Spring can be one of the most exciting times of the year. Nature has sprung back to life – trees regain their leaves, flowers bloom, and a renewed sense of inspiration just seems to be in the air. For many business owners, this annual rebirth of optimism also stirs up some questions that may have been lingering for quite some time: is it time to think about the next phase for my business? Is it time to sell and build an exit strategy?
If this is a question that may have gone through your head, there’s no better time to start prioritizing and preparing for the future. And, if you’ve ever done any “spring cleaning” to declutter your house and get rid of the junk you no longer need, the process is not too dissimilar for a business owner. Getting to a successful deal starts long before any buyer ever comes to the table, and there are things you can do now to ensure a smooth and positive experience when the time comes.
Below are some initial thoughts to help you prioritize the next move in what could be a daunting process if you’re unsure how to sell a business.
1. Clean Up Your Financials
First, remember that preparing your business for sale could mean different things depending on the size of your business and the industry in which you operate. Similarly, the preparation will vary if you are just gauging potential buyer interest, taking active steps to determine your business’ value, or organizing your documents to begin conversations—often the beginning of a due diligence checklist.
Regardless of where you are within these options, there are a few key considerations to make sure your business is ready for forthcoming scrutiny by potential buyers.
Let’s start with having buttoned-up financials, which should cover the prior 3-5 years. If you don’t have these ready, that’s all the more reason to start now! Your financial statements do not have to be audited but they should be accurate, up-to-date, and professionally prepared by a CPA. Any anomalies should be understood and able to be explained easily by the seller, especially during a pre-sale audit.
Ideally, the financials should speak for themselves. If the seller is finding they have quite a bit of explaining to do, it may mean some of the older company “norms” for handling items outside the normal course of business need to be reworked. And – make sure you separate personal from business expenses so that buyers have a clear sense of profitability. This will help you maximize business value.
2. Solidify Your Team And Hire The Right Advisors
Any potential buyer will want to know that the people working for your business are committed and here to stay. After all, if all the staff leaves and there is no enterprise value left when you depart, the business could be worth nothing – and smart buyers recognize that.
Make sure you are keeping employees happy and doing all you can to retain them. This includes implementing retention plans and incentives to ensure continuity after the sale. Additionally, this also extends to assembling the right team of advisors. We first recommend identifying an M&A advisor who you trust. Of course, that’s exactly the role we are proud to play at Wood Creek Advisors! Alternatively, this could be an intermediary, broker or an investment bank with which you are comfortable. Equally as important, you will want to hire a great M&A attorney and a CPA who is familiar with business valuation and deal structures.
3. Get Your Working Capital In Order And Optimize For Profitability
We recommend that all sellers should be ready with monthly financials – not just annual numbers. This enables the buyer and seller to discuss “real time” updates to the trailing-twelve-month (TTM) figures and analyze how those results explain current and future business aspects. Also, whether the potential suitors are financial or strategic buyers makes no difference in how the numbers should be presented. Both groups need a clear understanding of the seller’s financial foundation as this is the backbone upon which all other conversations will rest.
When it comes to optimization, this is also a good time to trim non-essential expenses so that you can boost margins leading up to the sale. Make sure you are conscious of taking on new debt unless it meaningfully adds to your story and is important for your exit strategy and could help increase sale price.
These are just some of the considerations I tell folks who feel the spring air and start to think about what’s needed for the sale of their business. As I’ll cover in future articles within the “preparing for a sale” theme, business owners also need to do their homework to find the right buyer, create a strong narrative, and address any outstanding legal and compliance issues—core components of a smart business succession planning process.
Having advised business owners for decades, we’ve seen what happens when folks are prepared and when they’re not. Hopefully, these are some helpful reminders about what steps to prioritize so that you can get the best deal for what you’ve worked so hard to build during your journey through the mergers and acquisitions (M&A) process.
