A study by the Alliance of Merger and Acquisiton Advisors found that at least 90% of all midsize businesses are ill-prepared for an ownership transfer, despite the fact that a healthy majority will attempt to do so within the next decade.
The best advice is that you should always be ready. No business owner is going to work (or live) forever. And most of the things that make a private company easier to sell also make it more attractive to keep.
Start early. Sophisticated buyers look at several years of history, and significant recent changes in the financial records, business plans, or other key documentation can raise a red flag or make it obvious that their target has taken special steps to make the company more attractive. (We sometimes refer to this as “putting on lipstick.”)
Audited financial statements inspire confidence that the numbers are accurate, especially when the auditor is a well-known CPA firm. If an audit is too expensive, consider a review, which requires independent inquiry into accounting practices, albeit with a lesser level of assurance provided by the CPA firm.
Cut back on unnecessary and discretionary expenses. While you can add-back owner benefits and perquisites, travel to exotic trade shows, etc. to arrive at an adjusted EBITDA on which to base your negotiations, these always raise questions, requiring extra due diligence and too many add-backs begin to make a company look more like a personal fiefdom than a smartly-run business.
Make sure corporate records and contracts are accessible and complete. Financial statements, tax returns (income tax, property tax, payroll tax), business licenses, loan agreements, lease agreements, customer and supplier contracts, insurance policies, employee benefit plan documents, and intellectual property licneses should all be in good order. Final or signed documents must be available. Review your agreements to make sure you are in compliance with key provisions. Are any amendments needed? Renewals due?
Consider creating a board of directors or advisors. A board of advisors is less formal as it does not have actual authority over corporate governance nor the same level of fiduciary obligation as directors. This may be a good way to set up a board structure and make sure the right people are involved before converting into a formal board of directors.
Conduct an enterprise risk assessment. Think about the major risks (internal and external) to the business. This should include loss of key personnel, concentration of customers, large or past due accounts receivable, obsolete inventory, legal or regulatory compliance, pending or threatened lawsuits, uninsured or self-insured property or liability exposures, weaknesses in financial or operational controls, and disaster recovery plans, just to name a few. Think about how your management of these risks will appear to an outsider.
Know what your company is really worth, and why. Some owners have highly inflated opinions about the value of their businesses, while others are unrealistically low, perhaps because of a long history of suppressing reported profits as part of a tax minimization strategy. Make sure your expectations are well founded. More importantly, make sure you understand the key factors that drive the valuation. If you can measure it, your can manage it, and business valuation is no exception.
Develop an estate plan. Before you sell your business, you should know what type of lifestyle the proceeds need to support, with plans for family and healthcare needs, charitable giving, bequests and legacy, investment strategy and risk tolerance, and contingencies. Appropriate wills, trusts and / or family limited partnership agreements should be in place.
Line up your key advisors. Everybody needs good professional help. A first rate investment banker or intermediary, M&A attorney and tax advisor add value in ways too numerous to mention in detail. Help them to understand your personal objectives and decision making style, but also remember that you manage your advisors; they do not manage you.
— David Bass
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