Is your Business “Ready” for Sale?

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For many private business owners, their ultimate “exit strategy” may involve the potential sale of their business to a third party. If you think that you may sell your business, then it is important that you begin to prepare for that possibility now. By making certain strategic decisions, you can make your company more attractive to potential buyers, ultimately helping you maximize the valuation of your company. If you wait until your company has “gone to market”, then you may have unknowingly limited your options and reduced the value that you might have otherwise realized on such a sale.

There are any number of steps that you, as a business owner, can take to help prepare your company for sale, including, but not limited to, the following:

Get a sense of what your business is actually worth.

  • It is important that you have reasonable expectations as to what your business may actually be worth to a third-party buyer. Most businesses are valued based on some multiple of its earnings or EBITDA (Earnings before interest, tax, depreciation and amortization). In order to determine the value of your business, you should engage a reputable valuation expert.  Even if you are confident that you know the value of your business, having a third-party report can provide significant help in negotiations.
    • Going through an evaluation process also provides an opportunity for an objective assessment of the company, including identifying its strengths, weaknesses, opportunities, and threats. Once you have this information, it becomes easier to focus your resources on making improvements.

Make sure that your legal affairs/documents are in order.

  • Make sure that all legal documentation, including your: (i) internal organizational documents and corporate books/records; and (ii) any permits, licenses, or other similar authorizations are up to date and that you are operating in compliance with any applicable rules. Any failure to comply with the required corporate formalities (including properly documenting Board and Shareholder approval of key transactions or maintaining necessary governmental approvals), could result in a decreased valuation.
  • Document your policies and procedures so that whoever takes over will immediately know how to run the business.
  • Identify and eliminate any potential legal matters (vendor complaints, employee claims, etc.).
  • Ensure that key contracts are assumable/transferable upon sale.

Establish a solid management team.

  • Build the business to run without you. It is important to remember that a buyer will be purchasing a business, and that business needs to be able to continue to thrive once you are gone. Therefore, prospective buyers like to see a strong supporting management team. This indicates that the business has the necessary structure in place to continue to flourish post-acquisition. In addition to building a strong management team, you should consider investing in systems to track key metrics.

Organize your finances.

  • Some common mistakes that many business owners make are maintaining sloppy books and mixing business and personal expenses. Accordingly, in advance of selling your business, you should make sure that your tax returns, financial statements, and other documents have been properly prepared and reviewed/audited by your accountant or other relevant professional advisors.  You also will want to find ways to increase profitability and create efficiencies as those will drive up the valuation.
    • It is crucial that you have strong financial statements and can readily present a clear and accurate picture of the financial health of your company to a prospective buyer.
    • This may require, for instance, maintaining a “normalized” balance sheet. For example, if you are paying too much (or too little) rent to an affiliated entity that can affect the overall financial picture that your financial statements might otherwise present to a prospective buyer.
      • Monetize redundant or under-used assets; and
      • Focus on spending and expense control opportunities.

Evaluate your customer relationships/customer concentration.

  • All Buyers want to reduce their transactional risk. One way they like to do that is typically by targeting companies that have a broad customer base with little customer concentration, as that reduces the harm that the loss of certain customers will have to the overall revenue of the business. For example, if a business only has one (1) customer that would significantly suppress its enterprise value as the loss of that customer would effectively eliminate the revenue stream.
  • Buyers also like to acquire businesses that have some stable “re-occurring revenue”, because that further reduces the financial risks associated with the M&A transactions. For example, having signed service/maintenance contracts with customers and/or being on approved “bid lists” provides potential buyers with some assurances that those customers will be retained following the completion of the transaction.

Lock down key employees.

  • Make sure that all key employees have signed employment agreements that contain non-compete agreements, non-disclosure provisions and, if applicable, assignment of invention provisions. Buyers will want to have some assurances that any key employees will not simply leave and join a competitor.

The Attorneys at Fitzpatrick Lentz & Bubba have extensive experience advising clients on a wide variety of business matters, including mergers, acquisitions and other forms of business transactions. For more information, listen to our podcast on mergers and acquisitions, or contact Ken Charette or any other attorney in our Corporate, Business & Banking Group.

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