If you consider selling your company, then you should set the right course well in advance. Otherwise, you risk sales proceeds being lower than expected or worse–lower than required. Professional, strategic advice helps with effective preparation for the sale of a company.
The successful sale of your company depends entirely upon preparation. Preparation involves data and documents. A newly developed business plan can be helpful. You’ll need the data from the last tax audit, supplier contracts, customer contracts, an up-to-date organizational chart, and many other things which should be organized before you put the company up for sale. Thorough preparation avoids unnecessary delays between negotiation appointments and the impression of not being prepared for discussions with potential buyers.
Prepare the necessary documentation at least three or four months before planning the first discussions with potential buyers. Of course, the first considerations and decisions must be made much earlier, often one to three years before the planned sale date.
Follow these steps to prepare your middle-market company for an exit.
1. Keep current with the market and know your potential buyers.
Even though you may never want to leave the company you built, you should know how your company will fare when it goes to the market. Always know your options. Track both macro and micro factors that were impacting the market. Know the moves of competitors and prominent players in the industry. Stay in the know regarding current market situations to foresee opportunities as well as trouble.
Staying current with changing industry trends helps your business in the navigation process. Knowing the prominent players in your industry and understanding their intentions keeps your business valuation expectations in check. Knowing the right time to exit based on the macro factors in the economy can help you realize every dollar on your business’s final valuation.
To positively influence the price of their company, the seller must know the key figures and factors that potential buyers use to rate the company. To do this, keep an eye on all of your company’s figures and keep a list of interested buyers ready for when you decide to exit. Company buyers have specific ideas about how they want to do business. If the seller has already met these expectations, it has an impact on the company’s valuation.
- A legal structure that is as simple as possible (few subsidiaries and subsidiary companies) facilitates the overview and integration with another corporation in a merger or takeover.
- A functioning reporting system provides the information necessary for a successful continuation of business operations from the get-go.
2. Stabilize income with recurring revenue.
Stable and recurring revenue attracts potential buyers or investors. Ensure that your business has a growing income stream that is recurring in nature to expedite a smooth exit. Focus on your customer base; it should have a majority of repeat customers.
A solid supplier base ensures the uninterrupted availability of your products and services at all times. Focus on including such product lines in your business.
A company with an established growth pattern will sell for a higher price. The value associated with the acquisition of the available cash flows is directly related to risk. The lower the risk of losing these cash flows in a transfer of ownership, the higher the acquisition price. If recurring sales are a significant part of a company’s total sales, then the recurring sales may be valued at a higher level than the one-time sales. Examples of recurring sales include maintenance contracts, monthly support agreements, annual license agreements, warranties, subscriptions, or other revenue streams that are contractually agreed upon and repetitive. Buyers are willing to pay the highest purchase price if they believe sales are predictable and will increase in the future.
3. Establish a good growth pattern.
Put in place a thoughtfully and strategically developed growth plan and update it periodically. Keep your investors in mind while creating the growth plan: it acts as a timeline for the growth your company needs to achieve within the next one or two years. It also serves as a benchmark against which you can measure how your company is faring in growth. Make periodic revisions of the growth plan to reflect the company’s current standing.
Potential buyers want to see good growth patterns in your business. Aim for steady and predictable financial growth, which can attract investors to your business.
4. Codify standard operating procedures.
Standard operating procedures (SOPs) facilitate business growth by ensuring that everyone is on the same page about what to do, when to do it, how to do it, and why.
Standard operating procedures improve efficiency. Your employees can serve more people by replicating processes at scale without compromising the quality of service. SOPs help the team grow and allow them to execute tasks quickly while focusing on increasing their skills. You need to have accurate, complete, and updated standard operating procedures in place at all times.
A potential buyer who wants to acquire or merge with your company also wants to know if the transition will be smooth or not. If they have to choose between a company with SOPs and another company that does not, you know which company he will choose, right?
The documentation of standard business procedures and systems shows that the company can continue to operate profitably after the sale. Business systems include the computerized and manual processes used in the business to generate revenue and control expenses and the methods used to track customer information and the delivery of products or services. The following are examples of business systems that add business value.
- Personnel recruitment, training, and retention
- Human resource management (i.e., employee handbook)
- New customer identification, advertising, and acquisition
- Development and improvement of products or services
- Inventory and control of fixed assets
- Quality control of products or services
- Communication with customers, suppliers, and employees
- Selection and maintenance of supplier relationships
- Business performance reports for management.
5. Create something proprietary.
Buyers are willing to pay a premium for intellectual property, any other legally protected position, market leadership within a niche, brand strength, patent, or other goodwill items. Proprietary products, services, designs, etc., make your company more valuable—work towards building such things and highlight them at the exit time.
6. Maintain bookkeeping best practices.
You need to have your finances in order from the beginning. Good bookkeeping practices not only help during the due diligence stage, but the historical data also provides direction when you’re ready to plan an exit. You should get an accurate and complete overview of your company’s income statement and balance sheet.
Reliable financial records are not only a crucial element of running a business, but they also support the claim that a company is consistently profitable. When purchasing a company, the buyer will conduct financial due diligence.
Suppose the buyer is uncomfortable with the company’s past financial performance. In that case, there will be no transaction or, at best, a reduced purchase price for the company when a buyer is faced with claims that the company has made $X million a year for the past three years and is expected to make at least that much in the future, then the seller must prove it. If the seller then presents past annual accounts that are incorrect, untenable, or incomplete, the buyer will most likely withdraw.
7. Employ a good management team.
An investor or buyer will want to have a good management team who can work independently without the original business owner’s guidance. This eases the transition to new management. Work toward building a succession team or a team of key employees who can run the show efficiently and effectively in your absence.
8. Find the right advisors.
In sales negotiations for a company, not only do sellers and buyers sit face to face but whole teams of economic, tax, and legal experts meet. Advisors understand these different perspectives and requirements for both buyers and sellers. This expertise enables them to prepare everything necessary for negotiation, which helps to make discussions efficient and time-saving and successfully protects the entrepreneur’s interests.
Ultimately, we built Value Scout so your value creation strategies and exit planning can become part and parcel of your routine business operation.