Selling your business is an emotional experience. Business owners pour countless hours into building and making their companies profitable. They develop many crucial relationships, from business partners to employees. When an owner decides it’s time to sell, he is best advised to let someone else take charge. Regardless of what personal investment a business owner makes in his company, he may not receive many sensible purchase offers over the life of the business. It’s important to do everything you can to prepare the business to be sold and increase its value to potential buyers.
Maximize value — The business owner wants the business to have as much value as possible before the business is “marketed” for sale. The most important items affecting its value are profits and cash flows. The higher the profits and cash flows, the higher the valuation. A business owner has two ways to increase profits and cash flows: increase sales and cut costs. Thus, the optimal time to sell the business occurs when the business generates its highest profits or cash flows. A buyer/investor will typically pay a “multiple” of these profits or cash flows when valuing the business.
Prepare financial statements — A business owner should ensure he has reliable financial statements. While not a requirement, it is better a company has its financial statements audited or “reviewed” by an independent accounting firm. From this, a buyer will trust financial statements that are sent to him. The business owner should also “recast” his income statement by taking his after-tax net income and adding back all his personal expenses, nonbusiness-related expenses or one-time, nondiscretionary expenses to achieve an annual “adjusted” profit or cash flow the business would have generated had it been a publicly traded company. A buyer will typically look at three to five years of historical financial statements, as well as a budget for the current year and possibly three years of projections.
Create a due diligence plan — Prepare for due diligence. Most buyers examine the business inside and out. Buyers will thoroughly review the business, which may take 30 days and consist of a due diligence request list that is 10-12 pages long and single spaced. Assign someone within the business the responsibility of generating due diligence information. In preparing to sell the business, a business owner should find a generic due diligence request list and locate as many of the items on the list as possible.
Hire an investment banker — To maximize the value of the business, hire an investment banker to sell or recapitalize it. The investment banker will play two roles: advise the business owner through the entire business sale process and create the “market” for the business to be sold/ recapitalized. This connotes the investment banker will take the sale/recapitalization opportunity to about 50-150 qualified strategic buyers and private equity buyers, which will allow the best price/offer to rise to the top.
Hire attorneys, accountants and other advisers — The other participants a business owner, with his investment banker’s help, needs to maximize his after-tax proceeds are attorneys, accountants and other specialty advisers. The more complex the transaction, the more the business owner should go with a full-service law firm that has mergers and acquisitions (M&A) transaction attorneys, tax specialists and real estate specialists. M&A attorneys will be used in the purchase agreement’s drafts and negotiations, noncompetition agreements, lease agreements and employment agreements. The accountant will analyze the deal structure to negotiate and finalize after-tax proceeds, as well as review and answer accounting questions. Other advisers who may be needed include real estate specialists, environmental specialists and insurance specialists. A business owner should accomplish all tasks necessary to increase the value of his business while reducing his risks in the transaction.
This article does not constitute legal or federal tax advice and is not intended or written to be used, and may not be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code.
For more information, call John Zapalac at (713) 826-7773 or email him at jzapalac@bicalliance.com.