How to Prepare your Company for Sale
Focus on Operating to Maximize Company Valuation
Operating Efficiency is a key value driver for companies and company valuations. Low fixed costs relative to industry standards can drive profit margins and appeal to investors. Whether attained through cutting underproducing assets or people to scalable operating capabilities, improving operating efficiency is key in maximizing company valuation.
Recurring Revenue or Reoccurring Revenue. Reoccurring revenue can be attained through low client turnover and high switching costs. Both provide a clear view of the future revenue streams of the company and present a more attractive investment for potential buyer.
Working Capital Management is key to ensure a stable cash conversion cycle for a company. While negotiating working capital terms is typically left to the end of the transaction process, it can have a real impact on a company’s valuation. Investors like to see capital-efficient companies with low capex and strong cash conversion cycles.
Reducing Customer Concentration is paramount in regards to receiving a premium valuation. High customer concentration can even limit the possibility of a transaction altogether. When a single client begins to account for 15-20% of a firm’s revenue, the likelihood of finding a willing buyer significantly diminishes. A general goal is to ensure no one client accounts for more 10% of a company’s revenue stream.
A Proper Post-Acquisition Plan is necessary in providing an investor a clear vision of company structure and growth initiatives post transaction. Leadership transition is an important factor to consider as investors vary in terms of wanting leadership to stay on or putting their own leadership in place. Regardless, leadership is expected to stay on for at least a transition period of a year. If leadership desires to leave post transition period, it is important to have a strong pipeline of groomed professionals already in the business to smoothly transition into leadership status. While sensitive questions will arise around who to include in the process and how to maintain confidentiality, certain members of the management team have to be involved to prepare the business for sale and a well-prepared management team will increase the value of the business.
Understanding The M&A Market is critical from a valuation standpoint. Factors to consider include industry trends impacting valuations and buyer appeal to a specific market as well as where similar sized companies in the industry are being valued. Davidson Capital Advisors would be happy to share more about current industry and valuation trends in the market.
Organize In-house operations for Due Diligence Process
From a financials standpoint, buyers will typically request 5-7 years of historical financials that are preferably audited by a third-party account firm, a current year budget and five years of projected financials. If a company enters a sale process without the ability to provide organized and consistent financials, it can reflective poorly on the management team, valuation, and ability to close a transaction.
Apart from financials, buyers will want to examine a firm’s articles of incorporation and the organizational structure/key personnel overviews for the company. Having an organization chart in place, lease agreements and any relevant contracts with customers, suppliers, and distributors will be necessary to ensure a company’s structured relationships.
Assign a Team of Advisors
Once a company has optimized its operating efficiency and organized its in-house operations, it will need to assign a team of trusted advisors. The group of trusted advisors will help to ensure success in the process, manage risk, and allow business owners to continue to run their company efficiently to mitigate the threat of poor business performance during the transaction process that can in turn cause a deal to fall through.
An Investment Banker acts as a middleman to the market and acts as the lead professional on the deal. Having an M&A advisor is paramount in helping prepare the company and management for sale, formulating a reasonable valuation to set expectations given market conditions, marketing the business to potential buyers and managing the due diligence, purchase price negotiations, and deal closing process.
An Accounting Team is important throughout the entire process. The accountant can help get accurate historical financials in order, deliver a quality of earnings report and support pricing negotiating. Having an accounting firm active throughout the process can help ensure an efficient process and the likelihood of a transaction.
Hiring a Lawyer specialized in M&A is important for the back end of the sale process. The goal of the legal team will be to mitigate risk in a transaction to protect the shareholders. The law firm will help review all sale & purchase agreements to help manage legal and tax structures, disclosure requirements and other documents that arise in the closing process.
Hiring a Estate & Wealth Manager is something to strongly consider during the process. Typically, a significant amount of a business owner’s wealth is apart of the value of the business, it is important to have an Estate & Wealth manager in place to ensure planning discipline. Having a strong plan can have a significant impact on the net outcome in regards to the complicated estate, legal and tax structures to be pursued.