Chapter 10: Shaping up your Business for Sale
If you have decided to sell your company as part of your exit strategy, before putting it on the block, you should increase its sales appeal as much as possible. Business brokers call this “dressing up” your firm. This means tidying up any remaining trouble spots with the company that slipped by during your shape up and turnaround. You want to eliminate any possible problems that may influence a potential buyer. Make your company as perfect as possible, turn it into a great takeover candidate which will create the most value for you and your investors.
This chapter details fourteen ways to improve your firm’s attractiveness to potential buyers. You may not be able to do them all, but if you miss a few, don’t let this deter you from putting your company up for sale if the time is right. You can make many of these fixes concur with the normal sales cycle. Remember selling your business can easily take twelve months, so you should have no trouble adopting most of these suggestions.
Make sure Contracts and Leases are Transferable
Everybody wants an ownership transition to go smoothly. Make sure your contracts and leases are easily transferable to smooth the way to an easy sale. Work with your vendors and landlord to make all agreements automatically transferable to the new owners. It will be a major selling point to prospective buyers.
Remove Excess Inventory and Equipment
During due diligence, obsolete inventory and equipment on the books raises a major warning sign. It usually indicates shoddy controls and a management that overstates its books. Don’t wait; write these assets down now, and dispose of the excess inventory and equipment as soon as possible.
Comply with all State and Federal Laws Especially Environmental Rules
Prospective buyers will baulk at purchasing a company that does not comply with current government rules. Putting these problems right is often a time-consuming process. In addition there could be fines and bad press. “Environmental” problems are a prime example. Such problems are notorious for needing expensive cleanups and may engender large lawsuits from the company’s neighbours. Deal with them now. You also need to correct any out-of-compliance issues. Do more than correct these issues, ensure that you also have all the official documentation to show that your company is in compliance. You don’t want the slightest excuse that will raise a prospective buyer’s fears about your company.
Get Costs under Control
Having all areas of your business operating in the most cost effective manner can increase your business’ attractiveness to potential buyers. Put a system in place to track your costs and evaluate your suppliers on regular intervals to be sure you are getting the best price for frequently purchased goods and services. Be sure you only cut costs sensibly and not where it will sacrifice quality or production in important areas. The following are the most common areas to evaluate for cost savings:
Freight / Courier
Office / Computer Supplies
Printing / Stationery
Telephone / Mobile Phone Costs
Bank / Interest Charges
Cleaning / Products
Hotel / Bar Supplies
Clean, Organise and Paint
Selling a business is much like selling a house: a clean-up and a fresh coat of paint will positively influence prospective buyers. Paint the interior, the outside, and the equipment. Make sure that you have organised everything. Sparkling offices and production areas tell a prospective buyer that you run a top-notch organisation.
As part of this improvement process, make sure your buildings are sound and the equipment works. Don’t skimp on your maintenance. Equipment and buildings must be in top condition. The last thing you want is an embarrassing equipment breakdown during due diligence. If your roof leaks, get it fixed. Puddles on the floor can be deal killers. In addition, repair any areas and surfaces that may have been water damaged. Even if a leaking roof is fixed, you should also cover up the evidence so that this is a non issue for a buyer.
Develop a Second-in-Command
Attempting to sell a business that is completely dependent on the owner or CEO can worry prospective buyers. They fear the company will fail to work once you are gone. However, if you have appointed a capable second-in-command this fear will be reduced. As part of this appointment, delegate the daily business tasks to this individual. Don’t wait to do this. The longer you have your second-in-command in place, the more valuable your company will become.
Have a Leadership Development Program
Buyers will appreciate that there is a second-in-command, but they will also look for management depth throughout your company. Having to depend on one employee will make them almost as nervous as depending solely upon the business owner. Start a leadership program now so that you will be able to show prospective buyers how you develop top people into senior leadership positions.
Focus on Your Business
Businesses that are too diversified are regarded as a little “iffy” to most prospective buyers. Most want a company that is strong player in a specific industry so that it fills a gap in their portfolio. If you have not focused your business to strongly address a market, you need to do it now. Look to your core business, and focus your energy there.
Have Good Accounting Systems in Place
Quality record keeping and accounting is another important selling point. Producing accurate and reliable information builds general trust in buyers. There is an additional upside in that the buyer does not have to reduce the price because of doubt in the accounting.
There is no doubt that superior accounting systems and procedures add value to a firm. If your systems don’t meet these criteria, you need to update them as soon as possible. Remember this is not an overnight process and such corrections normally take a few months before the systems works properly.
You should avoid setting up new accounting software right before a putting your business on the market. Installation can be a nightmare, and it could take a year or more before it functions properly. New software needs new procedures and, until it is well bedded in, it will produce poor reports. In general, you can expect at least minor chaos for an appreciable time if you introduce new accounting software.
It is best then not to change your accounting software immediately before marketing your company as a takeover candidate. If you have accounting system problems, try to adapt the current system without making a wholesale software change.
Have an Audit Done by a Reputable CPA Firm
As mentioned above, having trustworthy financial information is the key to getting a good price. Your financial numbers will look absolutely legitimate if you engage a Big Four accounting firm to audit your financial statements and take an independent count of your inventory. Although such an audit can easily cost $30,000 or more, it will give much confidence to any prospective buyer, ensuring them that your company has nothing to hide.
Don’t just accept the first price for an audit that you get. Bid it out to get the best deal.
Many of the leading accounting firms also give a large discount to new clients. However, if the price is still too high, consider using a regional firm. They might not have the Big Four’s (or Six) credibility, but an audit by a regional firm is much better than no audit at all.
Benchmark against Industry Ratios
Your company financial ratios may not be in line with your industry’s averages. This may raise a warning sign to prospective buyers who might worry that something is “wrong” with your company. This will be especially true for ratios related to our working capital and debt.
First, know what the financial ratio standards are for your industry. If you have trouble, contact your trade association as they may have this information. Once you have the information, change your business to match these figures as closely as possible.
Develop a Diversified Client Base
Buyers are wary of a company dependent on only one or two customers. The problem that worries them is that once you leave the company, the customer might transfer its business to a competitor. This is not an unreasonable fear, since you probably have developed a strong relationship with your primary client. To forestall such a scenario, you should try to diversify your client base as much as possible.
I would suggest that, ideally, no client should represent more then 10% of your business. Although it may be impossible to do this before you sell the company, it is always worthwhile goal.
Develop Competitive Advantages
Prospective buyers will be reluctant to look at your company unless it is strong and has competitive advantages. By definition, your company must have some or it would not have survived its turnaround. However, they might not be as evident as you would want. You must endeavour to make them noticeable, while also developing new ones that buyers want. Examples of clear competitive advantages are patents, strong brand identity, exclusive products, unique sales channels and prime locations.
Update Your Business & Marketing Plan
The business plan that you have developed can be more than a great guidance tool. It is also a great sales feature for your company. Its study will give potential buyers a deep understanding of your management’s estimate of the company’s potential and a road map to reach it.
Your business plan is where you can clearly identify your competitive advantages, and describe your strategy for keeping and growing a significant market share.
Take Action Exercises
Where are you in each of these areas? Rate yourself on a 0 to 10 scale. What would you business look like if you rated > 5? What about if you were rated > 9?
What could you business be valued at if you rated > 9?