Beyond Valuation: Preparing Your Business for Sale

A Well-Prepared Business Commands a Higher Price

The prospect of selling your business can be both exhilarating and daunting. It marks a significant milestone in your entrepreneurial journey, representing the culmination of countless hours of dedication, strategic planning and hard work. While a valuation provides an essential starting point, it’s important to recognize that a successful sale requires much more than a numerical assessment. A well-organized and prepared seller is more likely to attract a more favorable valuation and increase the chances of a successful transaction, and a business that is prepared for due diligence, with robust accounting and finance processes in place, presents a compelling opportunity for buyers.

The Importance of a Comprehensive Approach

A team of experienced financial advisors can play a pivotal role in guiding you through the sale process. They can help you control the narrative, facilitate a comprehensive approach to sale preparedness and address potential challenges. By strengthening your operations, building or refining your growth plan, maximizing profitability, developing an ironclad tax plan and securing your legacy, you can enhance the overall value of your business.

Key Areas of Focus

Several key areas require careful attention as you prepare your business for sale:

1. Internal Accounting Process: Ensure the integrity of your financial, accounting and operational information. Organize and optimize your records to streamline the due diligence process.
2. Finance Process: Assess and improve your core finance processes, including financial statement preparation, cash flow management, tax liability, forecasting, projections and data analytics.
3. Due Diligence: Conduct a thorough review of your capital structure, quality of earnings (QoE) and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA). Identify potential risks and implement strategies to mitigate them.
4. Valuation: Understand the complete value of your business and other assets. Develop strategies that maximize your sale price.
5. Transaction Tax Support: Seek advice on a tax-efficient deal structure to optimize tax treatment and minimize inherent risks for you and your stakeholders. Additionally, preserve your wealth for the next generation by setting up trusts and using gifting strategies.

Navigating the Sales Process

When you receive a potential offer, be cautious of premature enthusiasm. While an attractive purchase price may be intended to entice you into signing a letter of intent, it doesn’t guarantee a final sale, and it could conceal potential tax disadvantages and net working capital pitfalls. The buy-side due diligence process can uncover issues that may lead to retrading or renegotiations, resulting in reductions to the initial offer price. Several factors can also slow down or even derail a sale:

• Indemnification: Buyers often require indemnification escrows to protect themselves from potential post-closing liabilities.
• Target Working Capital: Buyers often require a certain level of working capital to ensure smooth operations after the sale. It’s crucial to thoroughly examine this calculation and discuss it with outside professionals to avoid any potential issues.
• Outstanding Debt: Depending on the agreement, any outstanding debt will reduce the amount of cash you receive at closing.
• Seller’s Expenses: Professional fees and other expenses related to the sale can impact your bottom line both positively and negatively
• Post-Transaction Tax Implications: Consider the potential tax consequences of the sale and plan accordingly.
• Deal Fatigue: Prolonged negotiations can lead to fatigue and frustration for both parties, potentially hindering progress.

Building the Right Team

Assembling a team of seasoned professionals is essential for navigating the complexities of selling your business. With the right team by your side, you can work through negotiations with confidence and minimize potential frustrations. It is crucial to select a team with both industry knowledge and extensive transaction experience, as deals can move quickly and become overwhelming. While industry-specific insight is valuable, transaction expertise is non-negotiable – they must be able to confidently interact with a buyer’s top-tier advisory team on your behalf. A well-rounded, holistic team of advisors should include the following:

• Business Valuation Professional: An independent valuation provides an unbiased assessment of your company’s true value. To ensure accuracy and credibility, this valuation should be conducted by an expert who holds both an Accredited in Business Valuation (ABV) and Certified Public Accountant (CPA) credentials. Engage a professional with this dual expertise for a comprehensive analysis, combining deep financial insight with specialized valuation skills, which can provide a reliable foundation for decision-making in any transaction.
• Financial/Transaction Advisory Professional: A professional with M&A experience is invaluable in guiding you through the due diligence process and conducting a QoE review of your company. This expertise can help you identify and understand potential adjustments to your financials, providing a clearer picture when determining a target purchase price. All aspects of the transaction should be thoroughly examined, minimizing risks and maximizing the value of the deal.
• Tax Advisor: It is essential to engage a seasoned CPA with extensive experience in both business and individual tax matters, particularly when dealing with flow-through entities, which are often taxed at the individual level. Additionally, a tax advisor that has access to comprehensive gift and estate planning resources is important, as strategies like creating trusts, gifting to heirs, considering philanthropic opportunities and other tax planning techniques can help mitigate taxes for you and your heirs. The CPA’s practice should also include expertise in negotiating tax true-ups, which can ensure that sellers are compensated for any tax liabilities they incur, allowing the buyer to benefit from depreciable intangible or fixed assets. Finally, the CPA should collaborate closely with your wealth advisor so that all tax considerations are thoroughly addressed, leaving no tax implications overlooked in your investment strategies from funds received.
• Legal Counsel: Experienced legal counsel with specialized M&A expertise is essential to ensure that your interests are protected and that the terms of the transaction are negotiated to your advantage.
• Investment Banker: If you don’t have a buyer lined up and are looking to put your company on the market, hiring an investment banker (IB) could be the optimal approach. An IB will advise on the best timing for the deal, create compelling marketing materials and manage a competitive bidding process to maximize the sale price. They also advocate for your interests and streamline the deal, meaning a higher chance of a smooth and successful transaction.

Everyone on your team should collaborate effectively, with the IB typically taking the lead in coordinating each aspect of the process. However, if an IB is not involved, a seasoned financial/transaction advisor or an experienced deal attorney can effectively step into that role.

Windham Brannon Can Help

Selling your business is a complex process that demands meticulous planning and preparation. By going beyond valuation and addressing the various aspects of your business, you can increase your chances of achieving a successful sale and maximizing your return on investment. Windham Brannon’s Advisory Practice professionals are equipped to provide comprehensive support, including expert valuation, tax planning, sell-side advisory and financial diligence. We are ready to help you become a well-prepared business supported by a strong team of advisors, helping you to attract favorable offers and navigate the challenges of the sale process with confidence. For more information, contact Laura Berry.