Selling your company is usually the largest financial transaction you will be involved in. You have bought and sold houses, and maybe commercial buildings or expensive equipment, but when it’s time to sell your company you are making a decision that will impact the rest of your life. Before making that decision, there are several steps you can take to make sure you are prepared to sell. Careful consideration of the advanced preparation will help to maximize the sale price and increase the likelihood of the sale being completed.
Get Organized
The easiest thing you can do to increase the value of your company is to get organized. Getting organized prior to marketing the company for sale makes it easier for your team to tell a good story about the company to prospective buyers and creates a great first impression. Buyers love good stories, but smart buyers will be wary of much of what you tell them.
Rather than taking the situation at face value, they will conduct detailed due diligence, to essentially prove-out everything you just told them. Thus, your team needs to have everything ready for buyers to examine. Examples of items to have ready are:
1. organizational documents,
2. organizational chart,
3. team bios and responsibilities,
4. customer contracts,
5. product descriptions,
6. details about your intellectual property,
7. financial records for the last three years, and
8. financial projections for the next three years.
Having all of this information prepared and organized allows prospective buyers to analyze the requested information and quickly make a decision about the acquisition. Furthermore, being prepared to share information creates an impression of truthfulness and transparency that may decrease the perceived risk with the transaction and thus increase value.
Put Your Team in Place
You will need to decide who will be on your internal and external deal teams before starting the sale process. At a minimum, your internal team must include your senior financial person, but should really include your entire senior staff. Experienced buyers will want to meet them, and you will need them to help tell the company’s story in a positive manner. The news of the sale will be a short-term distraction for your team, but you can keep them focused by offering bonuses to be paid at the closing of the transaction. Although your senior financial person is the most important person on the team during the sale process, that position is also the most likely to get eliminated if you sell to a strategic buyer. Secure the support of that team member by offering a bonus as well as a generous severance if the position is eliminated by the buyer. Your external team is equally important and should include the following experienced external advisors:
Investment Banker
An investment banker has been involved with many M&A transactions and will be able to help prepare the company for sale, while subsequently assisting with marketing, negotiation, and managing the process through close. They add a tremendous amount of value throughout the process, but especially by getting multiple prospective buyers interested in the company and thus creating a competitive market. The increased sale price they drive will more than offset their fees. Also, they can help you pick your other advisors.
Transaction Attorney
One of those other advisors should be a seasoned transaction attorney. It is very tempting to use your general counsel for this work, but you need to get someone with extensive M&A experience. The hourly billing rates for experienced deal attorneys will give you sticker shock, but because of their experience they will bill you for fewer hours and save you a lot of money while negotiating the details of the purchase agreement. Attorneys with little or no M&A experience will often unwittingly cause the sale to fall apart.
Tax Attorney or CPA
The third professional you need is a good tax advisor, which can be a tax attorney or CPA. They will help to minimize the taxes you pay when selling your company.
Wealth Advisor
Finally, an optional but highly suggested person on the team is a wealth management advisor. This person is going to help you manage the proceeds of the sale. They should not be involved at the beginning of the sale process, but as things get underway you should start consulting a wealth manager to help you plan for the future.
Identify and Minimize Risks
By acquiring a company, buyers are really acquiring the future earnings of that company. As part of their analysis, they will assess the risks that may impact on those future earnings. The more risk they can identify in your business, the more likely they are to steeply discount the purchase price or just walk away from the transaction.
You should look at your business as if you were an outsider (or get an outsider to help you) and identify and alleviate as many risks as possible. Are your sales too concentrated with a key customer? If so, expand your sales efforts with a focus on new customer acquisition. Does your company rely on a single supplier for key components in your manufacturing process? Consider expanding your supplier base or building an adequate safety stock of the components. Do you have pending or ongoing lawsuits against the company? Settle them. The more risk you can eliminate, the higher the valuation and likelihood of closing the sale will be.
Increase Earnings
As a business owner, you are familiar with valuation multiples and the means by which people value your business. But, truly think about what that multiple means. The standard industry multiple people often quote is 5.0 times the company’s cash flow. A good proxy for cash flow is earnings, with EBITDA often being the best measure for private companies. What that means to you is that every dollar you can increase your EBITDA translates to $5.00 in your valuation. So, it is important to critically look at the organization to determine how you can increase the EBITDA. If you have been coasting for the past few years, redouble your sales efforts to increase EBITDA. Also take a hard look at your expenses. If there are multiple administrative layers that account for $100,000 in expense, eliminate those redundancies and the value of the company will increase by $500,000. While an obvious notion, too many owners enter the sale process without doing any advance preparation and leave money on the table.
This article outlined just a few tips to prepare your company for the sale. The professionals at Waypoint Private Capital can offer further advice and guide you through the process of preparing your company for sale and identify those variables that will have the largest impact on value enhancement. We can then manage the sale process for the company.
About Waypoint Private Capital
Waypoint Private Capital is an investment banking firm that educates and advises middle-market, privately held companies through critical stages of their business' life cycle. Waypoint helps business owners and entrepreneurs sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from the business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
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