Come on, admit it. The sale of your business crossed your mind over the holidays. You may have even discussed what your life would be like after a sale with friends or family. It’s natural for owners to think about selling their business. If you plan to sell at some point in the future, the question you need to answer is, “how well positioned is your business for a potential sale?”
From our vantage point as advisors on buying and selling businesses, we find that the vast majority of businesses aren’t ready for a sale when the owners are ready to cash out. Preparation for a sale, ideally, is completed over the course of several years, and starts with making sure the company’s financial house is in order. Here are four critical components to this process:
- Maintain a complete set of financial statements that goes back at least three years. This includes a balance sheet, income statement, and statement of cash flow.
- Keep your financial information updated through the most recent completed month, along with a budget-to-actual statement for the remainder of the current operating year.
- Understand the numbers and be prepared to explain where the company is heading by establishing a multi-year forecast with defensible assumptions.
- Prepare and detail the components of normalized financial statements. These must clearly and objectively depict the company’s normalized operating income over, at least, the most recent 12-month period. To create an adjusted income statement, add back any true one-time or nonrecurring expenses to net operating income.
The question whether a company should have audited or reviewed financial statements typically gets asked when a sale is being contemplated. Preparing an audit or review depends upon a number of different factors independent of a sale. For example, large clients or lenders may require the company to maintain audited statements. When it comes to a sale, we don’t suggest you change your financial statements. Instead, we encourage you to make sure you have a complete set of current financial records that you can readily provide to a prospective buyer.
In addition to financial preparation, owners should allow enough time to address the following potential problem areas that may exist within their operation:
- Long-term lease obligations.
- Staffing gaps and any lingering personnel problems.
- Potential and existing lawsuits.
- Client matters such as renewing contracts.
- Capital expenditures and infrastructure inefficiencies.
Owners should also take the time to accurately pre-qualify prospective buyers. Before releasing any confidential information, a seller needs to be certain the buyer has an interest in their particular type of business, as well as the financial ability to complete a transaction. If an owner doesn’t maintain confidentiality when selling their business, irreversible harm can be inflicted upon the business that may negatively affect the price and/or terms of the deal. Additionally, if outside financing is needed, a seller should try to determine the buyer’s requirements in advance of disclosure.
Before entering into discussions with a prospective buyer, it is critical for owners to gain knowledge of how transactions in their particular market are being priced and structured. This could be accomplished by confidentially reaching out to other owners who recently sold their businesses, or by engaging an expert with extensive valuation and transaction experience to conduct an objective valuation assessment of the business.
It’s never too early to start preparing your business for an eventual sale. If you would like to confidentially speak with a member of our team, please send us an email at email@example.com.
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