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, business owners can implement several best practices that can 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 range 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 to enhance the value of the company.
Key Items 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 want to understand 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 take steps to eliminate them. Expenses should be properly classified; balance sheets must be reconciled and accounting policies should be well-defined and followed to the letter.
How Often You Need a Valuation Prior to Sale
Performing a valuation three to five years in advance of the proposed sales date, as well as updating that report annually, allows the business owner to constantly tweak and update areas of operations that will yield the highest return. This constant monitoring of operations helps the business owner customize their business to be as marketable as possible on the date that the company hits the market.
What Information You Need for a Valuation
The information needed for a valuation will vary based on the specific business and industry. The appraiser should be able to fully understand every aspect of the appraised business. 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
An information request should be coupled with an interview of management and key personnel within the company to gain a full understanding of operations necessary to render accurate value.
Key Items to Avoid for 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 higher-than-industry-average employee turnover, as it can indicate a problem. Employee turnover can be a turnoff for potential buyers.
- Avoid dependency on a single supplier, customer demographic or employee.
Taking the right steps to minimize any unknown factors within the company and solidifying the areas where the business soars helps to avoid any additional adjustments in the offer price once the buyer and seller get to the table.
Increasing the Value of Your Company
What is the magic formula for enhancing the value of a company? Though tweaks in certain 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 means that there will be sufficient resources for the investor to 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 being unable to weather any changes in external economic factors.
- Customer Base Diversification—Customers are the revenue drivers of a company. Too narrow a customer base could pose a financial risk. A diverse customer base can help bolster financial stability to overcome potential economic fluctuations.
- Diversification/Stability of Suppliers—Suppliers are an underrated key aspect to the well-being 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 experiencing 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 faces to enter the industry or market. High barriers to entry into an industry could 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.
How to Get the Timing Right
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 quickly, 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 re-evaluate whether 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.
Windham Brannon Can Help
Selling a business successfully requires extensive foresight with comprehensive planning. Windham Brannon’s Valuation Practice professionals can help guide you through the process of selling your business, from beginning to end. Whether you’re deep into the process or simply contemplating a sale, contact your Windham Brannon advisor for more information, or reach out to Matt Stelzman.
