As a business owner, you wake up each day ready to answer countless calls, but in today’s environment more leaders are getting a new one: do you want to sell your business? Every business owner has a different answer, but with the dramatic increase in business sales and succession activity in 2021, it’s in your best interest to prepare to respond – no matter what your answer is.
Even if your business isn’t for sale yet, knowing what’s involved in a transaction and understanding what buyers value most is a great way to ensure your business can receive the best valuation possible.
What are you really buying or selling?
Buying or selling a business is more than profit margins or gross revenue. It’s about buying or selling the entire company – including its people, brand and assets – all of which contribute to the overall valuation and purchase price. Pay attention to the quality of net working capital, fixed assets, workforce, cash flow and goodwill among stakeholders. Each of these items impacts the overall valuation.
Most interested parties or investment bankers will start by carefully examining your business’ books. If your records aren’t perfect, you’re not alone. However, correcting course right now will pay dividends in the future, should your business decide to sell.
Here are three items many acquiring companies look for:
- Reliable books and records – Requesting 24-36 months of financial records that follow General Accepted Accounting Principles (GAAP) is typical. Companies should minimize divergence from GAAP.
- Quality of earnings – Reviewing adjustments including one-time items, errors, and related party transactions is the basis of the enterprise value. It will also include a review of items such as on-time payments.
- Net working capital – Taking a look at anything that might take money out of your – and their – pocket, including excess inventory and slow paying customers, is often part of the process.
Existing contracts have an outsized impact on buyers, especially those with change of control provisions. That includes those with employees, vendors, landlords, loan agreements and related party agreements. Obligations to notify third parties of a sale are cumbersome, and as contracts come up for renewal businesses should review them for such clauses that would impede a sale.
Human resources considerations
Workforce and human capital continuity are important when considering a transaction. Businesses should review personnel contracts to ensure no significant changes can happen if the company is sold.
Is the management equity plan designed to keep people in place during the transition? Whether involving cash contributions, vesting or phantom equity, businesses should be prepared to make efforts to keep their best talent on board.
It’s never too early to get started
Selling your business may feel like a complex endeavor, but it is one that has potentially never been more lucrative than in today’s red-hot M&A market. Whether you’re actively planning to sell or considering it in the future, implementing best practices now will create a much smoother process when the phone does ring.
Contact us today to learn more about preparing for a potential sale and how our transaction services team can help. We look forward to speaking with you soon.