Prepare your company to be bought

Editor's Note: As we entered 2015, three of our clients received unexpected offers to sell their businesses. Because they were prepared, they held the line and the prospective acquirers significantly bid up the offers to a range that the owners decided they could not refuse. Two of them closed in 60 days. The third company decided to run a competitive process and is generating exceptional interest from additional buyers. This is a sellers' market. Well-prepared companies are receiving very high selling prices.

Many business owners fail to prepare their businesses for a sale either because they believe that a potential sale is far off in the future or because they are focused on current issues and do not consider preparation to be a priority. We would submit that companies need to be "prepared to be bought." Sometimes lucrative offers come unexpectedly for companies that are well-positioned. We typically recommend that a company engage an experienced investment banker to assist them in a sale - often even if they have received an offer - in order to generate a competitive environment.

Some business owners who have tried to "time the market" at some point off in the future have found that unpredictable events such as the 2007-2012 recession, credit and stock market crunches, tech bust(s), 9/11, industry issues, etc. can derail their ability to sell at maximum value. We recommend to our clients to work each year to make certain that their companies are currently desirable to buyers. - DPM]

How best to position a company to be attractive to buyers:

1.    Demonstrate Strong Financial Performance
 
 a. Historical Financials

• Consistent revenue growth (at least upward trend)
• Recurring revenue is a plus
• Strong operating margins
• Increasing profitability
• Importance of last twelve months

  b. Operating Cash Flow

• Focus on hitting projected revenue and earnings numbers
• Review net profitability of customers and products

2.    Maintain "clean" financials

  a. Audited or "auditable" Financial Statements

• Have your financial statements audited with a reputable firm to add credibility
• Use GAAP accounting. If not, identify how practices differ from GAAP
• Understand cash vs. accrual accounting - timing differences can be material

  b. Income Statement Adjustments and "Add-backs"

• Buyers are skeptical of earnings that rely on substantial add-backs (one-time, non-recurring charges, private company expenses, etc.)

3.    Diversify your customer & supplier base

• Diversification signifies a healthy business and reduces risk
• Buyers will pay less for companies dominated by one or two customers
• Examine what % of sales your top 10 customers represent?
• How stable are your top suppliers? How stable are their terms?
• Do you have multiple suppliers for critical components/services?
• What % of total purchases does your top supplier represent? Top-5 combined?
• What % of the company's sales are related to a few key employees?

4.    Develop a Strategic Growth Plan

• Maintain a clear strategy and be able to demonstrate your history of execution
• Be able to articulate specific future growth opportunities
• Position your company to take advantage of them

5.    Build a capable Management Team

• Invest in training and key strategic hires, if needed
• Motivate management to add value to the company through a potential sale
• Focus on building a deep management team that can thrive without your continued leadership

6.    Eliminate potential "Gotchas"(these are items that could result in significant discounts to value)

• Maintain legal documentation (licenses, regulatory filings, contracts, intellectual property, incorporation, etc.)
• Clear title to all assets
• Document processes and procedures
• Resolve legal disputes

7.    Build a team of Qualified Advisors

• Minimize distractions from running your business effectively
• Get advice from professionals who have expertise in areas you do not and have done it before
• Beware of advisors that outstep their areas of expertise

Are you and your company ready if a buyer appeared on the radar?
Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.

Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.