START PREPARING YOUR BUSINESS FOR BUYER SCRUTINY NOW
BILL ROESER, CPA
The best time to prepare your business for sale is the day you form or buy it. Always operate your company in a way that optimizes its value — whether you intend eventually to pass it on to the next generation or sell to your partners or an outside buyer. Unfortunately, most business owners are too busy with everyday activities — satisfying current customers or clients, pursuing new business and responding to crises — to worry about what seems like a distant event. This means that, when the time comes to sell, you may find your business unprepared and the challenges of getting it into shape great.
Addressing shortcomings
If you're ready to retire or move on to a new venture but haven't spent a lot of time preparing for a sale, it's essential to assemble a team of advisors. It should include a CPA, attorney and a Merger & Acquisition (M&A) advisor.
These advisors can help identify the unique advantages of your business and also its shortcomings, or what buyers might perceive as drawbacks to acquiring your business. This list of shortcomings deserves your immediate attention because, if you want to maximize the sales price, you need to develop strategies to remedy them. Your advisors will help you prepare a Selling Memorandum (Confidential Information Memorandum) which will serve to highlight your strengths.
Perhaps the first area deserving of scrutiny is your financials. Compare them to industry norms and trends; any potential buyer will want to know how you measure up to the competition. Current financial performance relative to your company's past performance is also important.
Be particularly alert to reserves and allowances in areas such as obsolete or slow-moving inventory, uncollectible receivables, and equipment no longer in use but still on the books. Also, look for ways to build your residual revenue stream. Buyers prefer business with steady income streams and strong backlogs. You can further improve the appearance of financials by eliminating expenditures that are wasteful or don't contribute materially to the value of the business. Buyers generally place an emphasis on current trends, so it's never too late to make changes for an immediate impact. Buyers are also likely to closely examine your accounting system. Make sure your financials are prepared using Generally Accepted Accounting Principles (GAAP). Even if you're a private company and not legally required to apply GAAP principles, following GAAP helps assure buyers your books are clean and accurate.
Marketing efforts
Your public image is crucial when you sell your business. This is the ideal time to upgrade our Web site because it may be where potential buyers first encounter your name. Don't get caught with outdated news on your homepage or an online ordering system that's full of bugs.
By the same token, review printed marketing materials to make your you're sending the right message — namely, that your business is a highly competitive and respected player in the industry. If you haven't already done so, assemble a package of customer testimonials that compliment your products, services, employees and business practices. Quality, on-time delivery, and the positive impact your business has had on customers can build your brand in the mind of buyers.
Other improvements
While financials and marketing should be primary concerns, don't forget other areas that may make a difference when you're ready to sell.
Contracts: Review any significant commitments and obligations, such as leases and contracts, and assess their impact on your business's value. While one buyer may value a long-term lease, another may wish to terminate a lease as quickly as possible. Generally, you should avoid making any long-term commitments to employees, landlords, customers or suppliers that can't be terminated at a reasonable cost.
Facilities: Clean up facilities such as offices, warehouses, and production areas. Dusty shelves and inventory tell a buyer business is slow, even if it isn't. and don't forget exterior landscaping — it's the first thing buyers see when they inspect your facilities.
Management: Make sure your management team favorably represents the quality of your business. When they acquire a business, buyers often rely on the expertise of senior managers. So consider weeding out marginal performers before they come under buyer scrutiny.
Get an early start
Keep in mind that buyers value the positive impact of changes regardless of when they were implemented. It's always better to make improvements six months before you put your business on the block than to do nothing and hope you can explain away problems. That said, it's best to start preparing your business for buyer scrutiny as early as possible.