What are the key value drivers when preparing for a business sale?
Several inter-related factors help determine the salability and value of a privately held business. A successful business sale depends on attention to each factor.
Ultimately, a business sale usually will be structured based upon a multiple of cash flow (either EBITDA or Discretionary Cash Flow). To facilitate a business sale, an owner must have all of the financial records segregated and in good order. At a minimum, buyers are interested in reviewing three years of historical financial statements and tax returns. Differences between taxable income and book income (e.g. cash basis vs. accrual) should be identified and explained. Identifying, explaining and eliminating significant discretionary expenditures along with unusual and non-recurring expenditures and losses also are important.
To better showcase your business to potential buyers, you should identify all products and services provided by your company, specific markets served and the future potential of each. You also should define the strategic advantages enjoyed by the company in your respective niche markets as well as comparative gross profit margins for each product and service with an emphasis on which of your customers are most profitable.
Future Growth Prospects
While buyers generally purchase a business at a price predicated on current and historical cash flows, the main impetus for their enthusiasm in purchasing the business in the first place may well be their understanding of how to grow the business at a rate that exceeds the norm for similar opportunities. It is important that you as the seller help define these growth possibilities and outline them in terms of product extensions, existing products to new markets, better market penetration, wider geographical distribution and any other distinguishing prospects.
In addition to concerns about how to transition the current customers in an acquisition, the buyer will be concerned about the depth, breadth and ability of your management team and their willingness to stay on board after the deal is consummated. You should prepare an Organization Chart which defines the direct reports to the CEO along with their titles, backgrounds and responsibilities. Ideally, you will build management profiles that provide brief resumes of each manager along with salaries and tenure with your company.
Many privately held companies are sold as asset sales (versus stock sales). Asset purchases allow the buyer to step-up the value basis of the purchased assets. This may generate future tax deductions for the buyer while concurrently avoiding unwanted contingent liabilities that result from a stock sale. As an owner, you should consult with a CPA and a tax attorney to understand the significant tax implications resulting from each scenario so you won’t be unpleasantly surprised at closing. Remember, it’s not what you get in gross proceeds but what you keep as net proceeds that matters!
Most owners prefer to be cashed out completely at closing with little or no owner financing. This is highly dependent on the cash flow character of your business including “add backs” to net income such as depreciation, interest and owner compensation. Most lenders typically shun discretionary add backs that fall outside these parameters. In aggregating the cash flow, lenders will consider: the required compensation of a new owner, the debt amortization period, debt coverage ratios and available collateral to determine the extent of financing availability.
Many items must be addressed in preparing for a successful business sale. If you spend more time today developing answers to these questions, you will receive dividends in the future with an easier due diligence period, a smoother close and less anxiety overall.