Contributed by Windham Brannon LLC.
Selling a company doesn’t happen overnight. The process can take years of planning and strategizing on behalf of the business owner. However, once the decision is made to sell, there are several steps that can be taken by a business owner that, if correctly implemented, will better prepare their company for the sale.
Selling a company begins long before the “for sale” sign goes in the window. The ideal timeline for preparing a company for sale can average from three to five years. During this planning phase, the company will undergo evaluation and streamlining measures to help increase profitability and reduce risk; thereby helping maximize the value of the company.
Three things you’ll want to evaluate during the planning phase:
- Cash Flow—Cash flow is one of the main components used to determine the value of a company. A solid cash flow base with an upward trend helps the acquirer feel comfortable with the investment. Items such as spikes in cash flows, volatile swings in earnings, decreasing earnings trends and negative earnings can be flags to potential acquirers, causing them to investigate further into your company’s operations.
- Forecasts—Acquirers are interested in how much of a return their potential investment can produce. A proper financial forecast is an incentive to the acquirer, allowing them to obtain a better understanding of the future operations of the company. This is particularly important if the business foresees a change in operations from what has historically taken place. The forecasts should extend to a point in time where earnings are smooth and stable.
- Cleaning up the Books—Determine what expenses aren’t needed and eliminate them. Ensure expenses are properly classified, balance sheets have been reconciled and accounting policies are well defined and followed to the letter.
Annual Valuation to Assist with Planning
By having a valuation performed three to five years in advance of the proposed sales date and updating that report annually, it allows the business owner to constantly tweak areas of operations that will yield the highest return. This constant monitoring of operations will ensure that the business owner has customized their business to be as marketable as possible on the date that the company hits the market.
Information Needed for a Valuation
The information needed for a valuation will vary based on the specific business and industry. It is critical that the appraiser fully understands every aspect of the business they are appraising. This information is gathered through a formal information request. Some of the items typically found on an information request include:
- Historic and forecasted financial statements
- Listing of personal expenses within the company
- Listing of extraordinary or nonrecurring expenses
- Depreciation schedules
- Management census
- Listing of main competitors
- Description of market area
- List of key customers and suppliers
- Description of facilities
It is key that an information request is coupled with an interview of management and key personnel within the company to gain the full understanding of operations necessary to render an accurate value.
Key Items to Avoid to Ensure a Successful Sale
The risk associated with a company has a direct impact on its value. As a general rule, the higher the risk for the buyer, the lower the value of the company. When focusing on business operations:
- Avoid major changes in the few years leading up to the sale. For instance, don’t make large-scale modifications to a particular service offering, especially if it was the primary revenue driver.
- Avoid a higher than industry average employee turnover, as it can indicate a problem. It’s a turnoff for buyers.
- Avoid dependency a single supplier, customer demographic, or employee.
By taking steps to minimize the unknown factors within the company and solidify the areas where the business soars, it will help ensure that there aren’t any additional adjustments in the offer price once the buyer and seller gets to the table.
Increasing the Value of Your Company
What is the magic formula for maximizing the value of a company? Though tweaks in areas can make a small difference, focusing your effort across a wide spectrum of areas will help realize larger increases in value. Below is a listing of some of these specific items.
- Depth of Management—An individual who is looking to acquire your business may or may not be an expert in the industry and will have the option to retain the company’s employees, and therefore, the industry expertise already in place. A deep management pool ensures that there will be sufficient resources the investor can tap into for industry expertise.
- Team Environment—Accrediting the success of a business to one individual is like investing all your money on one stock. This investment can go up or down in a moment’s notice and potentially wipe out your total investment. By spreading the responsibilities of key aspects of the company among several individuals, you mitigate the chances of a significant loss.
- Product Diversification—By diversifying your product line, up to a point, you decrease your chances of suddenly finding your company worth far less than expected and able to weather any changes in external economic factors.
- Customer Base Diversification—Customers are the revue drivers of a company. Too narrow of a customer base could pose as a financial risk. Whereas a diverse customer base can help ensure financial stability to overcome potential economic fluctuations.
- Diversification/Stability of Suppliers—Suppliers are an underrated key aspect to the wellbeing of a company. From your local corner market to multinational companies, suppliers are what keep the sales of companies alive. Just as diversification in product line and customer positively impacts a company’s value, so will a diverse set of suppliers. Potential scenarios such as: a supplier going out of business, or experiences business disruption can leave you scrambling with extensive business disruption if you are dependent on a singular supplier.
- Industry Barriers to Entry—One key aspect that can be considered in valuations of companies is the level of barriers to entry into the industry. A barrier to entry can include the costs or other challenges that an individual can face to enter the industry or market. In instances where there are high barriers to entry, this can indicate low competition, less price competition, more specialization and higher sales prices. If it’s relatively easy to enter the market with few obstacles, then the barrier to entry is low. Low barrier to entry means high competition, high price sensitivity, low specialization and typically lower values.
They say time is money, and there is nowhere truer than when you are selling a business. For many business owners, it never feels like a good time to sell. If this resonates, consider focusing on the ease of sale rather than the timing. As with real estate, it’s ideal to sell when the market is hot, businesses are selling quick and for top dollar. If you are struggling to find a buyer for your company, it might be time to take a step back and reevaluate if you have deployed the items listed above to make your company more attractive to buyers. The goal of a business owner is to know that the buyer has the same understanding and appreciation for the company that they do and that the legacy of the name will continue.
Selling a business successfully requires extensive foresight with comprehensive planning. Let us help guide you through the process of selling your business, from beginning to end.
No matter where you are in the process, contact Matt Stelzman, valuation director, for guidance towards the best next steps.
Windham Brannon LLC
3630 Peachtree Road, NE Ste 600, Atlanta, GA 30326
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