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 company’s valuation 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.)
Financial Statements
The most important reporting you need is historical, externally reviewed financial statements going back at least 3 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 on whether to proceed to the purchase price negotiations stage based on these historical financial reports.
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 demonstrate sophistication and lay the foundation for negotiating the price of your company. The acquisition team will inevitably produce a forecast based on its 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 accelerate initial price negotiations. 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.
The Top 10
Consider providing lists of the top 10 customers and the products/services you sell, relative 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 before moving into the due diligence process, which will encompass your entire list of customers 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 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.
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 may change. 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 Google reviews or customer questions in a timely manner?
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 for each role. 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 begin learning about your privately owned business and how it operates, in order to properly value it.
If the acquisition team agrees that your key staff are, in fact, critical to business operations, part of the due diligence (DD) process will include drafting employee agreements to be signed at closing, along with the final Sale and Purchase Agreement (SPA). Timing your employees' awareness of negotiations is a delicate balance among you, the acquisition team, and the certainty of successfully closing the deal.
Market & Competitive Data
Third-party market analysis and competitor intelligence are often overlooked and can be among 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 and presentable to showcase how your business anticipates market trends and differentiates your products/services from 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.
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 building's lease structure is more of interest to the acquisition team, depending on your industry.
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 ready to provide context for the current situation.
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? Contact us today for a complimentary consultation.
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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