of advisors, then it is okay to share your plan and gather feedback from that group of people. Just be sure those advisors understand and value confidentiality as much as you do. Further to this point, don’t tell your employees. This is one of the most common mistakes business owners make. They think they have an obligation to tell their employees if the company is for sale but they are doing their employees a disservice. Knowing the company is for sale is meaningless unless the employees can do something productive with that information. The truth is, it just causes worry. If employees know the company is for sale they can get anxious and sometimes even leave their jobs. It may take years for the company to sell and no one knows what the buyer’s intentions will be with employees. Do yourself and your employees a favor and keep it quiet until the purchase documents are finalized.
DO prepare yourself for candid financial questions from buyers. If sales have decreased over the past few years be prepared to explain why. If your margins have dropped a few points make sure you understand whether the decrease is due to pricing or cost. The truth is the only reason a buyer is looking at your company is because it might be a good financial investment. Most buyers are working on a 1 + 1 = 3 formula. Your financial statements tell buyers a story. Be sure it’s a story you know well, and have the data to back it up. Most buyers will expect a full set of financial statements including a balance sheet and income statement for three years. It is also helpful to have interim statements or at least interim sales numbers for buyers to consider. If you don’t have this information available hire an outside accountant to help you prepare it. Many owners run personal expenses through the company. Be sure to have these carefully documented so you can show buyers the true earnings of your company. There is no substitute for giving buyers a solid financial picture of your company and it is best to get yourself in the habit of keeping accurate monthly financials long before it is time to sell. If buyers see a well-run company with a knowledgeable owner, they will have more confidence and a higher inclination to purchase it.
DON’T assume your real estate will be part of the deal. Whether you own or lease a building it is best to be flexible with your facility when the time comes to sell the company. Buyers may or may not need a building but the best way to maximize the buyer pool is to have the ability but not the need to include it in the purchase. If you purchased a building, you have entered into the real estate business and that investment should stand on its own, which means you should be able to sell or lease it outside the company. If you lease your building you should not sign long-term leases, especially as you get closer to the time when you expect to sell the company. Many owners take pride in their beautiful facilities but the truth for buyers is they need to find ways to decrease overhead, and consolidating operations is the best way to do that. Two rent or mortgage checks dramatically reduces the return on investment, which reduces the amount buyers are willing to pay for your business.
DO establish a relationship with an attorney who understands your goals. Attorneys can be valuable assets when they understand the long-term goals and work according to those goals. Some attorneys are deal makers; others are deal breakers. Sometimes attorneys can be rigid and focus on the small picture. Others work according to their own timetable and cause unnecessary delays. Some business owners are scared of their attorneys and/or the issues they are facing and let their attorneys run the show. An attorney works for you and should work according to the schedule you give him or her. It may take some sifting to find the right fit but once you find that fit it will be well worth the time. Always remember that attorneys are there to give you their counsel but at the end of the day the decisions are yours to make because the consequences of those decisions fall on your shoulders.
DON’T forget to run your business. It is common to feel a financial and emotional pull between running and investing in the company and deciding any issues that come up will be someone else’s problem. The truth is that until you sign closing documents the company is your responsibility. Continue running the day-to-day operations just as if you were going to own the company for 10 more years. Most purchase agreements have a clause that stipulates the owner will run the company in the ordinary course of business. That doesn’t mean you have to go out and buy a brand new piece of equipment but it does mean that you should continue filling orders and treating customer matters with the same diligence as you always have. You want to close your chapter of the business with the same positive energy that you opened it with and ensure the buyer has a strong start to giving your customers the same positive experience you did.
DO start planning early. Whether your goal is to sell next year or 10 years from now it is never too early to begin planning for a sale. Most of the strategies to building a valuable company should be implemented long before you sell it and will make your company more successful. Much like selling a house, there is constant maintenance that should be done to ensure the company is strong and healthy for a potential buyer. Unlike selling a house, many of these maintenance items are behaviors that cannot be implemented overnight. Establish a succession plan and revisit the plan annually to be sure it still coincides with your long-term goals.
DON’T turn down the first offer just because you think you might get a better one. The best buyers are motivated to move quickly. It may be the best and/or only offer. There is a list of sellers who regret losing good deals because they waited too long for others. A bird in the hand is truly worth dozens in the bush.
DO enjoy the fruits of your labor. If you are a business owner, then you are a risk taker and an entrepreneur. You have provided yourself and most likely others a job. Take pride in knowing you have built something of value and take time to enjoy the reward for the efforts you have put forth. Good luck.
Jamie D. Watson, MAS, CPA, is a financial analyst with industry business services company Certified Marketing Consultants in Huntertown, Indiana.
- Start planning early. It is best to start the process at least five years before you plan to sell.
- Know your value. Get a business valuation and know what drives/subtracts from value.
- Keep accurate financials. This is important for all business but especially when you want to sell.
- Stay flexible. Be prepared for a buyer to relocate or make other changes to the business.
- Hire a professional. The right representation will make the deal flow better and increase the likelihood of closing the deal.