Merger and acquisition (M&A) activity is expected to remain robust in 2019. Qualified buyers are still able to access capital for acquisitions at relatively low cost. This, in turn, provides qualified sellers with leverage to command higher sale prices. Sellers who most successfully capitalize on these opportunities tend to be those who are most prepared.
The complete process for a business sale transaction typically ranges from a few months to a year or more. It is never too early for a seller to begin preparing to capitalize on the right opportunity – whether through a deliberate sales process or responding to an unsolicited inquiry from a potential buyer. Below are three steps for potential sellers to position themselves for optimal business sale outcomes.
1) Get Organized
The first step is to get your “business house” in order. A buyer will conduct a comprehensive due diligence investigation on your business and its records to evaluate the strengths and weaknesses. Be proactive in trying to assess your business through the lens of a potential buyer with a reverse due diligence process. Then take steps to position the business in the best light possible and to minimize issues that might negatively affect valuation. Transparency and a clean business will provide a buyer with more confidence about paying a higher purchase price than for a business that has clean-up issues.
A few examples include:
- Ensuring that books and records – especially accounting and financial records – are up to date, accurate, complete and use sound accounting principles. There is no faster way to scare off a buyer than to have sloppy, incomplete or questionable accounting and financial records or practices.
- Making sure your arrangements with key customers and vendors are memorialized in signed written contracts.
- Documenting and clarifying ownership and licensing of intellectual property that is important to the business.
- Buttoning up your capitalization table and owner or founder agreements, such as operating agreements, shareholder agreements, voting agreements, buy-sell or similar agreements among owners and investors.
- Reviewing your contracts and applicable regulations to identify approvals that might be required from customers, vendors, regulators or other third parties in connection with a sale of the business.
2) Get Educated on the Value of Your Company.
Understanding customary factors that drive enterprise values and sale prices based on your specific business or industry is critical in reasonably assessing potential fair market value. EBITDA or other earnings-based multiples are used for some industries and technologies whereas others may be driven more by top-line revenue figures with less emphasis on profitability, or by other intangible assets, including goodwill. Goodwill assets include brand recognition and reputation, a strong customer base, good relations with employees, customers and vendors, or patents or other proprietary intellectual property. An independent third-party valuation can provide a realistic estimate of what qualified buyers may be willing to pay for the business.
It is best to evaluate opportunities to increase the value of the business before going to market. In order to enhance value, management may want to identify and implement opportunities for revenue and profitability growth, cost reductions and improved operational efficiencies. A seller should also identify and support key employees for retention to help demonstrate to potential buyers that the business will continue to thrive post-sale.
3) Assemble a First-Rate Deal Team.
Sellers sometimes unknowingly hinder optimal sale outcomes by failing to engage qualified advisors or by trying to do too much themselves to save on transaction expenses. For example, a long-time family attorney or CPA whose practice is not focused on sale transactions is much less likely to identify key value drivers for sellers than advisors that specialize in M&A deals. Costs and expenses are important considerations. However, engaging the right experts to assist with your deal typically pays for itself in spades. Having a high-quality team aligned with you can best help you navigate through the complex and time-consuming M&A process to a successful completion and maximized transaction outcome.
Key advisors to consider engaging for advice and assistance before you begin a sale process may include:
- Experienced legal counsel with specialization in business sale transactions.
- Investment banker or business broker to help value and market the business.
- Qualified tax or audit professional(s).
- Financial planner to develop a seller’s post-sale wealth management plan.
- Human resource professional(s).
- Industry expert(s) versed and experienced in the opportunities and challenges of the business.
Selling a business is a specialized and process-driven endeavor. The most successful sellers are prepared from the outset. Some advance planning, refinements and building the right deal team goes a long way in helping sellers achieve their goals. The attorneys at Linden Law Partners have extensive specialized experience helping sellers prepare for, execute and successfully close business sale transactions across a broad spectrum of industries. If you would like to learn more, please contact us here.