January 31, 2022 •Richard Harmon
“Always be ready to sell.” It’s a timeless business adage. Companies that get ahead of potential M&A deals are often rewarded with timely transactions at strong valuations.
Having personally exited ventures and advised companies on ESOP sales, I've witnessed the value of disciplined preparation time-and-time again. Transaction-readiness may require months of planning, but the payback is usually well-worth the time invested.
Contemplating a deal? Not sure your company is ready? Consider these simple strategies and starting planning today.
10 Transaction Preparation Tips
Make sure your financials have integrity.
Your financial statements are your scorecard. No one buys a business without a trusted scorecard.
So, engage a CPA firm and have your financial statements audited or at least reviewed on an annual basis. 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 and 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.
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 buyer’s due diligence process.
A QOE also assesses one-time, non-recurring add-backs and/or expense reductions that affect your normalized EBITDA calculation. Buyers are increasingly asking for these reports. Having a QOE will give your buyer confidence and help expedite your transaction.
Document all key relationships.
This includes vendors, customers, employment agreements, licensing agreements, leases, permits, intellectual property, insurance, incorporation documents, and the like.
Settle any lawsuits.
Frivolous or not, uncertainty surrounding legal action, especially of a material nature, will diminish value. Settling is often the best course.
Be mindful of concentrations.
The less dependent your company is on any one vendor or customer, the more resilient you'll be. Diversification can help mitigate risk and enable businesses to command higher multiples.
Be an owner, not an operator.
Companies that reduce operational dependence on owners are more saleable. If you're a business owner, make sure your team can function without you. The more dependency on a departing leader, the bigger the reduction in sales price.
Don’t grow complacent.
Optimization can drive valuation. 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.
Have your story ready.
How did your company evolve? What sets your business apart? What makes your organization special?
Telling a compelling story will inspire buyer interest and help command top dollar. For maximum effect, present that story in a formal memorandum that captures your history, future outlook, and key financials.
Timing and momentum are essential.
Maybe your company has new products or services under development that are gaining traction in the marketplace. Or, your sales are rising and profits are increasing. Either way, the market can appreciate and value momentum.
Does M&A Readiness Really Matter?
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.