Start Preparing Now If You Intend to Sell Your Business Later
Posted on Mon, Jan 09, 2012 @ 03:28 PM
By George D. Shaw, CPA
In some ways, selling a business is comparable to selling a home. By making improvements before you go to market, you’ll increase your odds of attracting future buyers and commanding a higher price. Business improvements take time, however, so don’t wait until just before you’re ready to sell to make them. In fact, it is best to start planning 2-3 years in advance. When you consider that every $1 million increase in EBITDA could result in a $6 million increase in the purchase price, it will be well worth the time and effort in the end.
First, it’s important to look at your business from the buyer’s perspective. Assess the qualities your company has and areas that need improvement. Understand what both financial buyers and strategic buyers are looking for, and do whatever you can to make your company more attractive.
Buyers and investors are interested in companies that offer:
- An attractive growth story that is well-articulated
- Long-term relationships with high-quality customers that provide attractive profit margins
- A defensible industry position that creates sustainable revenue and profitability
- Competitive advantages, such as lower costs, superior products, a well-known brand and a reputation for outstanding service
- Leading technology
- Above-average gross margins and EBITDA margins
Next, prepare a “to do” list that includes the following:
Develop a growth strategy. Buyers are purchasing future performance, not past performance. That is why it’s important for sellers to have an achievable strategy for robust growth that they can articulate well. Company management should fully support the strategy and progress should be benchmarked using ongoing customer surveys to track performance. Recognize, too, that competitors are not standing still and be certain to analyze their performance, too.
Study your market. You should be able to describe to buyers or investors what your target markets are, what your position is in them and the potential for growth in each market. If you cannot provide this information, retain the services of someone who can.
Review your customer list. The desire to lock-in customers with contracts should be weighed against margins, potential cost increases and service requirements. To demonstrate a defensible position, customer contracts are just a starting point. You also need to analyze your profit margins, which are especially important if the potential buyer is publicly held. Start by generating margin reports with a breakdown by both customer and product. Then, based on an analysis of the reports, either shed low-margin customers, or make changes to your operations or products that will enable your company to increase margins.
Strengthen your management team. Financial buyers like companies with strong management teams. The pre-sale period is a great time to add to bench strength and weed out underperformers.
Minimize risk. Buyers dislike uncertainty. You can remove a great deal of risk and potentially increase the purchase price of your business by anticipating buyer concerns and addressing them. For example, an audited financial statement is typically a prerequisite for any sale; not having one ahead of time will only slow down the process. Start having audits 3 years before a potential transaction so that any GAAP adjustments are not reflected in the trailing twelve month EBITDA.
Review and plan your taxes. Recognize that it’s the after-tax proceeds from the sale that are important. Plan ahead and make certain you fully understand the tax implications of selling your business before you complete the sale. It may, for example, be advantageous to change the structure of your company and/or explore generational wealth planning opportunities. Also weigh the implications of a stock sale versus an asset sale.
Taking a strategic approach to selling your business gives you the upper hand. Advance planning will help maximize value and improve the likelihood of a successful transaction closing. If you plan on selling your business in the future, now is the time to discuss and implement a strategy with your DGC advisor.