EDGEMONT CAPITAL BLOG

Planning to Sell in a Few Years? Now is the Time to Plan

Middle market owners and executives might not want to contemplate an eventual sale during a time of growth, yet a successful exit demands years of preparations. Taking the right steps now can help owners get the right price down the line. Early preparation can minimize purchase price adjustments during due diligence and purchase prices almost always go down, not up. Here is a list of things you can do to prevent an unpleasant adjustment surprise.

Get Clear About the Numbers

Buyers pursuing a forensic accounting exam will look back at least three years, which means you must stay on top of what happens during the company’s growth phase. One must do more than just ensure proper revenue recording, but also ensure that unrecorded liabilities, such as vacation time and paid time off are accounted for. Tax noncompliance can cause a portion of the purchase price to be set aside. On the balance sheet, asset valuations require adequate reserves, and there must be enough cash to replace and service property and equipment.

Disclose it All

Even the strongest businesses have skeletons in the closet and the buyer’s due diligence team will uncover those skeletons. Savvy companies identify these issues early on and proactively address them. By disclosing them from the start, you can get ahead of those challenges, thus preventing downward price adjustments.

Choose the Right Buyer

Sellers must understand the different types of buyers and their goals. This allows them to focus their resources on maximizing the company’s value for the ideal buyer. Consider the following buyer types:

  • Strategic buyers seek growing profits, technological advances, brand recognition, and a strong market.
  • Financial buyers want free cash flow, strong management and operations, and growing revenues.
  • Internal buyers seek a company with strong financials, a good culture, diverse products, and solid balance sheets.

Do your diligence on a buyer to understand what they want and how you can deliver it.

Drive Value for Your Target Buyer

List three to seven items that will make the company more attractive to the buyer. For instance, a seller seeking a financial buyer might focus on cultivating profitability, defining a growth strategy, and building management expertise. One who seeks a strategic buyer might instead opt to enhance the brand’s market share and name recognition.

Know Your Walk-Away Number

Before trying to sell, know the market and know the value, net of tax, that you are willing to accept. Market conditions can affect your timing, but never negotiate without knowing your walk-away figure.

Don’t Neglect the Business

Selling a company is an exhausting process that can deplete resources and take away from daily operations. This is especially true for owners actively involved in the sale who also play a role in the business’s daily operations. Don’t allow a sale to derail your company and the deal you seek. Instead, consider hiring a deal professional, including an M&A attorney, CPA, and investment banker to lead the process and mitigate its potential harm to the business.

Consider Your Future

When you spend your life building a business, considering what comes next can be difficult. Take time to think about how the sale might affect your life. Are you ready to retire? Do you plan instead to start a new business? Being able to answer these questions can prevent seller’s remorse. You don’t want to appear uncertain about the deal, or send out emotional cues that undermine the transaction.

Most owners only get to sell their business once, so preparing for this once-in-a-lifetime opportunity can have far-reaching ramifications for your life, your finances, and the future of your company. Invest the time now and reap the rewards later.