The typical owner of a successful small or middle-market company is generally very focused on operations during the near to intermediate term. An owner of a successful company that has the potential to be sold should devote some time planning for that sale, even if there are no immediate plans to transfer ownership.
For many business owners, the business is the most valuable asset in the family, so value preservation and enhancement should be a primary goal as strategic operating decisions are made. Further, while sale of the company may be a long-term goal, it must be considered that not all business exits are planned. A competitor or partner could make an offer that is too good to refuse. A competitor or partner could make an offer that is too good to refuse. Alternatively, an unexpected event such as death may strike, forcing the owner's heirs to sell the company. Given the value that is at stake, a business should always be run like it is for sale.
Lean and Clean
Run the company as lean as possible and do not comingle personal and business assets. This is important for maintenance and preservation of value for two reasons:
- Paying for personal expenses out of the company may give an impression to a buyer that the company is not professionally operated.
- Buyers are leery when sellers ask them to adjust year-end financial statements for personal or quasi-business expenses, unrecorded cash sales or related party transactions that are not at fair market value. In other words, keep the balance sheet and income statement as clean as possible.
It is important to reinvest in fixed assets and advisable to purge nonessential balance sheet items such as idle or non-operating assets, obsolete inventory, bad debts, and shareholder notes.
Finally, buyers prefer financial information that is audited or reviewed by a CPA firm. This decision will have to be made by the owner on a case-by-case basis and will depend upon size of the company. As a decision is reached to sell the company and the plan to sell is formulated, the owner should give strong consideration to having an audit or review of two or more years of financial statements.
Low Risk, High Value
Owners who minimize risk reap a higher return. Future earnings appear more secure if the company is current on all leases, licenses and contracts, including employment and non-compete agreements that have been signed by all employees.
Note: Laws regarding non-compete agreements vary from state to state.
Owners can further lower risk by reviewing insurance policies on a regular basis to ensure they have purchased the right types of policies and coverage amounts.
Due Diligence Recordkeeping
The documents required in today's M&A environment can be extensive. If your recordkeeping has been subpar, it can be difficult or impossible to compile the information wanted by a potential buyer or partner. Owners should maintain documentation needed for the due diligence process long before a sale.
Above all, operating sale-ready means understanding what the business is worth today and identifying key value drivers. By focusing on these factors, the business will be more attractive to prospective investors and fetch a higher price in the marketplace.