Selling your business is an emotional experience. Business owners have poured countless hours into building it up and making it profitable. So when an owner (or group of shareholders) decides it’s time to sell, he is best advised to let someone else take charge. Regardless of whatever personal investment a business owner may have in the business, over the life of the business, he may not receive many offers for a purchase that make sense. That’s why it’s important to do everything you can to prepare the business to be sold.
Maximize value
The business owner wants the business to have as much value as possible before the business is “marketed” for sale. The most important items affecting the value of the business are its profits and cash flows. The higher the profits/cash flows, the higher the valuation. A business owner has two ways to increase profits/cash flows — increase sales and cut costs. Thus, the optimal time to sell the business would be when the business is generating its highest profits or cash flows. A buyer/investor will typically pay a “multiple” of these profits/cash flows when valuing the business.
Financial statements
A business owner will need to make sure he has reliable financial statements. While not a requirement, it’s better for a company to have its financial statements audited or reviewed by an independent accounting firm. In addition, as a separate exercise, business owners will need to “recast” their income statement by taking their after-tax net income and adding back all personal expenses, nonbusiness-related expenses or one-time nondiscretionary expenses in order to achieve an annual “adjusted” profit/cash flow that the business would have generated had it been operated as a publicly traded company for the benefit of shareholders. A buyer will typically want to look at three to five years of historical financial statements as well as a budget for the current year and possibly three years of projections.
Due diligence
Most buyers will want to examine the business inside and out. Buyers will have a thorough review of the business that consists of a due diligence request list that is 10 to 12 pages long and single spaced. It is best to plan to appoint someone within the business to be dedicated to generating the due diligence information. In getting ready to sell, a business owner should find a generic due diligence request list and begin to locate items on the list.
Hiring an investment banker
It is best to hire an investment banker to sell/recapitalize the business. The investment banker will play two roles for the owner. The investment banker will be advising the business owner through the entire business sale process. The investment banker will also create the “market” for the business to be sold/recapitalized. This means the investment banker will take the sale/recapitalization opportunity to a list of 50 to 150 qualified strategic buyers and private equity buyers, which will allow the best price/offer to rise to the top.
Hiring an attorney, accountants, other advisers
Other participants a business owner needs to consider in order to maximize after-tax proceeds are attorneys, accountants and other specialty advisers. The more complex the transaction, the more it makes sense for the business owner to go with a full-service law firm that has M&A transaction attorneys, tax specialists and real estate specialists. The M&A attorney will be used in drafting/negotiating the purchase agreements, noncompetition agreements, lease agreements and employment agreements. The accountant will be used in analyzing the deal structure to help negotiate and finalize after-tax proceeds. Ultimately, business owners are looking to do all items necessary that will increase the value of the business while reducing their risk in the transaction.
This article does not constitute legal or federal tax advice and is not intended or written to be used, and may not be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code.
For more information on preparing your business to be sold, contact John Zapalac at (713) 826-7773 or jzapalac@bicalliance.com.
