Preparation for a business sale is the single most important thing a business owner can do to make the sale process efficient and achieve the maximum outcome possible. It is a process most business owners only go through once in their careers. It is also the largest economic transaction of their careers in most cases. With so much at stake, solid preparation is paramount and an appropriate investment of your time and energy into this process will pay significant dividends.
Here are 5 key areas to focus on before you approach the market:
Step 1: Assemble a Top-notch Management Team
A common pitfall for many businesses is over-reliance on the owner. While your passion and expertise were likely instrumental in your company’s success, a buyer might see this dependence as a risk factor. The solution? Cultivate a strong, independent management team. This demonstrates to potential buyers that your business can thrive without you at the helm. Invest in leadership training programs, empower your team to make key decisions, and showcase their capabilities during buyer presentations.
Step 2: Clean Up Financial Records
Financial statements are the lifeblood of any business sale. Messy or incomplete financials raise red flags for buyers and can stall the sale process. The reporting requirements as a privately held, family owned business are different than those for private equity owned or publicly traded companies. They have stakeholders (i.e. lenders, limited partners and other investors) that require third party audited results on a timely basis. Coming to market with a financial package that includes audited statements or an updated quality of earnings package helps give buyers the confidence to bid aggressively on your business driving valuation and terms for you as the seller. Investing in these procedures prior to sale also helps identify gaps or issues that could be problematic as you progress through the due diligence process.
Step 3: Create a Growth Plan
Very few buyers are looking to acquire companies simply to maintain the status quo. No one knows your business as well as you do and a big part of this process is educating potential buyers on the opportunity ahead. Your ability to showcase a company that has a both a solid foundation along with a viable growth plan helps buyers envision the future potential of the business. Your investment banker will help in strategizing for this portion of the process. Identifying and showcasing opportunities for growth – whether new products or services, geographic expansion, actionable acquisition opportunities – and the investments required to execute on these growth plans will drive your valuation multiple.
Step 4: Minimize Concentration Issues
While buyers are looking for growth opportunities, they are also looking to minimize the risk factors associated with an investment. One area that always draws scrutiny in the evaluation of a business is pockets of concentration, whether that’s with the customer base, supply chain, industry exposure or single product or service reliance. A customer that makes up a significant proportion of your company’s revenue will be heavily diligenced regarding the long-term sustainability of that revenue stream, particularly under new ownership. The same goes for other areas of concentration, but we typically see it most on the customer side. This can inhibit buyers from pursuing an acquisition opportunity all-together or creating a structured transaction with less cash at closing and more of the value related to an earnout component tied to the retention of that client over several years post-close. With proper planning and execution you can take measures to diversify your areas of concentration resulting in a better sale outcome. This diversification effort typically takes more time than the some of the other value drivers outlined in this article, so it should a focus area for you and your management team over the lifetime of your ownership. are
Step 5: Integrate Your IT Systems
In today’s data-driven world, having a robust and updated IT system is no longer a luxury, it’s a necessity. A modern system allows you to efficiently track key metrics such as sales results, customer information, and employee performance. This transparency not only empowers you to make data-driven decisions but also demonstrates to potential buyers that your company is well-managed and operates with clear visibility into its performance. Additionally, being able to readily answer buyer inquiries during due diligence fosters trust and streamlines the closing process.
By investing in these 5 key areas, you’ll not only increase your valuation but also set your business up for long-term success, even under new ownership. A well-prepared business is a valuable business!
The Takeaway:
Selling your business for top dollar requires preparation. Focus on building a strong management team, cleaning up financials, and creating a growth plan. Diversifying your customer base and product offerings, and updating your IT systems for transparency also enhances the company’s valuation. By investing in these areas, you’ll not only impress potential buyers but ensure your business thrives in the long run.