Why Consider Selling Your Company?

In today’s turbulent times, Merger & Aquisition activity in the lower middle market remains brisk. The motivations of business owners to consider selling their companies are varied...some traditional, others rather unique in today’s environment.

Baby Boomer Exit...many business owners have children with little interest in inheriting the company and/or the inability to successfully manage it. Owners in this age group, almost by definition, are beginning to wonder what they are going to do with their businesses when they decide to retire or semi-retire.

Hard Times...times are obviously tough, and some owners are simply not able to earn what they did in previous years. And, some don't believe their companies are very valuable right now. That may or may not be true, but when combined with other factors, even if the company is not as valuable as it once was, these owners can still walk away with millions.

Good Times...some businesses are prospering even as others falter. These companies, for whatever reasons, may be at the zenith of their value right now. However, the owners realize that as the economic cycle progresses, the value may diminish.

Asset Concentration...for many owners, much, if not all of their net worth is concentrated in their companies. Selling majority (or minority) ownership could allow them to remain with the company yet 'cash out' significant equity to diversify their portfolios.

Growing Awareness of Corporate/institutional Buyers...who don't view the business’ value the same way the owner does. These buyers are larger firms in the industry or financial buyers that already have holdings in the industry. In either case, there will be inherent cost savings once the company is acquired; therefore, the acquirer looks at the financials differently. In addition to the 'bottom line', the target company may have value not realized by the owners such as customer lists, proprietary products/services/processes, the ability to open up a new territory, a strong sales/marketing force, etc.

Preparing to Sell

I urge business owners who are actively considering selling their companies to allow themselves at least 6 months to prepare the company to be put on the market. Many seemingly small issues, irrelevant to the company’s current success, can have a significant impact on the company’s attractiveness to potential suitors. Following are some of the most common items that an owner should ‘clean up’ in preparing the company to sell.

Audited/Reviewed Financials...Most potential buyers will require two years of audited or (at a minimum) reviewed financial statements. The costs and hassles of acquiring audited financials are wise investments when it comes time to sell the company.

Forecasts and Budgets...Though the value of the company is primarily determined by its historical performance, documented future performance forecasts reflect the sophistication of the company and a glimpse of its future potential.

Sloppy A/R...Take the time afforded in the 6-month preparation window to bring the A/R up to par. Implement collection efforts and, if necessary, bite the bullet and write-off uncollectibles.

Sloppy Inventory...The same concept as with A/R; sell or throw away inventory that burdens the balance sheet and bring inventory turns and other indices up to industry standards.

Sales/Marketing Plans...These are particularly important if the owner is currently the major salesperson of the company. Buyers will want to know how customers and revenues were obtained in the past and how they will be sustained in the future.