Three ways to prepare your firm for sale

Business owners need to maintain proper reporting and financials, build a forecast, and build trusted relationships.

By Neil Churman, 7 Mile Advisors July 13, 2018

Typically when homeowners decide to put their houses on the market, they typically touch up the paint, clean the carpets, and make sure the landscaping is tidy. Similarly, when entrepreneurs decide it’s time to sell their businesses, preparing in advance can go a long way toward enhancing value and ensuring a smooth transaction process. Below are three ways business owners can build enhanced performance and value ahead of a sale.

1. Emphasize reporting

It should go without saying that having accurate and complete financial statements is a must when pursuing a sale. Business owners should make sure all tax filings, financial statements, and internal reports are in order and all numbers are accurate. Having an audited set of financial statements for at least the past 3 years (and better yet, 5) will provide potential buyers with a higher degree of assurance on the company’s reporting, as well as help smooth the due diligence process.

Beyond financial statements and tax filings, business owners should create a management dashboard that reports key performance metrics weekly and/or monthly that can track trends over time. This not only provides historical information that will prove valuable in demonstrating performance, but it also sends a message to prospective buyers that management is running a tight ship with a keen eye on multiple aspects of the business.

2. Build a (realistic) forecast

Fundamentally, a buyer should be concerned not with where the business has been, but where it’s heading. Value in mergers and acquisitions (M&A) comes as a result of cost or revenue synergies, improved performance, or enhanced growth post-transaction. No one’s crystal ball should be clearer in terms of predicting a firm’s future performance than the company’s management. Owners need to build a realistic and supportable forecast to demonstrate their best view of future revenues and cash flows. Providing potential buyers with a forecast that is believable and achievable can help to enhance value in the deal.

If the forecast can be supported by a history of recurring revenue, signed contracts backlog, or realistic project prospects, a potential buyer is more likely to buy in. Owners should produce a regular pipeline report that tracks signed backlog, identified project opportunities, and prospective long-term sales.

3. Circle the wagons

A business owner shouldn’t plan to go it alone when pursuing a sale. The process is often complex and time-consuming, yet a cadre of trusted advisors can make all the difference in making a deal successful. An owner should look to their certified public accountant and tax advisors to maintain good financial housekeeping and help evaluate potential tax ramifications. A good attorney with M&A experience will be critical in identifying and managing risks and reviewing and negotiating the legal aspects of both the purchase agreement and employment agreements for key management.

A private-wealth manager can help individual shareholders manage and make use of the sale proceeds. An investment banker will be key in repackaging financials to clearly show financial performance, properly positioning the business in the market, engaging the right group of buyers, negotiating the business terms of the transaction, and managing the overall deal process. Identifying these individuals well ahead of a potential transaction and building trusted relationships with them will better position an entrepreneur to make their sale a success.

Considering these factors will set up building owners for success when it comes time to determining the future of your firm and the optimal time when buyers would be interested in acquiring the business.

Neil Churman is director at 7 Mile Advisors. This article originally appeared on the 7 Mile Advisors blog. 7 Mile Advisors is a CFE Media content partner.