*Note: This article is one in a three part series. You can find the entire series here: Part 1 | Part 2 | Part 3
Just like any other facet of your business, when it comes to a sale, planning is critical. In Part 1 of this series, I covered prioritizing shareholder objectives, getting a team in place and more.
Below, I share additional steps, so that you can get full credit for the strong business that you have built.
Identify and eliminate “non-core” expenses
Closely-held companies can often be run for tax efficiency, which maximizes short term tax benefits for shareholders by minimizing reported cash flow and earnings.
Strategies of running expenses through the business that aren’t critical to the day to day operations of the business — such as your car or a “company meeting” in the Bahamas — may soften your tax bill, but are ultimately detractors from sale value.
Businesses are typically valued as a multiple of cash flow or earnings. For a business that is valued at 6x cash flow, for example, saving the taxes on $100,000 from extra expenses (at whatever tax rate you pay, so some fraction of the $100,000) will cost you $600,000 of value in a sale.
Start cutting these non-core expenses two years prior to selling your business. If you are close to initiating a sale and it is too late to eliminate such expenses, work with your investment banker on what is called “pro-forma” financial statements.
This pro-forma will identify and add back the expenses that would not be needed by the new buyer. While a buyer might fight you on some of those, you should get at least partial credit for reasonable add-backs, enhancing your sale value.
Get your financials audited
While an audit can be a lengthy and pricey process, it is critical for a sale of a business with any meaningful valuation (if you have more than $5 million of revenue, this means you). If your financial statements have not been audited by an experienced and reliable accounting firm, they are not typically regarded as trustworthy by potential buyers.
This can result in a worse deal for you in two ways. First, in financial terms, it can lower your valuation. Then, regarding business and legal terms, you may be penalized by having to make stronger guarantees and warranties as part of the transaction.
Have your financials audited for the last complete fiscal year prior to the year of the sale.
If you are a bigger company, have at least three years of audited financial statements.
As a bonus, if you do an audit in the years prior to selling your business, it can point out weaknesses in your company’s financial operations and controls, giving you sufficient time to correct them prior to an exit.
Organize your key documents
Many small and middle market businesses are guilty of letting their recordkeeping slide a bit- or a lot. However, getting your files and documents in order will preserve value in a sale.
While you won’t get a higher valuation for your organizational skills, what it will do is prevent “value leakage”; this is where a seller is financially or otherwise penalized in terms of part of the deal proceeds being held back or onerous legal representations as the deal is finalized and the agreement is drafted.
The more administrative items that you have unaccounted for or are in disarray, the more penalties you will likely incur from a buyer. And, this includes a wide array of documents and files- all contracts signed, technical drawings, back-up copies of source code accounted for and detailed lists of tooling residing with manufacturing partners available.
Also, examine your contracts on a regular basis and look for any special requirements, such as change of control provisions, which could have an impact on a sale by making a third party required to give consent in order to keep the contract valid (this could range from a vendor to a landlord, the former potentially affecting prices paid). Review your contracts and special situations with your service providers to make sure that they will not adversely affect your sale process.
Continue working on the steps above and stay tuned for our final installment of tips to help you prepare for a sale.
*Note: This article is one in a three part series. You can find the entire series here: Part 1 | Part 2 | Part 3
