Increase Earnings/EBITDAFor the majority of businesses, EBITDA (earnings before interest, taxes, depreciation and amortization) is likely to be the metric used for valuation purposes. As you plan for a sale, you should run your business as efficiently as possible with the goal of maximizing sustainable EBITDA. As a general rule, the higher the EBITDA, the higher your valuation.
Financial StatementsIt is important to present your financial statements in a manner that is consistent with how buyers and their lenders will evaluate them. This means having financial statements (income statement, balance sheet, statement of cash flows) prepared on a monthly basis in accordance with GAAP, utilizing the “accrual method” of accounting. Buyers will look to review financial statements for the last three years and will likely perform a “Quality of Earnings” report on the last year or two. This is a report done by a third-party accounting firm during due diligence which scrutinizes the financial statements which you have reported. Given the importance of this report in validating your numbers, presenting accurate financial statements is more important than whether they are currently audited, reviewed, compiled or internally generated.
Understand “Adjustments” and the True Profitability of Your BusinessDuring the past three years, were there any unusual one-time expenses, such as moving to a larger facility or a legal expense, which should be excluded from a buyer’s analysis of recurring cash flow? Does the business rent property from a related party and are those leases “market rate”? Are compensation rates consistent with market? Most privately held businesses claim a variety of nonoperational expenses (personal automobile, etc.) that need to be adjusted. The fewer the adjustments to EBITDA enhances the company’s credibility and increases the certainty of closing a sale.
Structure and Utilize “Net Working Capital” as Efficiently as PossibleBuyers will expect your business to be delivered at closing with sufficient net working capital (generally Accounts Receivable + Inventory - Accounts Payable). The amount will be determined by the historical balances in these accounts. To the extent possible, utilize these balances as efficiently as possible. Do not carry extra inventory, keep accounts receivable current (less than 30 days) and take advantage of payment terms to vendors (i.e., do not prepay accounts payable without a financial incentive).
Formalize the Forecasting and Budget ProcessDevelop a 3-year plan by setting achievable goals and highlighting your competitive sustainability. While surpassing quantifiable goals and milestones can add value to your company’s acquisition offer, failing to meet financial targets can seriously jeopardize a sale. Be certain that the projected numbers are achievable in the proposed period, or more simply, under promise and over deliver while the company is engaged in the sales process.
Focus on Sales and GrowthAny prospective buyer is going to look closely at the growth potential of your business. Therefore, prior
to and during an M&A process, it makes strategic sense to grow your sales efforts, which may mean hiring additional sales reps and increasing your overall investment in growth initiatives. You should evaluate the timeline and payback period to make sure that EBITDA increases before the sales process begins.
Get Your Books and Records OrganizedSounds simple, but not all companies have their documents up to date and in one location. Start a virtual data room in the cloud and store all records there, including financial statements, tax returns, leases, vendor contracts, licensing agreements, loan documents, etc. (see checklist below).
Fully Understand the M&A Process and TimelineSelling a business is often a difficult decision and owners need to be prepared for a 6-10 month process. It is often a very satisfying and rewarding experience, but it takes time to prepare the company for sale, market the opportunity, identify the ultimate buyer and then close the transaction.
Determine Post-Transaction GoalsIs the current ownership/management planning to retire or continue to grow with the new owner? This could determine whether a strategic or financial buyer makes better sense. Is there an internal layer of management positioned to lead the company post-transaction? A review of roles, titles, responsibilities and with whom customer relationships are held should be done and proper transitions initiated.