Preparing Your Company for Sale (Even If You Aren’t Ready)
“Luck favors the prepared mind.” – Louis Pasteur
Most business owners never really worry about selling their company until something happens – they decide to retire, there is a succession issue, or they receive an unsolicited offer. Unless preparations have been made, none of these situations provide significant time to get the financial, operational, or legal house in order.
If you fall in this category, it is not the end of the world; you can still sell your company. However, by taking some simple steps to get organized, you will likely increase the value of your business by reducing the perceived risks to a buyer. You could also end up with a stronger company since you and your management team will make more informed decisions to positively impact overall performance.
Here are four key focus areas– financial, legal and tax structure, internal considerations, and external resources.
Maximize profits – Take time to review the cost structure of your company. Determine which costs are directly related to your company’s business objectives. Keep track of all expenses that fall outside of these parameters. It is not uncommon for family and founder-owned companies blur the lines between personal expenses and business-related expenses. I’m not saying eliminate these expenses, but just keep track of them so you can provide a defensible argument to a prospective buyer why they are not core to the business operations for a new owner.
Long-term strategic plan – Get into the habit of developing realistic and defensible multi-year financial projections with realistic assumptions and supporting documentation. Budgeting for the coming year is one management tool, however creating long-term financial projections requires a strategic planning discussion. Be prepared to defend any assumption or growth projection with data.
Appropriate working capital management – Managing cash and working capital is not simply checking the balances on your corporate bank account. A 13-week cash flow is a tool that many distressed companies use to plan out their next 3 months of collections and expenses. It is a good tool for any company – healthy or not- because it forces management to efficiently monitor cash in-flows and out-flows to maximize working capital.
Ensure accurate and timely reporting – Take the time to clean up all of those accounting issues that you have been putting off – review the past-due accounts receivable for collectability, perform that actual inventory count that you have been delaying, or consider an upgrade of your financial and reporting system. If your internal accounting team is unsure of the requirements, utilize an external accounting firm or financial consultant to review the company’s financial controls and accounting processes. These consultants will provide an objective overview of the company’s consistent application of appropriate accounting practices. If you already have audited or reviewed statements, chances are that your accounting firm already provides some recommendations in the form of a management letter.
2. Legal and tax planning
Ensure optimal ownership structure to minimize taxes – Consult a tax advisor with an expertise in business structuring and corporate reorganizations to obtain a comprehensive analysis of your business.
Authority and decision making – Review and revise your operating agreements and shareholder agreements to provide authority to make decisions and enter into agreements. Many middle-market companies have multiple shareholders who have different opinions of the value of their ownership stake.
Ensure proper documentation of corporate duties – All too often, privately-owned companies have limited documentation of corporate actions– board minutes, resolutions, amendments, etc. Owners should get into the habit of having appropriate documentation of all corporate decisions and votes in accordance with the governing documents.
Key contracts and change of control provisions – Review your customer contracts and other important contracts for transferability and change of control provisions. You should know which significant contracts and relationships can be transferred without notification. At a minimum, you should review the mission critical contracts and key customer contracts.
3. Internal preparation
Succession planning – Don’t be the most important person in the company. Most privately-owned companies rely on the personality and drive of the CEO. Be sure that the company is valuable even without your management participation.
The “inner circle” – Think about who on your team you would trust with the information about the sale of the company. This is the team that would know about a deal and participate actively in creating the analysis and presentations of the company. This is one of the most important decisions that you will make. Make sure you can trust these employees to put the company’s best foot forward.
Keep an eye on valuation – Get some perspective on a realistic valuation for your business. If the company achieves this value, are you a willing seller? Are the other shareholders willing sellers? Does it match your expectations and requirements for a post-transaction life?
4. External resources
Work with people you trust – If you have a long-time accountant or lawyer, ask them for advice on best practices for running your company. They have experience working with other companies and understand what works and what does not.
Consider developing relationships with investment bankers – Having a trusting relationship with an advisor developed over a longer period, will make the process easier when you decide to sell.
Selling a business is no easy task. A significant amount of time, effort, and emotion will be invested during a sale process. The key to success is being prepared. Focusing on the items outlined above will not only increase your odds of executing a successful sale, but they might even help you reduce the perceived risks for a buyer and thereby increase the value of your company. And if you don’t sell your company, you will probably create additional value by having a strategic plan to execute, and the ability to make better tactical decisions with more accurate and timely data.
If you are a business owner and are thinking about retiring or selling your business at some point in the future, we would like to talk with you. The Wiss Advisory team has extensive experience and can develop tailored solutions to meet your unique needs.