As economic conditions have improved and the number of baby-boomers ready for retirement has grown, we have seen a dramatic increase in the sale of private companies here in Minnesota and in the United States. Interest rates are still near historic lows. Entrepreneurs who once said that they intended to work “forever” are now starting to rethink their objectives.
For any entrepreneur, selling their business is one of the most difficult decisions that they will ever have to face. Sometimes, external factors such as health or age play a factor. Family issues involving the children or other heirs can significantly complicate the process.
Even before you make the decision to sell, the next step would be to determine what you can do to maximize your company’s market value – by addressing weaknesses and capitalizing on strengths. Preparing a business for sale takes time. It might take years of planning to maximize your value. It can be assumed that buyers will do thorough due diligence and discover facts and circumstances that will affect sales price.
There are many factors that can affect the value of a company:
- Are its products and services reaching maturity? Growing revenues and profits command the highest values.
- Is the company’s industry a mature one or one that is changing dramatically?
- Is the company affected by today’s rapid changes in technology?
- Does it show a stable history of growth, profitability and positive cash flow?
- Are there adequate raw material and labor sources available?
- What does the competition look like?
- Will capacity requirements dictate higher capital expenditures in the future?
- How will a buyer measure the quality of the company’s management?
- Does the company have a strategic plan for growth and profitability?
One of the challenges you will face will be to reconstruct the company’s financials to paint a better picture of future performance. Entrepreneurs typically run their companies to minimize income taxes. In many cases, there are items that would not be considered ordinary business expenses. Most adjustments made to reconstruct income statements include:
- Differences in accounting for inventory or fixed assets
- Non-operating assets such as securities income or gain/loss
- Related-party transactions
- Non-recurring items such as litigation costs, unusual bad debts, or discontinued operations
As far as the balance sheet goes, it should be “cleaned up” for unrelated assets that a buyer may have no interest in. You might want to transfer real estate into a separate entity and lease it to the buyer at market rate.
You should consider obtaining professional advice to prepare the business for sale. It is best to invest in professionals who can help you get the maximum net sale price. Consider business valuation, investment bankers/brokers, and tax structuring advice as just some of the value-added services that can be obtained. A business will sell at its highest price if everything is in order BEFORE a potential buyer shows up. A few obvious tips:
- Keep financial reporting current, including budgets and forecasts
- Update corporate documents
- Document and evaluate systems, processes and procedures
- Provide up-to-date organizational charts and job descriptions
- Have your sales and marketing materials and product samples readily available
You will only get one chance to sell your company – and in order to maximize its value, you have to address weaknesses and capitalize on strengths. By considering these factors and suggestions, a business owner gives them self the best chance to get what they want (and deserve) from the sale of their company.
For more information about business valuation, contact Scott Hoyles, CPA, MBT, CGMA at (651) 483-4521.