Before responding to a prospective buyer and starting the process to sell your company, you should evaluate these six aspects of the business. Whether or not you ultimately sell, you will be refreshing your own analysis and gaining a new insight on your holdings.
Most business owners initially grow their companies through an intimate understanding of their industry, their customers and their people. However, as the company matures and in times of high growth or stress, taking the time and making the commitment to evaluate your business from a buyer’s perspective will provide confidence in the areas of strength and identify gaps to address.
For a buyer to pay the highest price and best terms for your company, you need to be prepared to give the buyer, their bankers and the transaction advisers they hire the answers they need to rationalize why they are paying a premium price for your company. If you avoid these critical steps, the best you can hope for is an average price.
Revenue and profitability: Through your business systems and software, you need to analyze revenue and profitability on a transactional level by product, by service type, by customer, by industry served and geography.
This data needs to be compiled on a monthly basis along with an analysis and explanation of the driver of these trends and an understanding of any anomalies. Without this, a buyer cannot fully account for the growth opportunity or understand any short term fluctuations.
Management team and personnel: Take the time to assess the unique qualities of each member of your management team, as well as an analysis of the people on your company. Without a comprehensive understanding of your team, a buyer will not give you full credit for the value of their experience, knowledge and capabilities.
Are operations structured in a lean, cost-effective manner that leverage your team’s key skills and experience? Are your compensation plans and structure comparable to market?
Sales: A buyer needs to know how revenues are generated, which key people have relationships with which customers, the tenure and loyalty of customers, the cost and process to win new customers, the sales and marketing techniques your business uses and an assessment of time, investment and people needed to grow revenues organically in each area.
Inventory, equipment and IP: A buyer needs to fully understand the assets they are acquiring to justify a premium price. If it is intellectual property, you need to assess the revenue and profitability the IP generates, the cost to develop, replacement alternative and defensibility of all IP. If the company has significant inventory and equipment, then the gross margin return on investment for both inventory and capital equipment is necessary. You also need to assess the quality of inventory and equipment: turnover, age, condition, replacement needs and cost.
Technology utilization: If your business relies upon technology, then a buyer needs to understand how your technology tools are used, the productivity gains from their use, as well as the uniqueness, barriers and competitive advantage that your technology utilization delivers.
A buyer will also look for any technology gaps that will require time, money and business disruption to cure.
Business operations: Does your business run according to formal or informal business rules, processes and procedures? Are they universally adopted and measured? Are your business operations documented and what steps are taken on an ongoing basis to improve efficiency and performance within your business? A buyer needs to understand how your business runs on a daily basis and how that fits with their business.
While there are many additional steps that need to be taken to prepare a company to sell for maximum value, a business owner needs to start with these six.
Enlisting the help of an experienced investment banker and business adviser who not only has expert insight into the business sales process but also has experience operating companies ensures your business will be well positioned with every prospective buyer. The sale process will be more effective and discrete.
When a business owner puts the time and effort into being better prepared, the odds are a buyer will agree to a premium price and then be able to gather support within the company, financing sources and transaction advisers to close the deal at that price.