Considerations When Selling Your Business: Due Diligence Series

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Numerous factors can negatively impact your company’s valuation when it comes time to sell. However, with careful planning, it’s possible to address some of these factors prior to marketing your business. One factor – known as “stroke of the pen” risk – determines if your company is overly dependent on one (or few) suppliers or customers for more than 20% of your sales. This also determines if your company is too reliant on a single industry for a large portion of your revenue.

Portrait of professional man using touch screen digital tabletIf any of these attributes exist for an owner contemplating a sale, it may be worth working to diversify the company, either through an acquisition or by deliberate efforts to expand the company to new sectors and customers in the years leading up to a sale.

In thinking about preparing to sell your company, there are several steps you can take in advance:

Professionalism of financial information

Privately held companies frequently manage their business on a cash basis. When the time comes to sell a company, particularly if the business may be a fit for a private equity buyer, it’s advisable to convert the accounting to an accrual basis. Private equity buyers model return expectations with accrual-based financials. Having this translation of financial information available will facilitate a buyer’s analysis of your company. In addition, it’s recommended that companies complete a sell-side quality of earnings analysis by a third-party accounting firm. A quality of earnings analysis provides prospective buyers with the insights investors want and facilitates an efficient diligence process.

Positioning for growth

Another area for consideration prior to a sale is avenue for growth. Entrepreneurs or family businesses often operate without taking on outside capital, due to risks. Owners should be prepared to articulate how you would recommend an outside buyer grow your business when given access to additional capital. Many financial buyers request roadmaps on how an owner would grow given more capital. Think about the following questions:

  • Are there products or services your customers have requested that you are unable to deliver due to lack of competencies or capital?
  • Would it make sense to expand to new geographies or vertically integrate into new areas?
  • If you had a deeper sales team, are there additional offerings that you could manufacture with your current team?

These are the types of questions to consider when positioning your company as poised for growth with a new owner.

Emotional preparation

The process of selling your company can be challenging. A buyer will look to conduct all manners of diligence on your business – not only financial, but depending upon the nature of your business, this can include environmental, legal, customer, supplier, processes and more. You will need to provide hundreds of documents to the prospective buyer, so it’s wise to get organized in preparation for the diligence process and to think through which team members should be included to support your efforts.

The sales process is a marathon, not a sprint, so you will need to plan for at least eight months of additional work to prepare materials to sell the company through to the final diligence activities and purchase agreement negotiations. This process can be stressful and feel personal. If the company represents your life’s work or even the life’s work of multiple generations, it can be challenging to see how outsiders value your company. It’s wise to leverage trusted advisors with experience in this process to guide you through the process and provide a buffer between you and the prospective buyers to maximize the outcome and ensure the process is efficient and fair.

To learn more about the resources we can provide sellers, please contact our team below. And stay tuned for the next part of this selling due diligence series.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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