A recession is coming. Not to be an alarmist, but history has proved that there is always a recession on the horizon. And considering that we’ve been riding a wave of prosperity for longer than the historical norm, a recession is likely to be coming sooner than later. If you’re a business owner thinking of selling, have you considered that your window of opportunity is narrowing? Now might be the time to take action.
The environment is currently very attractive for sellers of well-managed private businesses in most industries. Valuations are high, financing for transactions is readily available, many terms are favorable to the seller, there is a large universe of buyers looking to acquire and a shortage of good companies to meet the buyer demand. These dynamics have created a strong market for business owners looking to exit. At some point, the business cycle will change and the economy will slow and with that, the prices buyers are willing to pay for private businesses will go down. When selling a business, much like when selling a stock, the business owner should sell when valuations are highest to maximize the return from all the years of investment and work building the business.
Even though the market is very strong for well-managed businesses, it is not easy to complete a sale transaction. In today’s environment, buyers spend a lot of time and resources investigating potential opportunities and are very diligent in their approach to completing a transaction. Not all companies are equal in terms of valuation metrics and if a business owner wants to maximize value when they sell the business, they must take steps to prepare the business for sale. A buyer wants to be comfortable that the acquisition they make will generate the required return and wants to minimize the risk of not achieving the required results. The seller’s thoroughness in preparing for the sale can go a long way in increasing a buyer’s comfort level with the transaction.
One way to increase the probability of a transaction being completed is to prepare the business for marketing. A key element of this phase of the transaction process is for the seller to prepare for the sale from a financial perspective prior to talking with potential buyers.
Financial statements are a window into the financial performance of the business and reflect how well-managed the business is. Strong financial performance supported by high quality financial statements provides a solid foundation to approach buyers and gain strong momentum in discussions with buyers. High quality financial statements will make your company stand out from other companies. Detailed financial information may be the most important documentation in the sale of your business. The result will be more interest in your company, a higher probability of closing a sale, a higher valuation and friendlier terms to the seller.
Low quality financial statements can be a significant roadblock during a transaction. If a buyer has a large number of questions when looking at the financial statements, it will give them pause about pursuing the acquisition or may result in a lower sales price or more onerous terms. Even if a seller is able to generate offers for their business without quality financial statements, the offers may be withdrawn during the due diligence process by the buyer. Items such as not accounting for inventory correctly, capitalizing versus expensing expenditures properly, and not making proper accruals are just some of the issues we have seen cause lower valuations for a business or cause a deal not to happen at all. Additionally, the existing financial reporting may not provide all of the information buyers will want; you may need to add to your financial statements. Gathering, updating and preparing financial statements can be a long process. Take the time to do it well and you will likely see increased returns.
Woodbridge Merger and Acquisition Advisors recommends business owners take the following steps in advance of selling their business to create confidence in the presentation of the financial statements for the business.
1. Have your financial statements audited annually. Audited financial statements might not be a necessity for the current owner of the business, but new owners place a large value on audited financial statements. Any cost a business owner incurs for audited financial statements will be more than offset by a higher sales price upon a sale of the business. A good rule of thumb is to start the audit 2 years before you decide to sell the business.
2. If the financial statements are not audited, analyze the statements relative to Generally Accepted Accounting Principles. (GAAP) GAAP statements provide standards and conventions to guide how financial statements are prepared and presented. If a business owner does not have GAAP statements, an analysis should be done as to how the statements are prepared relative to GAAP standards and this analysis should be shared up front with potential buyers and included in any marketing materials provided during the sales process. This analysis should not be left until the due diligence process where it could create uncertainty on the buyers’ part and cause them to not proceed with a transaction.
3. Do everything to maximize earnings. Ultimately, any valuation will be predicated on the cash flow the business generates. Making sure proper accruals are being made and accounting properly for capital investments made in the business are important. Buyers want to know with clarity what types of returns the business historically generates on the investments made and what future growth prospects look like. Growth in earnings and high returns on invested capital results in higher valuations by the buyer. Thus, more earnings historically and in the future will result in a higher price being paid by the buyer.
The starting point for any negotiation between the buyer and seller of a business is the financial statements. When financial statements project a high level of clarity with sound accounting practices, buyers feel confident in moving forward with a potential transaction and there is an increased probability a deal acceptable to both parties can get done. The right time to sell a business is when the market and the buyers are ready. This translates to the seller needing to be poised to sell at all times. If a seller runs the business with proper accounting methods, then they are always ready to take advantage of a favorable market and sell their business when the environment is right to maximize the terms of a sale.
If you are considering selling your business, it’s equally important to identify the legal ramifications of a sale. How will the sale impact your employees, your real-estate holdings and capital, your investment portfolio, taxes and personal finances and your estate plan? Sanford, Pierson, Thone & Strean, PLC recommends that you include your attorney throughout the sale process to identify opportunities and issues and to develop creative solutions to best meet your needs.
Steve Haas is a partner at Woodbridge Merger and Acquisition Advisors, which provides investment banking services to private businesses. Services provided include representing sellers and buyers of private business and structuring financings. Mr. Haas can be reached at .