- Establish a strong and defensible market position
All buyers of companies look for the seller who has carved out a strong and defensible market position, has healthy and sustainable margins, enjoys excellent profitability, and has established barriers to competitive entry. Obviously, building a company that meets these criteria takes time, so the earlier you work at positioning your company the better.
It’s important to be able to position your company in your market and articulate your value proposition. Clearly identify your market, its size, growth trends, competitors, and opportunities. Be prepared to address questions related to your revenue growth vis-a-vis market growth and how your key financial metrics compare to those of your competitors. Ask yourself what differentiates your product/service from your competitors and why your customers buy from you?
- Create a financial track record of predictable revenue and profitability growth
Buyers look closely at the financial history of a company in order to determine its value. They look for a track record of revenue growth and strong profitability with positive trends in both over the previous three to five years and a solid fundamental balance sheet.
The more you can keep costs well controlled and profits growing, the better. It is very easy in a mature company to become complacent and while business owners often focus on gross margin improvement, we often see overall cost control and poor inventory management being areas of neglect. As part of your preparation for selling your company you should implement a process to review all of the cost components of the business and make changes that positively impact the bottom line. For instance, if your current sales process differs from that of ten years ago, you may want to review your policy regarding company cars for sales people. Are there more cost effective ways to compensate your sales people for vehicle usage?
Another area where we see neglect is inventory levels and annual inventory turns. Too often business owners fail to identify slow moving or obsolete inventory and instead continue to believe that “it will move some day”. Today, online auction sites allow business owners to sell off stale inventory and while the value received may not be what is currently represented on the books, it’s better to sell these goods now, reduce your carrying costs and put that money back to work in the business. You certainly should not be expecting obsolete inventory to slip past a diligent buyer.
Business owners should also look at ways to implement a steady and fairly aggressive plan to pay down their debt. Buyers of traditional businesses generally look to pay a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), less normal recurring “Cap X” (Capital Expenditure requirements). The buyer expects to pay for a normal mix of assets and liabilities, excluding interest-bearing debt and capital leases.
Lastly, pay attention to the amount of working capital required to maintain the operations of the business. While cash on the balance sheet can typically be added to the price, excess cash and high levels of net working capital raise questions about the actual investment in the business required by the buyers. It’s always better to closely manage net working capital levels and move excess cash out of the company well before you go out to sell your business.
- Understanding growth potential
It is important to understand that while you may have built a profitable business, a buyer is looking to the future of the business and is more concerned about where it can go as opposed to where it has been. In order to sell your business at a premium it’s important to be able to articulate the company’s opportunities going forward. Take the time to complete a SWOT analysis (strengths, weaknesses, opportunities, threats) and implement a plan to address areas of concern. For example, key concerns about customer concentration could be mitigated if addressed well in advance of selling the business. At the very least, it might be possible to sign long-term contracts with key customers, thereby alleviating some of the buyer’s concerns about risk.
- Secure the intangibles
Intangible assets can increase the value of a Company. The most obvious intangibles relate to patented products or products subject to exclusive supply agreements. Trade names and trademarks create value so it’s important to be diligent about the legal maintenance of such intangibles. There was a recent article in the Report on Business (http://tinyurl.com/zjz3beq) that details the challenges and costs incurred by a business owner who failed to register appropriate trademarks. Don’t find yourself in this situation.
While you’re at it, don’t forget to consider one of your most valuable intangibles, your key employees. It is important to ensure that appropriate non-compete agreements are in place and that the rights to all intellectual property developed by employees or contractors have been correctly assigned to your company. The last thing you want to do is to put yourself in a weak bargaining position with key or ex-employees when news of your sale process becomes public. You should also identify the employees that are key to the sale process and will be important post-sale in driving the value of the business and ensure that you have put in place the appropriate compensation packages and protections to keep those employees active in the business.
- Be Totally Prepared
We cannot stress enough the importance of being prepared to sell your business. A sophisticated buyer will carry out extensive due diligence covering all aspects of your business and lack of preparation can not only delay the process but possibly also negatively impact your sale price. It’s important to remember that when you are selling your Company and have an interested buyer, time is not your friend. You want to complete due diligence and close the sale as quickly as possible. Therefore, the time spent gathering, reviewing, and correcting deficiencies and cataloguing contracts, accounting statements, corporate, banking, and HR documentation goes a long way to moving the process along and reducing your risk of delaying or negatively impacting the closing.
Lastly, you should have a very clear understanding of the Representations and Warranties that you will be required to sign as part of the sale of your business. Areas of concern should be addressed well in advance of beginning the sale process. For example, if your firm requires environmental certification you should ensure that all tests, licenses, and government requirements are current and in compliance.