You’re not ready to sell the company today, so you don’t think you need to spend any time planning for that exit down the road? Wrong – many times, the planning you do will take several years to create value, and in the meantime, anything you do today to create sustainable, transferable value tomorrow, is likely to increase your revenue and profits in the shorter term, too.
After more than 30 years of selling and buying businesses, I know how the buyer thinks. Here are the top five things you should focus on today to build value for tomorrow.
1. Focus on creating operational excellence.
You should have or put into place documented processes and procedures, for everything in your business – how you do what you do, or make what you manufacture; how and when you hire, fire and train employees; how you do your annual budgeting; how you track your sales pipeline. Put key operating metrics in place, and then track actual performance against them. This step along will result in a company that is well-run and growing in revenue and profits. When it’s time to sell, a buyer can clearly see the operational excellence, and this will help drive your valuation towards the high end of those paid for companies in your industry.
2. Concentrate on customers.
There are two critical areas to focus on here. First – look at your existing customer base: Are you suffering from customer concentration (more than 5% of revenue from one customer/decision maker)? If so, it’s time to look for several additional large (or a whole bunch of smaller) customers to drive that customer concentration down. Yeah, it’s great that XYZ corporation loves you so much that they keep giving you more and more of their business. However, from the buyer’s point of view, that’s a huge risk and it’s likely to have one of the following consequences: a) buyers will decide they have no interest in buying your company at all; b) buyers will pay you a lower purchase price because of the risk profile you’ve created; or c) buyers will want to put a very large portion of your purchase price in the form on an earn-out, paid over time based on the retention of those large customers.
Secondly, you should maintain a pipeline of potential new customers, along with a standard system for tracking and maintaining the pipeline. Remember that buyers are buying the FUTURE performance of your business, so your ability to show them a history of tracking and winning new business will help them to believe that the financial projections you provided to them are reasonable and achievable.
3. Prepare consistent, GAAP financial statements.
You don’t necessarily need to have an annual audit, but it absolutely helps. An annual audit can uncover revenue recognition problems, which can result in significantly lower revenue and profits than you thought you were producing, negatively impacting your company’s valuation. Rules for revenue recognition are getting more complex every day, so getting professional help is a must. If a buyer finds out during due diligence that your financial statements have not been consistently prepared according to GAAP, it opens the door to a renegotiation of the purchase price, and by the time you’re in due diligence, your negotiating leverage has been severely reduced.
4. Building depth in your team.
As a business owner, you’ve probably done every job in the company, but building a company with sustainable, transferable value means creating a company that can run without you. Remember, the buyer is about to put millions of dollars in your bank account – they will have a concern that once you no longer own the business, you won’t be as focused on running and growing it as you are today. You want them to believe that if you go sit on the beach, the team left behind can ensure the continued success of the company. The top three areas where buyers will want to see a team include: sales/customer relationships; operations; and financial reporting. And if you build out your team before you sell the business – you might even be able to take that two week river cruise in Europe your spouse has been begging for!
5. Maintain complete, organized and accurate corporate records.
I once had a client who couldn’t find his corporate record book – no problem, he thought; the attorney can just recreate it. So the attorney did. But three days before the closing, the corporate records showed up, and it turns out the share ownership was different than the seller believed! This caused the closing of the sale to be delayed for several weeks while the paperwork was sorted out. Time is the killer of every deal, so be sure that you can get your hands on your corporate by-laws, shareholder records, articles of incorporation, and that they are kept up to date. Additionally, be sure that you have fully executed (signed by both sides) copies of all customer contracts; prior year tax returns and payroll tax returns; leases; and vendor agreements.
If you focus on these five areas today, you will create a business that runs more efficiently, grows faster, and is more profitable today – and worth more tomorrow. If you would like to talk about how a buyer might view your business, contact me.
Laura Kevghas
President
Seed to Harvest LLC
E: laura@seedtoharvestllc.com
P: 978-618-1997
