Business for Sale? Don’t Hang Out the Sign Just Yet– August 14, 2014

Business owners work hard to plan for the future growth and profitability of their companies. The same level of preparation and planning, however, is not always applied to selling the business — the time when an owner’s sweat equity can finally be realized. All too frequently, owners of private, closely held businesses begin preparing for a sale too late, creating an overwhelming and tedious sale process. A well-planned sale, on the other hand, can help ensure the transaction runs smoothly and that owners receive the maximum value of the business.

Three key preparation areas include:

  • gathering relevant data,
  • empowering other management team members, and
  • using financial modeling to help understand the sale process.

Gather Relevant Data
The amount of information required from the different parties involved during an M&A transaction can be staggering. Investment bankers, buyers and due diligence firms often require detailed information that companies might not have readily available. This could include revenue and gross margin by product class, lists of top customers and vendors, revenue by geographical area, and financial projections, to name a few. Prior to taking the company to market, some sellers opt to proactively perform due diligence on their own company, with the help of a third party, to help expose any major issues in advance. In general, companies considering a sale process should consult with their advisors early on to begin accumulating information to expedite the process down the road.

Not surprisingly, one of the most important pieces of information that buyers will rely on is the financial statements for the past several years. While internally developed information can sometimes suffice, buyers generally prefer financial statements prepared by an independent audit firm. If you currently prepare your company’s internal financial statements and are planning to sell within the next several years, consider a review or audit for the last few years. The cost of obtaining these attest services is relatively small when compared to the magnitude of a sale transaction and the increased confidence provided to the potential buyer.

Empower Your Management Team
Another area that owners should focus on when preparing for a sale is their own involvement in the company. As a business grows, owners typically find themselves wearing many hats, including running the operations, sales, marketing, human resources and all other departments. As the business moves towards a sale, an owner should begin to empower the rest of the management team, such that the business could continue in the owner’s absence. Frequently, buyers are concerned that without the previous owner, key components of the business will be lost, such as customer relationships, vendor relationships or product development. These concerns could result in the buyer perceiving the business as a riskier prospect, decreasing its value.

Use Financial Models
Throughout the entire sale process, it’s important to utilize some level of financial modeling to help understand the deal. (Read our white paper for more about the mechanics and logic behind financial modeling.) Initially, businesses should rely on their advisors to help develop a range of possibilities for the sale price. Consider a business owner who expects to sell his company for $20 million but, after some initial modeling, realizes that a range of $8 million to $12 million is more realistic for the current market. The owner and advisor would discuss whether it makes sense to focus on growing the company further to increase its value, develop a very specific list of strategic buyers who might be willing to pay a premium, or whether the expectation of a $20 million sale price needs to change. As the sale process proceeds, financial modeling can be used to provide a foundation for a sale price when negotiations begin, and can be tailored as different offers or scenarios arise.

This article touches on just a few of the many planning considerations when selling a company in order to help command a higher value during a sale. The sale process can be intimidating, emphasizing the need for a well-timed, thought-out process and a competent group of advisors. Remember that it’s never too early to start planning for the sale of your business.

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This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.