(Hint: The same things that attract buyers make a well-run company.)
By Greg Wallis, Virtual CFO, Summit CPA Group, A Division of Anders CPAs + Advisors
When you’re selling a business, you’re selling potential. To establish an intangible like a revenue stream, you need more than a rosy forecast. If a buyer finds a single dent in its credibility, you could scare them off or end up with a lower offer.
In my experience as a Virtual CFO (VCFO), sellers fall into one of three buckets:
There’s the seller who has everything dialed in,
The seller who is flying by the seat of their pants, and
The seller in the middle who has taken a lot of the right steps but not all of them, and not all the way.
The dialed-in seller will be ready to fine-tune every little detail the minute they get the letter of intent (LOI) in hand. Their due diligence process will take a few weeks, and they’ll be confident that at the end of it, the offer price is exactly what they were expecting.
The seat-of-their-pants seller panics at the sight of the LOI, because at that point it’s too late. There’s no time to put in all the work it will take to get everything together to respond in a punctual way to their requests. And when you drag your feet to come up with every single answer (and come up with something half-baked in the meantime), you’ll never get the highest and best offer.
The in-between seller is probably the most common: Unless you’re very disciplined about staying on top of every single aspect of your business, which usually requires excellent delegation skills, there’s going to be a thing or two that slips through the cracks.
Here’s what to do to make sure you’re dialed in, way before the LOI reaches your desk.
Keep your balance sheet clean
When you sell your business, you’ll go through a due diligence period when a third party, like an investment banker, is going to scrub your books. You want to avoid any surprises during this period because that’s when your buyer’s accountants are going to try to knock down the purchase price.
Make sure that you’ve always got a good balance review going – ideally monthly or at least quarterly – so that accounts are reconciled to know what assets have value, and you know exactly what your liabilities are capped at.
The cleaner your books are during due diligence, the higher the multiple they’ll offer you because they’re assuming less risk. If you must scramble to throw together Excel sheets, their confidence will take a hit, and so will your purchase price.
I've seen deals fall apart because every time a question gets asked, the answer is, “Oh, let me go look into that,” and then a week later they come back with something flimsy. Having documentation at your fingertips means that you’ll have a good answer for whatever question comes your way. If they ask, “What happened in January 2017,” and you can say, “No one could work because we had blizzards in our main locations,” it shows you’re a type of business that is worth acquiring.
They’re not just looking for a good answer; the fact that you can answer quickly and competently goes a long way in showing you know what you’re doing, and they can feel comfortable making you a strong offer.
Document everything (and know where you put it)
Beyond the balance sheet, during due diligence, the other side will scrutinize your legal agreements with your clients, your employees, and your contractors. If you’ve got equity sharing programs with your employees, or any clauses that get triggered by a sale, they’ll want to see that, too. They’ll dig into your HR policies to make sure they’re lined up and organized, and they’ll dive into your legal history to see if you’ve had any lawsuits or claims filed against you.
This is one of the areas where we frequently see clients needing a little nudge to get everything buttoned up, especially those who have been through major growth. When you first start out, you might be able to function with an HR policy that’s a Word document printed out in the breakroom, but at a certain point, if you don’t have good documentation, you’re not going to be running your business to the best of your ability. Take time to look through your policies, make sure they’re all in one place and, most of all, that they’re current.
Even if you’re not interested in selling anytime soon, having access to these policies will make your day-to-day operations go more smoothly. You don’t want to waste bandwidth wondering, “Where’s my HR policy, what’s the pay scale?” every time you post a job ad. No one wants to buy a business whose operations are scribbled on the back of a napkin. And, if you’re running your business that way, you’re probably not having the smoothest experience either.
Rundown your expenses
It’s easy to get so caught up in sales or growth that we take our eye off cost. One of our sayings is, “Revenue hides mistakes.” In other words, even if your cash has been good, there might be an opportunity to trim.
When you look at presenting financial models, you want to continue to show improvements, whether it’s gross margin or reducing operating expenses. You should always keep an eye on utilization rates, if you have excess capacity out there, your metrics, your KPIs relative to the industry. Where are you compared to industry averages? If you’re below and trying to catch up, what’s your plan for doing so?
Keeping an eye on expenses doesn’t mean slashing everything to the bare minimum. You need to make sure your expenditures align with your forecast. So, if you plan to double your revenue and you’re only planning on increasing your marketing costs by five percent how do you account for that? You might have a perfectly good answer, so be ready to share it. It’s about rightsizing your company continuously, making little adjustments all the time, so you don’t have to do something dramatic all at once.
Bulletproof your forecast
Having come from the sell side, the reliability of future forecasts is critical. An acquirer is buying your future cash flow, and you need to have a detailed, robust and supportable forecast that holds water. If your results don't match up to the forecasts you put in print, that's where doubt comes in.
You need to have the discipline to put that forecast in place. More importantly, if you monitor your forecast and actuals, and adjust accordingly and constantly train your models, it will serve you well in the long term and help keep your purchase price bulletproof and free from adjustments.
Bringing in an outside set of eyes beyond your usual financial team is a great way to check for any blind spots you haven’t yet considered and to make sure the business narrative checks out. And, whatever growth forecast you put together, build out the complementary marketing plan to support it.
As part of due diligence, the buyer will meet with the management team to pick apart the marketing plan, your client base, your niche. They’ll turn over every rock to understand the future revenue opportunity in the marketplace. Beat them to it by getting outside experts to examine every inch of your forecast.
Know what you’re aiming for
Prospective buyers consider several factors when making an offer. EBITDA – earnings before interest, tax, depreciation and amortization – is a common area of scrutiny, but so are different ratios, KPIs, revenue and growth. When you have all these ratios in front of you, it’s easy to get distracted.
That’s where an on-staff or VCFO comes in: They know which ones matter, how to interpret them, and how to make necessary adjustments.
Your go-to finance person will be indispensable during due diligence and the technical questions start rolling in: You want an expert to be handing over the documentation, along with whatever necessary explanations. You need to be 100% sure to get everything right. As the owner, you probably don’t know the history of payroll liability, so make sure you have someone who does.
If you’re contemplating selling within the next four to five years, get that trusted advisor by your side now, and you’ll build the roadmap to get the highest value.
Get ahead of the curve
I’ve been a part of countless acquisitions over the years, and I can tell you that the owner who starts preparations way before they get ready to sell is the one who will speed through due diligence and walk away with the highest possible multiple.
Business owners who are actively looking to sell know the clock is ticking, and that pressure is often exactly the motivation to get started on these necessary processes.
For those not ready to sell or who may want to in the future, take these steps now so you can be ready when the opportunity strikes. Someone may knock on your door and make you an offer you can’t refuse. If you want it to be the absolute best and highest offer, you will want to make these steps routine. When you put yourself in a seller’s mindset, you’ll run a better business, regardless of whether an offer shows up out of nowhere or you go in search of it with the help of an investment banker.