Positioning Your Business for Sale: What Privately Held Companies Often Overlook

Mergers & Acquisitions Part I

When a company is evaluating - and valuing - your business for purchase, they are likely looking at other potential acquisitions in your company's industry in parallel. You, as the owner of the company, take on the role of a salesperson - not of a product or service, but of yourself, your employees, your company, and your brand reputation.

Accurate and complete reporting not only increases the value of your firm - but also the value of you and your employees. To defend your valuation of your company and successfully position it for sale, you need to prepare eight key areas of your internal reporting. (This information is shared only after a confidential disclosure agreement (CDA) between the buyer and seller is executed.)

1. Financial Statements

   • The most important reporting you need to have in order is historical, externally reviewed financial statements going back a minimum of three years. Your historical financials will tell a story of the stability of your business, your firm's ability to manage cash flow and your year-on-year growth. Unless yours is a start-up firm, the acquisition team will base its initial decision whether to move forward to purchase price negotiations based on these historical financial reports.

2. The Business Plan (the Forecast for Growth)

   • Before you enter negotiations with a prospective buyer, you need a target valuation of your business and to know whether you prefer a stock or asset purchase. Providing a 3-5 year forecast for your business will show a degree of sophistication and establish the foundation for negotiating the price of your company. The acquisition team will invariably come up with their own forecast based on their synergy assumptions. If there is a significant gap between buyer/seller valuations, however, this step in the business planning process will defend your value positioning.

     The sharing of your business forecast may also: make the acquisition team's job easier; shape their thinking along the same lines as yours; and move the initial price negotiations along faster. Remember, the acquisition team - whether it's an in-house team or an outsourced investment banker - also has to sell this acquisition project to the acquiring company's owner(s) and they may have different degrees of familiarity with your industry and markets.

3. The Top 10

   • Consider providing lists of the top ten customers and products/services you sell in relation to total sales. Provide a list of your top ten suppliers as a proportion of total purchases. This is a brief snapshot of your business to show how diversified you are prior to moving into the due diligence process, which will encompass your entire list of customer and product/service sales, as well as your vendor spending. If you have significant customer loyalty and little customer turnover, providing the top ten customer retention trends over a period of several years makes a strong case for the sustainability (and value) of your business. It's a great metric for an acquisition team to have during the first phase of negotiations to present to their firm's leadership team.

4. Your Online Presence

   • Depending on the acquirer’s post-merger integration plan, your business's social media and website presence may not survive an acquisition or it may changes. However, your online presence - or an up-to-date, great looking website and fresh content on various social media platforms - gives a prospective buyer an idea of the value of your intangible assets.

     • Customer Loyalty and Brand Awareness: How many followers do you have? How many are actively commenting on and sharing your posts? Are people using your website to obtain relevant information? Do you have an e-commerce platform?

     • Brand Reputation: What are your followers saying about your business, your products and services? Are you responding to reviews on Google or questions raised by customers in a timely fashion?

5. Human Resources - Integration Planning

   • Whether or not you are planning to retire after the sale of your business, you should have a succession plan in place for your business. You also need to identify key staff members. Update your organizational chart with names, titles, key responsibilities, and qualifications with respect to their respective roles. You will want this document to underlie your negotiations as soon as a CDA is signed. Do your best to make your employees shine in the eyes of the acquisition team. They will appreciate the effort as they start the process of learning about your privately owned business and how it operates in order to value it properly.

   • If the acquisition team does agree that your key staff are, in fact, critical to business operations, part of the due diligence (DD) process will include drafting employee agreements that need to be signed at closing along with the final Sale and Purchase Agreement (SPA). The timing to make your employees aware of negotiations is a delicate balance between you, the acquisition team and the certainty of closing the deal successfully.

6. Market & Competitive Data

   • Third party market analysis and competitor intelligence is often overlooked and sometimes the hardest information to obtain in the private business sector. If you can, fact-check your own market assumptions and competitor analysis with third party reports. Keep this organized in a presentable manner to showcase how your business is anticipating market trends and differentiating your products/services relative to the competition. The third-party market data that corroborates your own serves as an educational tool for the acquisition team, even if they are in the same industry as you, and helps them to sell the acquisition of your company to their executive management team.

7. Plant, Property & Equipment (PP&E)

   • Is your property leased or owned? Have you had a recent appraisal done on the property? In what condition is your key equipment? Fixed assets will be analyzed further during DD, but it is ALWAYS good to have a current fixed asset list ready to hand to the acquisition team in the early stages of the negotiations - especially if that equipment is key to running your business. In some cases, the lease structure of the building is of more interest to the acquisition team, depending on your industry.

8. Legal Contracts & Intellectual Property

   • This is another area that will be closely scrutinized during the DD period, but, it is helpful to have an evergreen summary of patents, names of trade secrets (just not the details!), trademarks, etc. on-hand. Intellectual property is an asset that could help boost the valuation of your business - and therefore be a key selling point for the prospective buyer.

   • Review all your existing legal contracts to identify any that could be problematic or put your business at a disadvantage upon sale. If so, put a plan in place to mitigate these risks, or have a reasonable explanation to provide context for the current situation at the ready.

Next Steps:

Do you own your own business? Do you need valuation services? Are you thinking about retiring or transitioning into the next phase of your life? Do you need an investor or a partner company to take it to the next level of growth, but would like to stay on?

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Christie Solomon, MBA, established Elevate Next Business Consulting after ten years of broad experience in corporate operations and administration, including mergers and acquisitions. Contact us today for a complimentary session to see how we can help you position your company for sale.

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