I was recently speaking to a group of business owners, and when asked how many had received unsolicited offers to invest or buy their business outright, half the hands in the room shot up. I was a little surprised, but with the amount of undeployed cash held by private equity firms, it makes sense why so many are on the lookout for good companies.
How do you position your company so it is sought after by private equity firms or investment bankers, and when opportunity strikes, how do you make sure you are prepared for a sale?
With trillions of dollars expected to change hands as baby boomers retire, more and more business owners will face potential buyers with little or no experience in being part of a transaction. Conversely, investment bankers, private equity groups, M&A attorneys and Certified Public Accountants, who are insiders of the Merger & Acquisition world, see transactions every day as part of their role.
Preparing for a future exit requires being ready when the opportunity strikes. Not only does this include being prepared for discussions with potential investors, but it also means preparing yourself individually. How does one prepare for such a monumental change in lifestyle and one with so many outside factors? First, prepare yourself personally. Second, ensure that the story of your business is well-presented.
It’s difficult to plan for an event when you don’t know the specific date or conditions, but that is exactly what business owners must do to effectively prepare for the sale of their business. What do you want your life to be like after the sale? The economic outlook may be pointing to a recession sometime in the next 12 to 24 months, depending on which economist you listen to. If you believe that you will get a higher price for your business before a recession, do you want to try to time the market? Or will your timing be based on a personal choice? Another option often heard is taking additional time to grow your business to increase the value.
Tell your story
To tell your story well the numbers will need to back up the narrative. M&A professionals will expect to see three years of financial statements, utilizing Generally Accepted Accounting Principles. Before opening up your financial statements, take a close look to identify any current or future cash flow issues from the buyer’s perspective, and be prepared to answer questions about significant business issues. Through a sell-side quality of earnings, you can adequately anticipate and address any future buyer’s questions prior to meeting with an investment banker.
Your Deal Team
The decision to exit your company is the first step in a long process. Business owners considering a sale should develop a bench of qualified M&A professionals to provide business advisory services focused on reaching your objectives. The deal team should include a wealth advisor, M&A attorney, CPA, and investment banker. By developing these relationships early, your M&A professionals will understand your needs and objectives clearly and a well-established work style will be in place prior to the sale of your business. Much of the frustration and delay that arises during the diligence and documentation process can be avoided through careful planning and preparation.
Preparing for Due Diligence
More and more sellers are conducting a sell-side quality of earnings report. It is a dry run through the buyer’s due diligence process and helps uncover changes in your business. Your historical financial statements allow for a basis to project future earning potential of the business. A clear story of your company’s future earning potential, backed up by audited financial statements and Sell-Side Quality of earnings reports, will put you in a better position to withstand the rigors of due diligence. During due diligence the potential buyer will verify that they want to buy the business. Once they have determined that, they will be looking for items or issues that may justify lowering the offer price. Being prepared for this scrutiny is critical to maximizing the selling price of your business.
Are you considering the sale of your company or getting calls from interested private equity firms? Contact our accounting and business advisory experts today for a consultation.