As featured in our Q4 2013 Capital Ideas Newsletter. An article by Craig Allsopp, Managing Director of our Portland office.
Baby boomer business owners may be overwhelmed with information covering the do’s and don’ts of preparing a company for sale. So to help start the process, here are 10 actions for you to add value today so that you can impress potential buyers when you are ready to go to market:
- Audit your financials. Sloppy numbers sap value like a poorly tuned engine saps horsepower. You may find a buyer who will overlook holes in your financial reporting, but you won’t get top dollar. An audit shows a prospective buyer that you are serious about doing the little things right – which can be a powerful signal to send when you are in a negotiating process.
- Fill gaps in your team. No one can do everything well – including you. If you can’t be away for a week without checking in on routine problems you need a stronger team. This is especially true if the buyers for your business include private equity groups who almost always are looking for a deep bench when they are recapitalizing a company.
- Create an exit plan. Sitting down with an investment banker and your other business advisors (lawyer, accountant, financial planner) to plan your exit in advance will eliminate confusion during the business sale process. Don’t wait for a life-changing event to force the planning process. Give yourself time to make your business an A+ company.
- Diversify your customer base. Many business owners are surprised to learn that customer concentration is a major knockout for sophisticated buyers. But when businesses derive 40% or 50% of their revenues from one or two customers, a red flag goes up for potential buyers who don’t want the risk of losing a major customer. A good rule of thumb: no one customer should represent more than 10% to 15% of your revenue.
- Solidify your contracts. Everyone knows it costs more to get a new customer than to keep an existing one. Buyers will pay a premium for a business with customers under contract and/or recurring subscription type revenues. This is one of the reasons why companies with service contracts are so popular with investors today.
- Build the product pipeline. If you want buyers to pay up for the future, you need to give them a reason. Consider launching new products or entering new markets to show growth potential. The research you do as part of this effort will also help answer two of the big investor questions (1) “How big is the market” and (2) “How can you get more share.” Confident answers make it hard for buyers to walk away.
- Get a realistic valuation. Your company will not trade at the same multiple as IBM, but it may be worth more (or less) than you think. Buyers will be armed with this information; to negotiate properly you should be too. Get a valuation assessment by a skilled professional or, in certain cases, a formal valuation by a certified appraiser. CFA’s Certified Business Valuators are highly skilled and experienced in accurately valuing all types and sizes of businesses.
- Make an acquisition. Buying another company is a big undertaking, but strategic acquisition is often the fastest way to growth and a more attractive exit upon successful integration. “There is certainly no playbook,” says Glenn Fishler, who embarked on an acquisition strategy after 23 years of building his company one customer at a time. “If you’ve never made an acquisition before, and you don’t have people inside the company to guide you, you’ve got to find all the help you can get.”
- Put your records in order. The better organized you are, the easier it will be to sell your company and the less disruptive you will find the due diligence process. Time will start to speed up the day you accept a Letter of Intent from a prospective buyer. You will be asked for information about your company, your corporate structure, your stockholders, your employees, your customers and your legal affairs. Organizing these records beforehand will help keep the deal on track and, perhaps more important, re-affirm for the buyer that he is making the right deal.
- Protect your IP. In our knowledge based economy, intellectual property is more valuable today than ever. To support your business model, catalog your training processes, document your software, trademark your products, copyright your web site and keep close tabs on your customer list. These are valuable assets and you want to make sure you get fairly paid for them.
Whether you’re planning on selling your business in 5 months or 5 years, don’t wait until you’re ready to sell to begin preparing your business for sale. Starting now can get you a higher price and a faster, easier sale process in the future.
For additional information contact:
Douglas Nix, CA | Vice Chairman
Corporate Finance Associates | Toronto West | 905-845-4340 x211 | firstname.lastname@example.org