Key Considerations for Improving Value When Preparing to Sell Your Business
Deciding to sell your business is one of the most important decisions you’ll ever make as a business owner. It represents the culmination of your hard work and dedication. As you approach this significant milestone, several key factors require careful consideration. The goal is to maximize value for all your efforts. Weigh the following points to ensure a successful and fulfilling transition.
Personal Goals
It is most important to consider why you want to sell your business and what you will do next. Buyers will want to understand this and your willingness to stay with the business for a short-term transition or as a major player long-term. Be able to articulate this to buyers. A key part of this is consulting with a team of advisors: Wealth Management, M&A Advisor, Accountant, and Attorney. Together, they can help you understand key aspects of a transaction’s before, during, and after stages.
Financial Performance
The most relevant financial statements are the Profit and Loss and Balance Sheet. Buyers will review three to five years of financial history of the business. Accurate records give buyers confidence that they understand the condition of the business and that the business is well run. Financial documents must be current, accurate, and available for review. Without this, some buyers will not be interested, and others will devalue the business. Consider having a quality of earnings (QofE) review on your business. Buyers typically do this, but doing a QofE pre-emptively will make your business more attractive and prevent surprises down the road.
Profit & Loss Statement
Ensure proper accounting and adequate documentation for all expenses and income reflected on the financial statements. Also, identify “one-time” expenses that will not re-occur for a new owner. Those can be added back to income for cash flow and valuation purposes. Trends in sales, gross profit, and net income are all essential and variations should be understood. Consult with your M&A Advisor when working on addbacks.
Balance Sheet
It is important when selling your business that the balance sheet accurately reflects the true value of assets and liabilities. Things to look for include uncollectable accounts receivables and old debts. These should be written off or reserved for the balance sheet. Now is an excellent time to look at your collection procedures as well. Slow receivable collections can impact terms in a deal. An accurate inventory is important as well. Old and obsolete inventory should be identified and written off. Buyers only value the hard assets with a future value and often try to decrease the price if assets on the balance sheet have zero value. Since buyers may require a physical inventory before closing on a sale, it might be a good idea to review your inventory controls and consider performing a physical inventory if warranted.
Equipment
Equipment should be in good condition, and replacing equipment near a sale should be discussed with your advisor. Buyers will deduct the cost of obviously outdated or poor-conditioned equipment from the purchase price. On the other hand, you may not fully recover your investment in new equipment. Sometimes, a formal equipment appraisal will be needed for financing collateral; however, these are generally requested and paid for by the buyer and their lender.
Presentation
Keep your facility clean and organized. First impressions are important, and if your business shows well, it tells a buyer that it is more likely to be a well-run company.
Advisors
As we noted previously, having an attorney, accountant, wealth advisor, and M&A advisor with transaction experience in mergers and acquisitions is important. Deal terms, taxes, and future investment decisions call for professional assistance.
Engage an Experienced M&A Advisor to Handle the Sale
An M&A advisor, such as BMI Mergers & Acquisitions, will help facilitate the process from beginning to end. These advisors are sometimes referred to as “Investment Bankers,” M&A Advisors, or “Business Brokers”. The important thing is to find one competent for your business’s size and complexity. An experienced advisor will assist in determining business value based on actual transactions in your industry. Make sure they thoroughly understand the selling process and have a network and databases of serious buyers looking for good businesses in specific industries. A properly packaged and marketed business usually generates multiple offers and deal structures. These are key to meeting your goals.
Management
In most companies, top management is critical to a sale. They are the ones who will carry on the business, and they are essential to buyers, given their knowledge of the company, the industry, and the customer base. Some may need to assist in the business selling process. Consider stay-bonuses and non-competes for them to protect the business from their premature exits, which could impact the sale. Owners also have the option of staying and participating in the company’s future success. While most do not, some buyers only consider companies where the owner will remain for several years. Some buyers will bring in their CEO/President but do not expect buyers to readily replace multiple managers leaving soon after closing. This needs to be thought out ahead of going to market.
Business Performance
While selling your business demands significant time and attention, maintaining strong performance throughout the sale process is crucial. It puts you in the optimal negotiating position to maximize value. Businesses with declining profits face greater challenges in valuation and deal terms. A skilled M&A advisor can substantially lessen the transaction workload, allowing you to stay focused on driving results.
Conclusion
A thorough review encompasses far more than what we have outlined here, but considering these key factors will make the selling process as smooth as possible and ensure that, as the owner, you receive the most value from your business. And, of course, have an experienced advisory team that will work for your best interests.
For more information contact BMI Mergers & Acquisitions:
Email: contact@bmimergers.com