Get Transaction-Ready

“Always be ready to sell.” It’s an enduring business adage. Companies that get ahead of potential M&A opportunities are often rewarded with timely deals at strong valuations.

Transaction readiness demands a comprehensive approach, addressing financial, operational, and strategic aspects of business management. A concerted effort often demands time, attention, and a financial investment. But more often than not, the return justifies the expense. 

Are you contemplating a third-party or ESOP sale? Not sure if your company is ready? Consider these key steps and start planning today.

Nine Tips to Get Your Company Transaction-Ready

Make sure your financials have integrity.

Your financial statements are your scorecard. No one buys a business without a trusted scorecard. Ensuring your statements are accurate and reliable is the foundation of transaction readiness.

It pays to have a third party attest to the actual performance of your business in terms of an income statement and a balance sheet. A CPA can provide this by annually reviewing or auditing your statements. The former is generally less invasive (an analytical review of current and prior year balances), while the latter provides a broader reconciliation of payables, receivables, and all accounts, as well as an assessment of internal controls.

A CPA firm can provide these services on an annual basis. Companies with revenues of north of $5 million should at least consider reviewed statements. Audits are generally best suited for firms generating at least $20 million annually. Not having audited or reviewed financial statements will extend the due diligence process and undermine value.

Normalize your EBITDA.

Most businesses have several expenses that wouldn’t continue if the owner sold or retired. That may include an owner’s salary, auto expenses, travel, insurance, donations, and family expenses. All can be added back to normalize EBITDA (earnings before interest, tax, depreciation, and amortization).

Expenses for one-off initiatives can also be added back. For example, you may have incurred expenses related to a software transition or a move to a new facility. Documenting these add-backs can have a meaningful impact on your EBITDA and improve your sale price.

Why does EBITDA matter? For buyers and transaction partners, it's a proxy for cash flow. They're looking at a company's past performance and estimating what it will generate moving forward. The present value of those future cash flows is a significant valuation driver. 

Get a quality of earnings report.

Prepared by a CPA, a quality of earnings report (QOE) assesses the accuracy and quality of past earnings and assets while evaluating the future sustainability of those earnings. It objectively documents the condition of your business and highlights potential areas of concern that would otherwise only be discovered during a due diligence process.

A QOE also assesses one-time, non-recurring add-backs and/or expense reductions that affect your normalized EBITDA calculation. Buyers and financial institutions are increasingly asking for these reports. QOEs build confidence for all parties and can help expedite a deal. Companies will generally commission a report when a transaction is imminent.

Document all key relationships.

Think of anything that would be included in a transaction closing book. That includes vendor and customer lists, employment and licensing agreements, leases, permits, intellectual property, insurance, and incorporation documents.

Potential acquirers will undoubtably request these items as part of their due diligence process. Clear documentation helps reaffirm a business's sustainability, especially if a new management team were to assume operational control.

Settle any lawsuits.

Emotions often complicate settlement considerations. Nonetheless, legal uncertainty, especially of a material nature, will diminish value or drive prospective buyers away. Settling a lawsuit (following a cost-benefit analysis) is generally the best course of action.

Companies contemplating a transaction should also confirm compliance with all relevant regulations and can account for any necessary licenses and permits. The existence of any kind of legal matter hanging over your business will impact you one way or another.

Be mindful of concentrations.

Tales of major retailers squeezing manufacturers are far too common. The same goes for supply chain partners. A company that relies on a service or material provider can find itself at that party's mercy.

The less dependent your company is on a single vendor or customer, the more resilient and durable you'll be. Diversification is an insurance policy for owners, buyers, and lenders. Addressing concentration risk can help companies safeguard future earnings and command higher transaction multiples.

Be an owner, not an operator.

Flat organizations are notoriously difficult to sell. When buyers perceive that an owner drives overwhelimg value, they may reduce their offering price and/or require a seller to accept an extended earnout.

Companies that reduce key-man risk are more saleable. That often means de-siloing business relationships or building more robust leadership structures. If a business owner truly wants to extracate themselves immediately following a sale, that company must be capable of functioning with them.

Don’t grow complacent.

Buyers will often pay a premium for a company with tangible upside. Meanwhile, stagnant revenues may signal a business is in the early stages of decline. That may not be the case, but the optics can't be ignored. 

Even if you're on the verge of taking your business to market, keep your eye on the ball and your foot on the gas pedal. Ongoing optimization is critical. New sales initiatives, coupled with cost-cutting measures, are tools used by every business to maximize profit. The better you master this dance, the more valuable your equity will become. The market can appreciate and value momentum.

Have your story ready.

What makes a company special? It could be a highly engaged and productive workforce. Or maybe the business's product mix or market niche sets it apart.

Strong financials help paint a picture, but a compelling narrative—detailing a firm's birth, trajectory, and identity—pulls everything together. A great story inspires buyer interest and helps companies command top dollar. 

Proper Preparation Yields M&A Opportunities

Consider this scenario: In less than three years, your business has grown from a small consulting project to a services firm with hundreds of employees and Fortune 500 clients stretching across 30 states. Your limited partner, thrilled by the growth and profits, wants to sell his share. The market is peaking, and you realize there may never be a better time for a liquidity transaction. So you decide to join your partner and sell the entire business.

But a snap decision like this is only possible when a company has made the right preparations. I appreciate this better than most, because that was my company.

We had audited financials dating back to inception and extensive, organized operating documentation. As a result, our buyer closed quickly and leveraged that same information to hold a successful IPO shortly thereafter. For myself and my partner, the seamless transaction, coupled with our growth momentum, resulted in a significant exit.

Businesses that are transaction-ready, no matter which M&A option they pursue, are best positioned to capitalize on momentum and secure a premium price.