To Sell or Not to Sell
Positioning your company to make the right decision
While it might not be on your mind right now, in the next few months or even next year, an opportunity to sell your business may arise, either through a planned effort or even by chance. Is your company sell-ready?
The key is to anticipate any questions a potential buyer may have. What you want to avoid is a decision based on emotions instead of facts – and even though you may think you are ready, chances are you'll still need to make some changes and/or gather vital information. This process may lead you to decide not to sell, but anytime you can improve your business, you will see benefits. I advise my clients it is a best practice to be sell-ready, even if selling the company is not in the immediate plan. Here are five steps you can follow to get your business sell-ready. Regardless of whether you have an offer today or in three years, you'll have an edge by having already anticipated these five areas.
Step 1: Maintain Good Accounting Records
While this shouldn't be a shock to any business owner, the amount of detail required by some investors can be overwhelming. We still live in a post-Enron environment in which transparency is vital. Over the last few years, for example, we have worked with several clients who wanted to sell their businesses to venture capital firms, only to be surprised when they were faced with a deep level of detail required by these firms.
At a minimum you'll need:
- A clean and accurate balance sheet; preferably reviewed or audited by an independent CPA firm.
- Well documented revenue recognition policies that are in compliance with GAAP.
- Clearly documented accounting systems and controls.
- Past corporate tax returns.
- Forecast of working capital needs.
- A list of expected capital expenditures.
- Revenue and profitability by customer, location, product or service line.
- A track record of preparing and using an annual revenue and expense budget.
These kinds of records are useful for your own purposes in determining whether to sell your business, but they are easier said than done. Make sure you have the systems and processes in place that allow you to paint a clear picture of your business, for yourself and any potential buyers.
Step 2: Put a Budget in Place
Related to good financial records is good forecasting and projections. Many small business owners hate the idea of a budget, but it is a good discipline because it can help you see the relationship between what is coming in and what is going out.
A client of ours knew he should have an annual budget, but did not want to let the budget dictate potential purchase opportunities or capital expenditure needs. Said another way, he did not want to be overly dependent on a budget without some kind of built-in flexibility. Once he created the budget, however, he realized it was a great tool for his business because it helped control costs and estimated revenues for the year.
Remember that a budget is a guideline; it isn't meant to be set in stone. When it comes to getting your business ready to sell, having a budget process in place that you have gotten good at over the years, is important because you will be able to forecast the future for the potential buyer
Step 3: Put a Succession Plan in Place
The success of a business is frequently due to the effort, the commitment and the relationships of its owner. Buyers and investors know this, which is why it is essential that a company's key personnel take a large role in running the business. In short, if a business is sold, the previous owner may no longer have an equity stake in the company, which means the new owners will walk in and quickly size up the company's assets, aka, the staff.
Size up key personnel. Make sure they know the ins and outs of the business and have practice making decisions, so that they can help in a transition when you sell your business. And, of course, make sure they are committed to the business and their positions; the last thing you want to have happen before the sale is complete is to have staff walk out. In short when it comes to selling your business, the less dependent it is on you, the more attractive it will be to a buyer.
Step 4: Form an Advisory Board
Regardless whether you are trying to sell your business, consider putting together a small group of professionals to help you achieve key business targets. Pull together a team which includes banker, lawyer, accountant, human resource expert, business strategist, insurance representative, and other professionals with differing perspectives.
Meet with them quarterly. Establish your goals for the group, the roles and responsibilities they will hold, and ask them to hold you accountable. Remember, however, that you, the business owner, control this process – not the group. To effectively use this group to advise you in your business goals, you must be honest and transparent, factually representing your business challenges and limitations.
This group will probably expect to be compensated for their time and knowledge, including expenses such as mileage, food and lodging. One resource suggests cash compensation of $300-500 per meeting. There may be additional, non-monetary compensation such as networking connections that you can provide as well.
Step 5: Take the Long View
One of our clients was doing really well, having their best year yet. In looking at their records, one month was off a bit. In the middle of the due diligence process, our client was concerned because she had to explain to potential investors why the company was not on a growth trend. After scrutinizing the reports, she decided it wasn't in the best interest of the company to sell and that she needed to make an investment in the company itself. Now, she is restructuring the company and will be in a better position to sell in a couple of years
It has taken time and energy to get your business where it is. Invest the time and money to put systems and processes in place that will help you eventually sell it. Make business, rather than emotional decisions, and know that rushing into a sale can cause more harm than good.
Byron Hebert, CPA, CTP, is a director at PKF Texas and practice leader for the Entrepreneurial Advisory Services (EAS)team. PKF Texas can provide assistance to companies looking to implement the techniques detailed in this issue.