Preparing Your Business For Sale

What follows is from our April 2006 newsletter to our friends and clients:

We appreciate the opportunity to stay in touch with you.  Colorado’s economy continues to improve—and that helps business values.  We hope these insights on preparing your business for sale will help you take advantage of this trend, when and if you decide to sell your business.

Basic Steps for Preparing Your Business for Sale

Step 1. Valuation       Step 2. Financial Information         Step 3. Physical Presentation

Step 1: Valuation—Maximize Your Company’s Value

The goal of any seller is to maximize the after-tax value of their business.  The first step in maximizing that value is to understand what it’s worth today, and what that means for achieving your goals for value when you sell.

Some of the factors we consider when performing a business valuation:

• What is the company’s Adjusted Cash Flow or EBITDA?
• What is the condition of the assets?
• How does your company’s cash flow compare to others in your industry?
• What is the inherent risk in your business?
• How is your specific business trending?
• How will a buyer perceive the return on their potential investment?

When the time comes to sell, it’s an unfortunate fact that a business is often worth less than what an owner had hoped for.  This can be a surprise that dramatically affects plans for retirement or pursuit of new opportunities.  The good news is that you can have a dramatic impact on your selling price later, if you focus now on factors that affect value.

Step 2: Prepare Quality Financial Information

A lack of quality, dependable financial information is the single greatest obstacle to getting a business sold, let alone getting the highest price possible.  Some of the financial information factors that affect value and salability:

• Financial statements should be prepared monthly, or at least quarterly.
• Statements should be prepared by a professional accountant or outside service on a timely basis.
• Financial statements need to reconcile to tax returns.

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Step 3: Improve Your Company’s Physical Presentation

            When you sell a business, regardless of your industry, you become a retailer, and potential buyers are your customers.  You must pay attention to the physical impression your business makes on these customers:

• Your facilities must be in good condition inside and out—evaluate carpet, paint, and overall organization; get rid of debris and fix broken windows, signs, lights, etc.
• Repair, replace or dispose of any broken equipment.
• Remove unprofessional items from inside the business.

Simple organization and a little paint can add up to big bucks at the closing table.

A successful sale takes a good plan, and buyers need to be comfortable with what they are buying.   A business with quality, dependable financial information, and that appears organized and effective, will always look like a better investment.  You should also consider documenting key processes and jobs in an employee or business operations manual.  This will help a new owner’s confidence in their ability to be successful, and, ultimately, that’s what you’re selling—an opportunity for success.

Is It Time to Sell?

What follows is from our July 2006 newsletter to our friends and clients:

Last time around we talked with you about critical steps in preparing your business for sale.  Now it makes sense now to ponder whether or not current market conditions make it a good time to sell. 

Is It Time To Sell your Business?

The years 1998 through 2000 were heady times.  The Dow Jones Industrial Average hit an all time high of 11,722 points, Internet millionaires were popping up everywhere, and the number of announced mergers and acquisitions in the US exceeded 11,000 per year. 

The recession of 2001 followed by slower economic growth put a damper on this activity, but 2006-2007 is shaping up as one of the best times in years for selling your business—and maybe the best time for years to come.

Recent Market

Until 2003, the market remained flat, and valuations were substantially lower than they had been in the late nineties.  Sellers didn’t want to sell at lower valuations, and buyers were hesitant to buy at the higher prices quality sellers were willing to accept.  For mid-market firms, those valuations were typically in the range of six to eight times EBITDA (earnings before interest, taxes, depreciation and amortization).

Over the last two years, however, the number of M & A deals has increased across the board, and valuations have begun to recover.  Some larger, mid-market deals in the range of $70MM - $200MM have even hit multiples as high as 9 times EBITDA.

Current Market

According to the Wall Street Journal (June 27, 2006 ed.), “2006 [is] on pace to be the most active merger year ever, with a tally that could top $3.5 trillion.”   Even though that number tracks mainly larger deals, it’s good news for sellers of all sizes.  More buyers, more activity and more confidence boosts values and increases the chance to get deals done, whether you’re a $25MM distributor or a $100,000 ice cream shop.

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Although there is still plenty of money “sloshing” around out there, rising interest rates and concerns about the course of the economy over the next two to three years may represent clouds on the horizon.  Amid rising interest rates and inflation, continuing problems in Iraq, North Korean missile tests, high oil prices and uncertainty over Iran, not to mention moves towards labor protectionism and an increase in the minimum wage at home, there is plenty to worry about.

As interest rates rise and it becomes more expensive to service acquisition debt, valuations will tend to fall.  If the economy slows, both top and bottom line may be affected, further reducing business values. 

To Sell or Not?

Working with--and Choosing--a BusinessIntermediary

What follows is from our October 2006 newsletter to our friends and clients:

In each of these quarterly letters I try to focus on some aspect of the business selling process that may be helpful to you someday.  I’ve touched base with you on preparing your business for sale (April 2006 ed.) and the outlook for selling now and into next year (July 2006 ed.).  At this point, I’d like to shed some light on what you should expect when you engage a professional business intermediary to help you sell your company.

Business Valuation

Understanding the value of your company is one of the most critical steps in the selling process.  You want an intermediary who understands accepted valuation approaches and how to apply them to your business.  Anyone can tell you what you want to hear, simply to get the listing.  What you actually want and need is an objective, honest assessment that helps you understand what your company might bring in the marketplace.  Anything else is just a waste of your time.

Preparing for Sale/Going to Market

In April I touched on issues around preparing your financial information and physical premises for sale, but I want to touch briefly here on “packaging” your company for sale with a professional Confidential Business Review (CBR).

At ProForma West, we have developed one of the top CBR’s in the marketplace.  A CBR is the “book” on your business and contains much of the detail that we allow qualified buyer prospects to review.  It contains background and financial information, as well as our analysis of the factors that make your company a valuable and desirable candidate for acquisition.  A CBR has to be done right.  The financial analysis must be accurate, and it must be professionally written and inspire additional interest.

Fees and Commissions

            It’s natural and reasonable to ask what fees are associated with selling your company.  Different brokers have different philosophies as it relates to commissions

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and up-front fees.  Some have very high up-front fees regardless of the size or complexity of your company, and have a bare minimum requirement of $10,000 or more at signing.  At the other extreme, some brokers pitch that they don’t charge an up-front fee at all, and should “only be paid on sale.”  Unfortunately, their effort often matches their pay and your business is treated like a commodity.

The right answer for fees lies between these two extremes.  Intelligent valuation work, a thoughtful marketing plan, and quality deal management are time consuming and valuable.  A modest commitment fee at signing combined with a reasonable commission at closing makes sense and is in everyone’s best interests.

At ProForma West, our fee structure at signing and closing is always competitive with the marketplace.  Fees will be scaled and appropriate for your business, with an emphasis on pay-for-performance commissions at closing. 

Deal Makers, Not Deal Breakers

Deal management is where the rubber meets the road.  A good intermediary is resourceful, flexible and solution oriented.  The best price in the world doesn’t mean a thing if the deal can’t be structured and financed successfully, and then taken to the closing table.

Knowledge. Experience. Results.TM