Even if you are not ready to put your company up for sale, it behooves you to start preparing now. First, most of the issues you tackle to prepare your company for sale are the same things you should focus on every day to grow and build value in your business. Second, this cannot be done overnight, and being well prepared in advance improves your odds of a smoother transaction at a higher price down the road. Here are the five top things you should focus on today:
- Emphasize operational excellence: By this, I mean that you should have or put into place documented processes and procedures, for everything from how you provide your service or manufacture your product, to how you hire and compensate employees, to how you do your annual budgeting. Put in place key operating metrics against which performance is tracked. All of these actions will contribute to you having a well-run, more efficient business, which will drive short-term profitability and at the same time, during a sale process, it will give the buyers comfort that the business is professionally run and give them confidence in your short- and long-term prospects.
- Concentrate on customers: Maintain a pipeline of potential new business, and keep old versions for comparison purposes. Today, this will help you to assess how well new business appears to be tracking to the budget, which is valuable to your day-to-day management of the business. In the future, a well-maintained pipeline can convince buyers that the financial projections you have prepared for them are realistic and achievable. A second area to look at in the customer department is your customer concentration. If any one customer contributes more than 5% of your total annual revenue, it’s time to look for some additional large customers to reduce the buyer’s perceived risk. Last, keep lists detailing which customer contracts require consent and which do not (and avoid “change of control” clauses to the extent possible).
- Focus on preparing consistent, GAAP financial statements: You don’t necessarily need to be audited, but it certainly helps. The biggest problem we see when we dig into the numbers of a client that has not been audited is in the revenue recognition area. The rules for revenue recognition can be complex, and if the buyer finds out during due diligence that your financial statements have not consistently been prepared according to GAAP, it may give them a reason to come back and renegotiate the purchase price. I have had clients in the past who believed they were running a profitable business, only to have the buyer’s auditor come in and restate the financials, and give the seller the bad news that if their books had been prepared according to GAAP, they would have had a loss, not a profit. Needless to say, the buyer renegotiated the purchase price.
- Build depth in your management team: As an entrepreneur, you’ve probably done every job in the company, but if you want to build a business with sustainable, transferable value, you’ve got to build a team that can continue to grow the company without you. Remember that a buyer is probably going to pay you millions of dollars for your business, and they will reasonably have a concern that once you no longer own the company and have enough money to go sit on the beach, you may not be as focused on running and growing the business as you are today. Top three areas to start adding depth: sales/customer relationships; operations; and financial reporting. If you build that management depth today, you might even be able to take a vacation once in a while!
- Maintain complete, organized, and accurate information: I once had a client who couldn’t find his corporate record book, but he thought that was okay, because they certainly knew how much of the company each shareholder owned. So his attorney redrafted the necessary corporate documents. Then two days before the sale was to close, the client found his corporate record books; discovered that ownership was not split the way he thought it was, and the result was that the closing was delayed for two weeks while the corporate paperwork was sorted out. Time is the death of every deal, so make sure that you can get your hands on your corporate by-laws, articles of incorporation, and shareholder documents, and that they are kept up-to-date. Lastly, make sure that you have fully executed (i.e. signed by both parties) copies of every agreement – customer contracts, leases, vendor agreements, etc.
If you focus on these five areas now, you are creating a business that is likely to grow faster, be more profitable, and be less dependent upon you today. At the same time, you are building a company with transferable value, and are reducing the chances of major distractions during the sale and due diligence process down the road. A smooth running, well-led organization that will require minimal changes once the sale has taken place has a higher value in the eyes of a buyer. If you’d like advice specific to your situation, please contact me.