Posted: September 04, 2013
Another step in the prep to sell your businessJon Wiley
Having the proper financial management and operations in place might not increase your company’s valuation, but it can definitely keep it from being discounted.
When I speak of operations, I’m not talking about running the company as efficiently as possible. This, of course, will absolutely add to your valuation. The same multiple applied to higher earnings will lead to a higher valuation. The operations I am referring to have to do with lowering the risks that a buyer will be taking on with the purchase of your company.
Management – Do you have a full management team in place? Most private equity buyers expect to have a complete or mostly complete team in place. They might be willing to help fill in one or two key positions but if the owner/CEO is also the CFO, COO and heading up the sales team, it is typically not a positive for buyers. Begin filling out the management team several years before you plan to sell so that the key team members will have time to learn the business and add value.
Legal – Make sure all of your contracts are reviewed and kept up to date. You don’t want to find out during due diligence that you have defaulted on one of your key contracts and weren’t aware.
Policies and procedures – Do you have policies and procedures? If you don’t, you should. Do you have a board of directors? Again, if you don’t, you should. And your policies and procedures will likely spell out how often the board should meet. Make sure the board meets according to plan and that minutes from those meetings are kept. Review the procedures regularly to make sure you are not deviating from the plan. And if you are, either get back on track or change the procedures to reflect the new method of operations.
Your company’s financial operations are going to vary depending on the size and complexity of your business. But prior to selling the business, it is essential to make sure that this area is being handled correctly.
Personnel - Make sure that you have a competent CFO preparing your internal financial statements using software suitable for a business of your size. If you don’t need a full time CFO, there are companies that will handle this on an outsourced basis.
Outside review – Third party reviews and audits are going to cost additional money but they will give buyers additional peace of mind. If there are questions about the validity of your numbers, buyers are going to estimate on the low end. And if the concerns are large enough the buyer may pass altogether.
The financial and operations issues above are items that are often uncovered during due diligence. The more questions that arise, the more likely buyers will be to renegotiate value (and not in your favor). The best plan is to take care of these items before you even begin the process of selling your business. Some additional care and planning now can keep you from taking less for your company when it is time to sell.
Jon Wiley is a Managing Director in the Denver office of Hunter Wise Financial Group. Hunter Wise is a national investment banking firm providing institutional financing, merger and acquisition, divestiture and advisory services, to middle market companies in a broad range of industries. Contact Jon at firstname.lastname@example.org or 303-833-1131.