It doesn't matter when you plan to sell your company. Do these five things, today, to get at better valuation at the finish line.
It doesn’t matter if you want to sell your company next year, in five years, or in 10 years or more. No matter your time frame, there are five things you need to put in place, right now, to maximize your company’s value at the finish line. These issues really are critical: in every case, I’ve seen a promising deal completely derailed because one of these five things was missing.
Clean Financial Statements
“Clean” financial statements doesn’t just mean that all the numbers add up and you know you can make payroll. Buyers are expecting detailed forecasts, budgets based on those forecasts, and a quality of earnings report that validates your EBITDA calculations.
At a minimum, you need to clean up your balance sheet, look for operating slack and take out any personal expenses that have been running through the company. There are even firms that specialize in placing temporary-CFO types in companies preparing for sale, specifically to manage this process. We regularly hire these services to get a seller’s finances ready for detailed inspection by prospective buyers. Having great financials keeps the sales process moving smoothly. The reverse causes all kinds of delays, leading to deal fatigue on both sides and less likelihood of a successful closing.
The single biggest problem I see is that buyers want to look at each individual product or service that you provide and calculate the contribution that element of the company makes to the overall business. Many companies just aren’t collecting data and keeping records at that level of detail. Take a look at your financials through a buyer’s eyes, and make sure that you collect and analyze data the way an acquirer will.
A Solid Management Team
Some sellers think that because the buyer is taking over ownership, they’re also taking over management, making the current management team irrelevant. That couldn’t be farther from the truth. Financial buyers, like venture capital funds and private equity groups, are in the business of investing in companies, not running them. They might bring in some seasoned experts to add value to your board of directors, or provide a professional sales executive if you don’t have one, but they’re not going to jump in and immediately take over the reins.
Strategic acquirers feel the same way. They need your current management to help transition your company and integrate it with theirs. If your top management wants to walk away, you should have successors groomed, in place, and ready to take over with a minimum of disruption. An ideal selling company has a deep executive bench, comprised of competent professionals who know how to work together as a team.
A Clear Strategic Focus
This is what Jim Collins, author of Good to Great and Built to Last, calls a BHAG: a Big Hairy Audacious Goal. His research found that companies with a very clear focus on the value-add they bring to their industry far outperform the competition. It should be no surprise, then, that those companies are worth significantly more to buyers, as well. If it’s important to the company’s health and growth to explore a new strategic direction--for example, to try selling your sporting gear directly to consumers rather than exclusively to wholesalers--then go for it, but don’t try to sell your company at the same time. Buyers love a stable business plan that has been historically successful and is positioned to continue being profitable in the future.
A Broad Customer Spread
Customer concentration is a big turn-off for buyers. My heart sinks when a company owner shows me great revenue numbers and then tells me that 90% of that money is tied up in a government contract. Even the most risk-tolerant of buyers doesn’t want to take a chance that the company’s revenue could virtually dry up overnight. If more than a third of your profits come from one customer, or one closely-related group of customers, you need to implement strategies to expand.
Know Your Personal and Financial Goals
Out of nowhere, a buyer offers you a check for $42 million. That’s a huge amount of money, but a comparable company in your space just sold for $53 million, and you got a valuation recently that says you’re worth $48 million. But making judgments about buyers’ offers based on emotion or incomplete data isn’t productive. The harsh truth is that until you have a willing buyer in front of you, the value of your company in the marketplace is exactly zero. That’s just one reason it can be really useful to sit down with a wealth management professional to clarify exactly what you want out of a sale--whether it’s a yacht or money for starting your next company or enough of a trust fund that even your great-grandchildren will be able to go to the college of their choice--and how much money it will take to get there. Then, with your motivations and priorities clear, and with everything else I’ve described in place, you’ll be in the best position to make a successful and profitable sale.
DAVID LONSDALE built and sold three venture-funded companies before becoming president and co-owner of Allegiance Capital in 2005, which provides M&A financial services to middle market business owners. @MiddleMktMandA