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When the time comes to sell your family business, it pays to ensure the company is transaction ready. The following key value drivers will help prepare the business for sale, increase the price that buyers are willing to pay, and increase the likelihood of a successful close:
Make Yourself Redundant
If your business requires your constant input and management, how will it operate after you sell it? A buyer will see this as a challenge; you need to provide a solution, either by remaining on with the company, or by finding a replacement. The earlier you hire a strong, professional management team that allows you to step back from the company, the better. This will allow for a track record of success to be established before a sales process begins and a smooth transition after you sell.
Reduce Customer Concentration
High proportions of sales revenue concentrated in a small number of customers presents a risk for a buyer. If one, or worse, two customers are lost, how will that impact earnings? This risk will influence the investment thesis for buyers and thus the price they are willing to pay for your company. Driving sales with new customer groups will help reduce this business risk and help to bolster the organic growth story during the divestiture process.
Separating Family Issues and Business Issues
Are there personal expenses or assets held by the business? When it comes time to sell, adding these expenses back to earnings, driving a story of higher profitability, and justifying the removal of redundant family assets can become a point of contention with prospective purchasers. The sooner you remove these items from the business, the less they will muddy the waters at the time you choose to sell your business.
Ensure Contracts are in Place
Buyers will focus on important contracts such as those with customers, suppliers, and landlords. Are the contracts in place and are they transferrable if the business is sold? These questions drive certainty around continued revenue streams and costs after the sale of the business. Agreements based on an owner’s relationships with customers and suppliers but that are not formally contracted increase the risk profile for the purchaser and lead to lower pricing and reduced certainty of closing.
Invest in Quality Financial Information
The availability of accurate financial and operating information is critical for potential buyers understanding your business. Availability of timely schedules such as revenue and gross margin by customer and detailed and summary monthly schedules will provide valuable insight for a prospective purchaser. The investment in accounting and other information systems that drive these reports and help manage the business should happen early, as it takes time to properly implement them. Investing in an annual audit of financial statements provides further credibility to the story being presented to buyers, drives higher pricing, and increases the likelihood of closing a transaction.
Understanding and addressing the key deal drivers identified above will help ensure that your transaction will be ready to close when you are.
This article was co-authored by Aleem Bandali and Russell Henderson.
For more information, contact Russel Henderson, CPA, CA at 604.685.8408 or [email protected]
Related Topics:Selling a Business; Transactions; Small Business
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