Getting ready to sell your company can feel like a huge undertaking. “We put it off for years because it’s so time-consuming,” some clients confide. At Aethlon we’ve focused on five key areas that business owners should address before selling to position their company for success.
For simplicity, we refer to these as CLOSE:
- Clean Up The Financials
- List Future Growth Opportunities
- Organize a Management Succession Plan
- Seize New Business
- Establish Your Price
1. Clean Up The Financials
Financials need to be organized to clearly show the company’s successful track record and future growth opportunities. Buyers are often looking at a dozen different acquisitions at any one time, and they do not want to sift through poorly constructed financials. They simply move on.
While it is Aethlon’s job to help format your financials into an easy-to-read format, hiring an outside accounting firm to review, or even audit, your financials for the last three years before the sale process can get your financials in tip-top shape. Not only will an external accounting firm help organize the numbers, but they will also identify any potential issues that could impact EBITDA, such as accounting procedures that are not in accordance with generally accepted accounting principles (GAAP).
If financials aren’t compiled according to GAAP, a buyer will bring it up during due diligence. This may lead to financials being restated and an adjustment to the originally negotiated purchase price. The sooner you clean up financials, the better.
2. List Future Growth Opportunities
Buyers are most interested in the strength of your company’s future revenue stream, so if you can clearly define your growth opportunities and demonstrate that your future cash flows are repeatable and predictable, you can increase buyer interest.
The best way to do this is by examining your sales pipeline and current customers. We ask our clients to list their top 25 customers for the last five years and estimate what each customer could provide for future revenue. We request they do the same with their sales pipeline and identify which opportunities could turn into significant revenue. Having this analysis to share with potential buyers takes the guesswork out of the process and shows a clear path to continued profitability.
3. Organize And Build Your Management Team
Strategic buyers have executives who can run a newly acquired business, but not all private equity buyers have them, particularly those that are hands off. They will be looking for a company that runs well without the owner’s involvement. To avoid losing these buyers, build a strong management team that can successfully operate the company post sale.
We always ask our clients if they have a strong management team in place. If not, we advise they build one in advance of the sale process.
Showing the company runs well without the business owner’s involvement attracts more buyers. The entire team doesn’t need to be in place, but you should highlight your management plan with potential buyers.
4. Seize New Business
Even though buyers determine a company’s value based on future cash flows, they won’t pay for theoretical business opportunities. If you have an untapped customer segment, a new geography, and/or a new product idea, start pursuing those opportunities pre-sale.
You do not have to turn these opportunities into profitable revenue right away, but we recommend showing some measurable progress to get the most value in a sale. Measurable progress can include:
- business plan and timeline,
- patent applications,
- sales plans,
- market studies that demonstrate a path toward capitalizing on new opportunities.
5. Establish Your Price
One of the biggest hurdles in completing a sale can be a business owner who has an unrealistic price expectation. This is often based on assuming the most recent sale of another business in the industry is an accurate reflection of their own company’s value. The mistake here is thinking that businesses are all the same; The truth is that they’re all unique:
- Your company’s size, profitability and future prospects matter,
- the management team matters,
- long-term customer relationships matter.
Comparable deals can be a helpful guide, but the true value is what the market is willing to pay. We are firm believers in running robust sale processes to get a full picture of how buyers view your business.
This doesn’t mean you should go into the sale process without price expectations.
Establish your price based on what you think is fair value for your business. We will review the current industry valuation trends to determine if your fair value aligns with the general market. If it does (or the market is higher), it is probably a good time to sell. If your price expectations are higher than the market, it might not be the time to run a sale process. That is why establishing your price before the sale process begins is important.
The Benefit Of Selecting Your Team Of Advisors Early
Ideally, collaborate with your investment banker well before a sale. The process is more efficient when we are brought in early to assemble the financials, projections, write the Confidential Investment Memorandum (CIM) and populate the data room with company files. Tax lawyers and accountants are also best consulted early. There can be significant tax advantages to structuring the transaction a certain way, and oftentimes, these tax advantages can only occur if there has been careful planning.
To find out how Aethlon can help you prepare your business for a sale, contact Sima Griffith at 612.338.6065 or sgriffith@aethlon.com.
