Growth from the Ground Up

Article by:

Stephen Goldberg

EO New Jersey

Stephen brings more than 20 years of merger and acquisition experience to the helm of Sun Mergers & Acquisitions. In addition to his work as a certified business intermediary, frequent lecturer and writer on merger and acquisition issues, Stephen has personally helped 200+ business owners of entrepreneurial mid-market companies implement successful business sale transactions. You can reach Stephen at [email protected].

When it comes to owning a business, nothing lasts forever. Regardless of industry, every business owner will inevitably face the possibility of selling his or her business. Based on my 25 years of experience handling the sale of privately held companies, I’ve discovered numerous ways to maximize the valuation and marketability of a business. Here are 10 proactive steps to consider before beginning the business sale process:

• Recast the Financial Statements
  A company’s financial statements are typically prepared with a view toward minimizing burden. This tends to be at odds with what a business owner wants to show to a potential buyer in the context of a business sale. To enable a potential buyer to "read between the lines," the financial statements must be "adjusted" to reflect the true profitability and discretionary cash flow that would be available to a new owner. I encourage my clients to analyze the general ledger and identify all expense items that can be restated or adjusted, thereby maximizing the price a seller will receive for the company. In a recent client transaction, the business owner achieved an estimated US$3 million in additional valuation by identifying creative add-backs for buyer consideration.

• Get an Independent Valuation
  An independent valuation enables a business owner to get a sense of a realistically achievable value and confirm in advance whether or not it makes financial sense to sell the business. If the lowest price that a business owner would be willing to accept for the company is well above what a potential acquirer would realistically pay, it is essential to be aware of that information before trying to sell the company. This step can eliminate time wasted on the business sale process. What’s more, properly understanding valuation at the outset will also prevent "leaving money on the table" by undervaluing the company or losing qualified acquirers by seeking an unrealistic price.

• Consider the Tax Implications
  It is crucial to understand the tax implications of a sale in advance. This will provide a realistic picture of the net-after-tax yield and help determine the most advantageous way to structure the sale for tax purposes. For example, advance recognition of the tax implications of a "C" corporation requires that negotiations be positioned toward a deal structure that would minimize a seller’s tax exposure. Many of our clients whose companies were "C" corporations were able to achieve an additional 25 percent after-tax yield because we informed acquirers in advance that a stock-sale structure was a requirement.

• Develop a Growth Plan
  A well-thought-out and realistic plan for growth can greatly enhance the value of a company. It serves as a roadmap to expansion opportunities that a new owner could exploit with additional capital or other resources. Based on my research, the plan should assume that significant capital resources will be available after the sale and identify areas where historic sales were constrained due to capital limitations. It is likely that the acquirer will be better capitalized than the current owner and have enhanced capabilities to act on these opportunities.

• Address Key Dependencies
  In my experience, reducing key dependencies in a business will serve to increase the marketability and value of a company. Three key areas include customers, vendors and employees. Customer dependency exists when a high percentage of the company’s revenue is derived from a few large customers; vendor dependency results from difficulty finding comparable vendor replacements; and employee dependency exists when the business is highly dependent or held hostage by key employees or the existing owner. These dependencies create significant risks for an acquirer and can have a negative impact on valuation.

• Look at Third-Party Financing
  I have found it important to ascertain in advance the likely level of financing available to an acquirer. This will help qualify potential buyers as serious prospects and determine if the necessary capital will be available to consummate a transaction. Not being armed with this knowledge in advance leads to wasted time and jeopardizes confidentiality with unqualified acquirers.

• Carve Out Excess Assets
  One method to increase a seller’s total financial yield from a transaction is to identify excess assets that can be converted into cash prior to a transaction without adversely impacting the business. One of my clients was able to reduce excess inventory by approximately US$750,000 without impacting the ability to service their clients. Converting the "excess" inventory to cash prior to the closing enabled him to significantly increase his total financial yield from the transaction.

• Research Likely Acquirers
  Advance research within an industry can determine if it makes sense to approach companies in a related business seeking additional sales or territories. These "strategic buyers" may have a strong desire to acquire a related business as a means of growing through acquisition, or because they may recognize the synergies that will result from the combination of the two companies. By identifying likely prospects, the search for an acquirer can be more tightly focused in a direction that can maximize the overall deal value.

• Recruit a Team of Professionals
  Before entering the uncharted waters of selling a business, selecting the right team is imperative. This includes a qualified CPA, an attorney with a background in corporate transactional work and an experienced mergers and acquisitions intermediary. All parties should meet in advance, since their efforts will need to be coordinated later in the process. This will ensure that all team members are on the same page and have a clear understanding of the goals and expectations of their mutual client.

• Check the Current Sales Performance
  An often overlooked area that has a major impact on the marketability of a business is the company’s current financial performance. The 12-month period during which the sales process takes place is a decisive one. If sales performance deteriorates during this period, marketability and value will be negatively impacted. I’ve learned that it’s important to focus my efforts on whatever can be done to maintain consistent (or improved) sales, margins and profits during this period.