Preparing to Sell Your Business Requires the Same Due Diligence as Running it

Gary Miller

The Denver Post 

Posted:   05/25/2014 12:01:00 AM MDT




A crisis is looming for business owners wanting to sell their companies.

Currently, 80 percent of business owners of small- and middle-market companies who put their businesses up for sale never close the transaction. The reasons: poor planning and over-valuation.

With the impending baby- boomer tsunami, more businesses will be for sale than at any other point in history, creating a buyer’s market. This will cause significant competition, and businesses that do not plan well or overvalue their companies will be left out in the cold.

Many strategic and financial buyers with significant funds to invest are more cautious and reluctant to pay premiums for companies than a few years ago. To ready a business for sale, there are three critical steps to take to significantly increase the chances of closing a deal.

Think like a buyer. Most buyers want to purchase a company that has the following characteristics:

• A proven entrepreneurial management team in place who can continue rapid growth and expansion after the transaction closes. Most buyers do not want to replace current management of the company they are buying. Doing so adds a risk profile that could endanger the viability of the business going forward.

• A strong and realistic growth plan to continue value creation through market penetration and expansion, defined market niche and/or acquisitions.

• An ability to produce significant returns on invested capital coupled with strong positive cash flows.

• A sustainable competitive advantage.

Prepare before you go after a buyer. Attracting a buyer is like preparing for a beauty contest. Companies that “show best” win “first.” It takes six to 18 months to prepare your company for the buyers’ marketplace. Strong preparation could mean the difference between a much higher “selling price” than weak preparation. Strong preparation steps include:

• Quantifying the business value through a third-party valuation firm.

• Getting rid of obsolete inventory. If your financial records show a higher value than market value, take the write-off now so that it doesn’t become an issue for the buyer.

• Auditing your financial records by an independent accounting firm.

• Strengthening legal and contractual affairs.

• Installing and improving operating systems and processes.

• Telling your management team that you plan to sell the company. Be truthful. Include them in the preparation process. To not do so could scare your key employees (the very ones you need to keep) when a buyer’s due- diligence team shows up to begin its process. This could trigger your key employees to search for new careers.

• Creating management and key employee long-term incentive plans to stay with the company.

• Preparing for buyer due diligence. If you were buying your company, what would you drill down on first, second and so on? Conducting your own due diligence similar to a buyer’s due- diligence process allows you to discover any “skeletons” before the buyer does.

Select the right team to help you prepare you to go to market. Assembling a collaborative, multidisciplined team of experts is critical to help prepare you to go to market. Before a buyer shows up, this team can advise on alternative exit strategies, tax issues, alternative deal structures and prepare you for negotiations. Five key team members are important to your success:

• A management consulting firm with strong business strategy expertise and transaction experience to lead the team.

• A law firm with significant transaction experience led by an attorney who is a CPA.

• An investment banking firm with deep transaction experience in your industry.

• An accounting firm with major transaction experience to guide you through the tax issues.

• A wealth-management firm to help you plan wealth preservation from the transaction.

Following these three steps will significantly help you in finding the right buyer, at the right time, paying the right price to close the transaction.

Gary Miller  is founder and chief executive of GEM Strategy Management Inc., a management consulting firm focusing on strategic planning, growth capital for expansion, value creation and exit strategies for middle-market companies. ( or 970.390.4441


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