For middle-market company owners and executives, the last thing they might be thinking about during the growth phase of their businesses is planning for an eventual sale. However, a successful “exit” takes years of preparation, and only those owners who take the right steps along the way will get the price they want.
The goal of early preparation is to minimize potential purchase price adjustments in the due diligence phase. In all my years of working on deals, I have only seen the purchase price go down -- never up.
Here then are seven steps you can take to make a deal process as painless and streamlined as possible:
Nail down the numbers.
Buyers undertake a forensic accounting examination of the target company looking back at least three years. That means during the growth phase of a company, executives must stay on top of key financial, accounting and legal matters. Critical issues go beyond making sure revenue is recorded in accordance with GAAP; you also have to ensure that unrecorded liabilities are accounted for (such as paid time off, vacation time, and warranty/guarantee liabilities). Tax non-compliance -- issues related to sales and use, personal property and payroll taxes -- can lead to a portion of the purchase price being set aside in escrow until those issues are resolved. That escrow can often be as much as 10 to 15 percent of the sale price. On the balance sheet, asset valuations must have adequate reserves, and there should be sufficient cash set aside for equipment replacement and servicing.
Disclose, disclose, disclose.
Even the best companies have skeletons in their closets. The smartest companies recognize those issues early and proactively identify and address them in the sale process. Undoubtedly, the buyer’s due diligence team will find the issues that could result in a lower purchase price. But, if you disclose it from the start, you can position those challenges as hurdles that can be or already have been overcome.
Identify the right buyer for your goals.
By understanding the different types of buyers, sellers can focus their time, efforts and resources on those things that will maximize the company’s value. Buyers fall into three categories: strategic, financial and internal. Strategic buyers want a trend of growing profits based on strong product or service development, technology advances, as well as strong market share and brand recognition. Financial buyers want free cash flow, growing revenues, strong management teams and systems. Internal buyers want a company with generally strong financials, solid balance sheets, good corporate cultures and diverse product lines. And do your diligence on the buyers to the same extent they do diligence on the company.
Read the rest of the article on Entrepreneur.com to learn the next steps in selling your company.