Chris Parisi is managing director of Dallas-based Allegiance Capital.
Whether you want to sell your company in a year, five years, even 10 years and beyond, there are five steps you need to take right now that will maximize your company’s value. These issues are critical. Proper preparation will enhance the value of your company, make the transaction flow more smoothly, and avoid pitfalls that often terminate transactions midstream.
1. Clean Up the Financial Statements
“Clean” financial statements doesn’t just mean that all the numbers add up and you know you can make payroll. Buyers expect detailed forecasts, budgets based on those forecasts, and a Quality of Earnings report that validates your EBITDA calculations. This includes cleaning up the balance sheet and operating slack, and eliminating personal expenses that have been paid for by the company.
There are even firms that provide temporary CFOs to manage this process and to prepare companies for sale. Investment banks often take advantage of those services to get a seller’s finances up to date and ready for detailed inspection by prospective buyers. Having great financials keeps the sales process moving smoothly. The opposite causes all kinds of delays, leading to deal fatigue on both sides and less likelihood of a successful transaction closing.
One of the biggest financial issues we often see is buyers who look at financial statements differently. They want to see how each individual product or service that you provide contributes to the overall success of the company. Often, owners just aren’t collecting detailed financial data and keeping records broken down to that level.
For example, if you operate a fleet that includes both long haul and local delivery, a potential buyer may want to see two separate sets of financials for each operation to determine which is operating most efficiently and contributes the most to the bottom line.
Take a look at your financials through a buyer’s eyes and make sure that you collect and analyze data the way an acquirer will in their due diligence.
2. Create a Great Management Team
Some sellers think that because the buyer is taking over ownership, they’re also taking over management, so the company’s current management team is irrelevant. That couldn’t be farther from the truth. Financial buyers, like venture capital funds and private equity groups, want to invest in companies, not run them. These investors realize the seller has created a successful operation and they need your team to maximize the return on their investment.
The investors may bring in some seasoned experts to add value to your board of directors, or provide a professional sales executive if you don’t have one, but they’re not going to jump in and immediately take over.
Strategic acquirers or corporations who purchase smaller companies operate the same way. They need your current management team to help transition your company and integrate it with theirs. If top management does want to walk away immediately, or in the near future, competent successors should already be chosen, groomed and in place, ready to take over to minimize disruption. Ideally, your company would have a well-developed executive team of competent professionals who are capable of working together as a team.
3. Have a Clear Strategic Focus
Your company should have strategic goals that are clearly communicated. Employees should know your goal is to become the #1 refrigerated fleet in your region, and how you plan to achieve that goal.
This is what Jim Collins, author of Good to Great and Built to Last, calls a BHAG: a Big Hairy Audacious Goal. His research found that companies with a very clear focus on the value-add they bring to their industry far outperform their competition. Your entire company should understand why it is the best at what it does. It should be no surprise that those companies are worth significantly more to buyers, as well.
If it’s important to the company’s health and growth to explore a new strategic direction, do so, but don’t try to sell your company at the same time. Buyers love a stable business plan that has been historically successful and is positioned to continue being profitable in the future. Have a clearly focused, executable vision and goal that everyone in the company understands.
4. Diversify Your Customer Base
Don’t put all your eggs in one basket. If 90% of your revenue comes from one customer, that is a big turn-off for buyers. Some trucking companies have great revenue numbers, but 90% of it is tied up in one government contract. Or, a majority of their sales comes from a single, locally owned business. Even the most risk-tolerant buyer doesn’t want to take the chance that the company’s revenue could disappear overnight.
If more than a third of your profits come from one customer, or one closely-related group of customers, you need to create and implement strategies to expand. Diversify your services. Secure new customers. It will make your company more valuable -- and more viable.
5. Know Your Personal and Financial Goals
Out of nowhere, a buyer offers $35 million for your trucking company. That’s a huge amount of money, but another company similar to yours just sold for $43 million, and you got a valuation recently that says you’re worth $40 million. Making snap judgments about any offer based on emotion or incomplete data is not wise or productive.
The real truth is that, until you have a willing buyer in front of you, the value of your company in the marketplace is exactly zero. So it can be very useful to sit down with a wealth management professional to clarify exactly what you want to accomplish when you sell your company.
You must determine whether it’s a yacht, or enough money to launch your next company, or a trust fund large enough that evens your great-grandchildren will be able to go to the college of their choice. How much money it will take to achieve those goals?
Then, with your goals, motivations and priorities clear, and with everything else in place, you’ll be in the best position to make a successful and profitable sale. You will understand “why” you are selling and helps you realize that the sale is helping you reach an important goal in your life.
As the Boy Scout motto emphasizes – “Be Prepared,” even when it comes to selling your company. Being prepared to sell improves the likelihood the transaction will be completed, reduces stress during due diligence, and enhances the value of your company.
Chris Parisi is managing director of Dallas-based Allegiance Capital Corp., a M&A investment bank dedicated to private middle market businesses.
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