There are a lot of similarities between selling a home and selling a business. For example, when you are preparing to sell a house, you do some minor repairs, paint the walls, clean up the garage, plant new flowers, and last but not least, you hire a realtor. Similarly, when selling a business, you want to make sure your company “looks” as good as possible, if you are selling a retail store, it’s better to have the product on the shelves. As when selling a house, preparing to sell your business, you want to get a team of consultants: a broker, an attorney, and a CFO. Two considerations:
One of the most important things is timing. Like the old saying “sell high – buy low,” you want to be in a position to sell your business when the profits are high, meaning your revenues are increasing and peaking. All companies go through cycles, some are short (e.g., retail), while some are very long (e.g., real estate). It is essential to plan and be cognizant of the right time to put up the “for sale” sign.
As a small business, there may not be sufficient resources in place to ensure the proper financial reporting and preparation needed to sell your business. Investing in a CFO consultant can ensure your financials are in order and give you the confidence to market your business.
If your business is more than $10 million in revenue, get audited financial statements. Audited financials prepared by an independent CPA are going to carry a lot more weight and confidence than unaudited statements. Depending on the situation I recommend 3 years of audited financials to be able to showcase the history of your business.
Re-cast financial Statements to present them on an accrual basis. Presenting financials on a cash basis instead of accrual basis, is amateurish and will immediately raise questions and create adjustments during the due diligence process. More information on GAAP. If necessary, hire a professional to re-cast the financials per GAAP.
Financials are just numbers and they can be easily taken out of context. It is important to highlight the story behind the numbers (good or bad). After reviewing your financials, what do need to explain to the Buyer? For example – what is the growth strategy and how does that strategy turn into initiatives which resulted in growing revenues. If there were cost reductions, how did they impact the bottom line?
Metrics (KPI) are quick ways to showcase how the business is doing relative to prior years and relative to competitors/industry standards.
A big part of the story is the forecast, usually 5 years. Buyers buy businesses based on future opportunities to capture future earnings. Therefore, this is the most critical part of the financial “story” and an important step in getting your business ready to sell.
Document all of this information in a Confidential Information Memorandum (CIM), which is a somewhat standardized document that contains the strategic vision of the company as well as the financial and operation information distributed to potential buyers.
As a seller, you not only want to showcase your accomplishments, but most importantly you want to showcase the opportunities for the buyer. For example, if the company has been successful in a particular market and has only achieved a 2% market share, perhaps there is plenty of growth left for the buyer.
Maintain good financial hygiene in the P&L as well as in the Balance Sheet. Prior to presenting financial statements to the buyer exclude all of the owner’s benefits that are posted in the P&L.
Example 1
Ebitda: 500,000 and Adjusted Ebitda: 1,000,000
This will raise a lot of questions in terms of what adjustments are being included in the financials and these adjustments tend to be points of contention between the buyer and the seller.
Example 2
If one of the adjustments was a one time employee training on a new ERP system and you don’t expect to implement another ERP, the seller may argue that this is an add-back, but the buyer may argue that this is an expense related to running the business. Another common example is to run all personal travel and automobile expenses through the company’s PL.
Often overlooked by small businesses, is a balance sheet review. Items to clean up:
Bottom line, take the time and spend the resources to showcase your business in the best way possible. Hire a CFO Consultant to: