Selling a Company vs. Selling a House

Getting your company ready to sell is both like and unlike selling your house.

When you sell your house, you make it look as nice as possible by performing touch-up painting, maybe replacing a worn carpet, or replacing windows that may have lost their seal. These are all "cosmetic" improvements. When you sell your business, you should take care of as many "cosmetic" improvements as are necessary to have the business "show" as well as it can. Buyers are more interested in companies that have been well taken care of.

Sometimes a house needs "infrastructure" help, like foundation leveling. However, this does more to keep the price of the house equal to comparable houses. It does not usually "increase" the selling price of your house.

But unlike selling your house, there are many ways to increase your Enterprise Value and your return on investment that extend beyond the cosmetic. And many of these take time to design and implement, so starting on them now will provide you the best opportunity to maximize your value.

Top 10 Ways to Increase Your Company's Enterprise Value

1. Get Your Financials in Order

Why? Buyers will perform due diligence on your financial records to determine how much assurance they can place on them. When buyers find "issues" in the financials, they ascribe the types and volumes of issues to risk. The higher the risk (meaning more investment on their part to mitigate the risks), the lower the selling price.

What to do: Have a review that will simulate the due diligence process, identifying all of the red flags that will pop out during due diligence. Have someone perform a "GAAP Review" to identify all of the issues that will potentially come up at the closing table.

Benefit: Maintain and/or increase the sales price. Having clean financials gives buyers confidence in the numbers.

2. Prepare for Due Diligence

Why? Buyers use time (elapsed time) in the deal process as a negotiating tactic. The more prepared you are for due diligence, the less time it will take to close.

What to do: Have someone who is very familiar with the due diligence process collect and organize the data you will need to present to a buyer. Today, many use online data rooms for this.

Benefit: Closing on time and getting paid on time.

3. Have a Plan for Growth, and Execute on the Plan

Why? Buyers are not purchasing your company to operate "as is". They want to increase the return on investment, and will look for companies that have demonstrated reasonable growth of at least 10% over the trailing twelve months.

What to do: You need a documented plan and you need to manage to that plan.

Benefit: Buyers will give more credence to projections (and thus a higher sales price) if you have demonstrated the ability to plan and execute effectively.

4. Prepare a Budget and Forecast, Then Live It

Why? Having targets in writing is motivational to most people, and you need everyone on your team pulling in the same direction. Buyers are looking to see how well managed the company is.

What to do: Prepare a detailed forecast (including detail at the revenue driver level) and monthly budget and manage to the numbers every month.

Benefit: Better internal accountability and a higher selling price.

5. Maximize Revenue and Profit to the Business

Why? The higher your EBITDA, generally, the more you will make on the sale of your business.

What to do: Get help. These projects include things like streamlining your operations to reduce unnecessary staff, eliminating unnecessary and non-business operational costs, expanding markets/industries.

Benefit: Every dollar you add to the bottom line can have a "multiple" effect on value.

6. Develop a Second Level of Capable Management

Why? Buyers know that you will be leaving the company. They are concerned about sustainability and continuity of the business at previous levels and higher.

What to do: Document the value-add that you provide the business. Determine what skill is necessary to replace your contribution, and then find/hire that skill if it does not exist in the company.

Benefit: Less risk ascribed to the sustainability of the company, which translates into a higher price or better terms and conditions.

7. Document What People Do

Why? Titles don't always convey the reality of a position in a company. Buyers want to know who does what, and in what combination.

What to do: Document job descriptions for each of the top 2 or 3 layers of management and the supervisory level. Include key skills and attributes, certifications, degree or license requirements, etc.

Benefit: Buyers will make assumptions about replacing or adding to staff once the sale is closed. Clear documentation reduces their "additional cost" assumptions.

8. Simplify the "Family Relationships" in the Business

Why? Buyers don't trust family members working in the business for the most part, especially if they will be receiving a portion of the sale.

What to do: For non-key employee friends/family members, attempt to move them on to their next successful venture before closing. For key employees, get an Employment Agreement in place.

Benefit: Peace of mind that friends and relatives will be taken care of. This can have a positive effect on sale price.

9. Diversify Your Customer and Supplier Base

Why? Concentration in either customers or key suppliers is a big red flag to potential buyers, especially when that concentration is based on a relationship between the customer/supplier and the current owner.

What to do: Identify concentration issues and either get long-term contracts in place, or work to find additional customers/suppliers to reduce concentration.

Benefit: Less risk in the business, translating into maintaining or increasing your final sale price.

10. Keep Your Customers Happy

Why? Buyers will investigate whether customers are happy with the products and services they receive from the target company. This gives them an idea of how loyal the customers will be during an ownership transition.

What to do: If you haven't surveyed your customers recently, do so. The key question to ask is "On a scale of 1 to 10, how likely are you to refer our company to a friend or colleague?"

Benefit: Buyers will see a very loyal customer base that is founded upon confidence and reliability in your products and services rather than any one individual.

Conclusion

Seem daunting? It can be. Starting early, and getting the advice of an experienced sell-side intermediary (M&A advisor), an accountant, and a competent transaction attorney will provide extremely valuable insight and your return on investment in these professionals will be realized at the closing table. Plus, you will have the peace of mind of knowing that you did everything you could to maximize the value of your business at the most important time in the life of the company.

About Flatirons

Flatirons Capital Advisors, LLC (www.flatironscap.com) is an investment banking firm that helps privately held companies sell their businesses, acquire other businesses, and raise capital. Flatirons has offices in Colorado and Texas.

For more information: Call 303.905.0733, or email info@flatironscap.com.