How to Prepare a Business for Sale

1. How to Prepare a Business for Sale Making the decision to sell one’s business is never easy. Most owners put years of their life in building their businesses, and would of course like to extract the most value for their hard work. Deciding on the right asking price is naturally a complex decision and is often driving the process, both in terms of the seller’s motivation and the ultimate outcome. However, regardless of at what price you would be willing to sell, it is not as simple as getting a good broker and having him solicit bids. To get the best results, there is a number of things that should be taken in account and steps to prepare the business for the sale. Making the right decisions ahead of the time and preparing the business for sale will go a long way to taking all the money off the table. his list is by no means exhaustive, but in my experience these are some of the key considerations:

2. Transferability You are selling your business, not yourself. Prospective buyers are buying a stream of future benefits, most notably the cash flow. They will want to know that once you leave the business will continue performing as well as before. The buyers like to see strong supporting management team, established processes and procedures, automation, software solutions, institutionalized relationships with the customers, etc. The presence of those indicate that the business will continue to be successful after you leave the firm. A good method to test that is remind yourself how did the business perform the last time you went on –say – a month long vacation, assuming that you ever took a long vacation. If you have to be present and directly involved in operations at all times, it is unlikely that the business can run on its own. Aside from the fact that that is a probably unnecessary risk for the business, at the very least, it is also unsustainable. In fact, regardless whether the new buyer would be able to take over and be as effective, it will also most definitely going to be considered a major risk by a prospective buyer. That will, of course, affect the value of the business or even drive the prospective buyers away. The way to address the issue is to make yourself redundant. A buyer will be buying your business, not you, and no matter how great you make your business, if it cannot be run without you, it will be worth a lot less. Equally important, perceptions matter. It needs to be apparent that the business can be run by the existing management team. If you have a capable management team, but it appears that all the decisions are still being made by the owner, the buyers will likely be cautious. Profitability Your business is benefiting you in a number of ways aside from the bottom line shown at your tax return. Perhaps you are covering some expenses that are not absolutely necessary for running the business.

3. Ideally, you should start working on maximizing the profitability before deciding to sell. Removing unnecessary expense items, improving efficiency, or ramping up the sales in the middle of the sale process will likely be as effective in terms of enhancing the value as the higher earnings that are already showing in the financial statements. Concentrate on achieving the operational improvements, sales increases, cost reductions, and other activities that have direct impact on the bottom line. When you make the decision to sell, it is really helpful if the buyer can see a strong cash flow. Add-backs for the one- off events and the spending that is clearly not business related will be properly valued by the experienced buyers most of the time. However, you want to maximize the size of the buyer pool and, most often, noting can quite match strong financial performance. If possible, start early. Clean up the balance sheet and work on the operational efficiencies. Look for the opportunities to remove non- productive assets. Your business most likely does not need that boat or the box seats at the Staples Center. If you sell underutilized assets you will not only improve capital efficiency, but will also generate additional cash flow that your buyer may not take out. Setting up the right procedures for expense controlling will not only prevent possible fraud but also have a direct impact on your employees’ spending habits. Clean Books and Records This cannot be overstated. Having accurate and well organized financial statements coupled with reliable and timely reporting will significantly reduce the buyers’ perception of the risks. In fact, the business may be inherently riskier than a comparable business, however if the books and records are solid and reporting is well set- up, many buyers will have a more favorable impression. In other words, aside from the fact that efficient reporting and clean books are necessary for efficiently running the business!

4. Reliable Reporting Make sure that your CFO has a full understanding of your business’ processes, identify the key performance indicators, track the appropriate number of indicators depending on your business type and size, and disseminate the information within the organization. Even without a concerted effort to implement the necessary changes, the availability of reliable information about the performance will often push your organization in the right direction. Furthermore, relevant and reliable reporting will most likely positively influence a buyer’s perception of the business. Diversification Most buyers prefer businesses that have low buyer concentration, so if any one buyer decides to take their business elsewhere the business is not affected. However, if you have one or more large clients, in most cases the benefits will outweigh that consideration. In other words, having large client concentration is “a good problem” and in most cases any risk discount to the valuation of your business will likely be more than compensated by the stronger cash flows. However, if you are sourcing from a limited number of sellers, with no backup options, a buyer will rightfully consider that a significant operational risk. Depending on your industry and the product, the disruption from losing a supplier may be very costly or even fatal. You should avoid being blindsided by an inquiry from a potential buyer. If you leave an impression that you never considered the issue, at the very least, the potential buyer will rightfully believe that there may be other important risks you never considered. Worse, the buyer may decide that the risk is too great and move on.

5. Instead, make a cost benefit analysis and address the issue to the extent that is optimal to do so. In some cases, there might little you can do. However, it may be possible to address the issue by doing some research and makingsome contingency planning and/or contracting. Upside Potential / Vision Most people that are at least a few years removed from the business school, or have never went to a business school, understand that efficient markets – with rare exceptions – are not a norm. Therefore, I am most certainly not arguing that a business will always fetch the right price because the buyers in a market will bid up the price to a predetermined “correct amount”. Other things being equal, if one is to choose between the two businesses with the same sale prices and the same cash flows, it is more advantageous to buy a not-so-well run business than an efficiently run business with great employees that dominates in its market. The reasoning is obvious, the new owner is paying not only for the cash flows, but is also hoping to improve the cash flows and make the investment look better. It is much easier to improve a badly run business than a business that is already operating at a maximum efficiency and has no more space to grow. In other words, going back to the initial argument, the markets are not efficient and will not always price the firm properly based on whichever chosen criteria. The perception of the upside potential for the business will often be a significant and, sometimes, the decisive consideration when making the decision.

6. Having said the above, obviously you may not want to try to actually convince the buyer that the business has been run badly and is not performing well. Instead, show the buyer the upside potential. You may have turned every stone, but there are likely areas where there is space to grow, new markets or products, alternative distribution channels to be explored, cost savings, etc. Tell the buyer about the strategic directions your business can go, the potential growth, and untapped profitability of your business. Seasoned Trusted Advisors The right advice can help you avoid costly mistakes, provide significant savings, and add value. Make sure that you have the right support from the professionals helping you with accounting, tax, legal, and other transactional issues. They will provide invaluable support in their respective areas as well as a different overall perspective to the transaction. In addition, aside from the direct impact, they will assurance to the buyer that they are acquiring or merging with the business that is indeed a viable investment. More likely than not, they will justify their cost multiple times over, and will with near certainty prevent you from making serious mistakes that are not worth taking the chances with in any case. For more details : Call us at : +1 310-340-9900 Visit : www.tomculo.com Location : Los Angeles, CA, USA