Many owners do not consider the sale of their business – and hence, the business’ value – until they either get ill, have financial problems or decide they are now ready to retire. Given that many business owners run their businesses as lifestyle businesses – i.e., the company has the operational infrastructure, culture and style to fit their lifestyle – this often does not bode well for obtaining the best price for the business. There are a number of operational and financial considerations to review and put in place to ensure you get the maximum business valuation for your company.
According to an Ernst and Young publication, “reliable financial statements and accurate, timely reporting” greatly increases the financial attractiveness of a business. What does that mean? That means that you create monthly financial statements and review them for accuracy. It also means that your financial statements are audited (maximum benefit) or, at a minimum, reviewed by an outside auditing CPA firm. Small business owners are notorious for running personal items through their businesses – cars, travel, certain expenses. While some of this may be allowable for tax purposes, if this is not properly tracked and documented, you simply cannot expect someone to take your word for it that these are expenses that can be added back to that general term “owner’s cash flow”.
In addition, infrastructure is important. Who is running your sales? operations? finance department? Is it you or another owner or someone who will remain with the company after it is sold? Someone who is dedicated to that financial reporting and to assisting the company with strategic financial and operational decisions, such as a CFO or finance director, enables a potential acquirer to know that functional support is not only available during the lead up to the transaction for questions, but will also be available afterwards. If this person helped you get where you are in terms of financial systems and processes, then a buyer would love to continue to have this person on the team after you are gone. If you or a co-owner handles all the financial reporting via his or her own personal outside accountant, that relationship goes away once the company’s ownership changes.
Strong, fairly predictable cash flows and low capital expenditures (with no or minimal deferred capital improvements) also make the company more attractive for any relevant business sale or investment injection being considered. Strong cash flow signals liquidity and the ability to repay debt. This makes your company attractive to financial buyers will often use debt to fund part of the transaction. Strong cash flow also indicates strong infrastructure, systems and stability. Alternatively, it means cash is available to repay investors or buyers through cash distributions, so more options exist for an exit than simply another sale 5-7 years hence.
Exit Strategies: Preparing the Business for Sale: https://www.pwc.com/us/en/private-company-services/publications/assets/la-13-0194-tl-pcs-preparing-the-biz-for-sale.pdf
Ernst & Young – Preparing Your Private Business for Sale: 10 Tips to Help You Get Ready: http://www.ey.com/Publication/vwLUAssets/EY-Preparing-your-private-business-for-sale/$FILE/EY-Preparing-your-private-business-for-sale.pdf