Seven things you must do before selling your company: part 3
Editor’s note: This is the third of a five-part series on preparing yourself and your company for sale to maximize your outcome. Read part one and part two.
Preparing your company for sale includes more than just improving the value drivers in the business. There are a number of areas a prospective buyer will review during the sales process that are not readily visible when they make the initial offer. These areas will be looked at in depth during due diligence.
Due diligence is an opportunity for the buyer to look deep into your company and review all information, processes and structure of the company that was presented during the first part of the sales process. This is where those areas that were neglected over time come back and can negatively impact the price you get for your business. These areas make up the value detractors.
5.) Manage the Value Detractors
The value detractors include areas of your business that are reviewed during due diligence by the buyer and can represent risk to the new owner. Risk comes in many forms and can include too much revenue concentration in only a few customers, aging IT infrastructure, or lack of process in the organization. These are only a few areas that can cost a new buyer additional money after purchasing the business, or can represent risk in the revenue stream.
Most offers are based on a multiple of the free cash flow in the business, and any risk to the revenue can impact the purchase price a prospective buyer is willing to pay for a business. You need to objectively review your operation and identify those areas that a buyer would view as risk to their investment.
A.) How secure is the revenue in your business with you gone? Many business owners are the key interface with customers, and when gone represents risk to someone else running the business. In this example it is critical that you have already transitioned many of the key sales activities to others in your company, so you can demonstrate your lack of involvement in the day-to-day sales efforts.
B.) Do you have a procedure manual that outlines the processes of your organization, or do key employees have the process in their head? The risk to a buyer in this case is from employees leaving or out for extended periods of time. Focus efforts on developing a procedure manual that outlines the key areas in your business and defines the process flow of your organization. It should be written in a way that would allow a new employee or temp to read a section as it relates the job they are doing and perform that task with some guidance. A buyer will look at the procedure manual as a roadmap to provide direction in the operation.
C.) Is your IT infrastructure outdated? The buyer will look at this area as an additional investment they will need to make within the first 12 months of purchase. Have your IT infrastructure reviewed approximately 18 months before going to market and update the equipment and software that is outdated. By managing this upgrade far enough in advance of taking your company to market allows you to make smaller monthly investments, as opposed to one large investment. This approach helps you manage your cash flows during the time leading up to your liquidity event.
D.) Too much revenue in too few clients. You have a problem if only a few customers make up 10% t0 15% of your total revenue. This lack of diversity represents risk to the new buyer in the security of the future revenue and cash flow in the business. This is also a difficult item to fix in a short time frame. The only solution is to increase sales with other customers to lessen the impact of the large customers.
These are only a few areas to review and fix prior to going to taking your company to market. By reviewing those areas in your business that represent risk to an outside buyer, you can be prepared for the due diligence process and maximize the value you receive from the sale of your business.
Coming up: Ready your business for market by getting your house in order and managing through the process.