A common question asked of IBA M&A professionals, as the oldest and largest business brokerage firm in the Pacific Northwest, is “What Should I Do to Prepare My Company for Sale to Maximize Market Value and Facilitate the Smoothest Transition of Ownership?”.
This is a great question. Our common follow up response is, “When Do You Want to Sell?” If you are looking at selling on a short-term time horizon (3 – 6 months) there are few things you can do to significantly change the market value. However, if you are willing to defer the sale until 2023 there are multiple things that can be done to enhance value and mitigate turbulence during the transition of ownership.
The following is a brief overview of some of the activities we recommend. We would also welcome the opportunity to meet or talk with you, if you are based in Washington, Oregon, Alaska, or Idaho, and provide a free strategic planning consulting session on preparing a business for sale. These sessions are provided by IBA’s knowledgeable, experienced, highly skilled team of business brokers on a complimentary basis as we look at the meeting as an opportunity for us to introduce ourselves and begin to develop a relationship with an entrepreneur early in their process of selling an asset, they have invested significant time, energy, and capital nurturing & developing. IBA has successfully sold over 4200 businesses in the Pacific Northwest since 1975, we have a long horizon perspective on helping the entrepreneurial community. We simply desire to be included in the interview process by a business owner seeking professional representation in a sale whether a transaction is desired in 2022, 2023, or 2025. If we cannot demonstrate why we are the preferred option in the region for selling a business for six, seven, or eight figures then we are likely not the best choice.
Accurate, transparent, detailed financial records are a foundational component in achieving a premium market value for a privately held company or family business. On the buyer side of the table multiple parties will review this documentation. It is important that the financial records pass scrutiny by the buyer, their accountant, CFO, acquisition financing lender, and/or investors or the deal will be at risk of failure. The most important documentation in the sale of a business will be the federally filed tax returns with the most recent year bearing the most weight. The opportunity currently exists to incorporate strategies related to the 2022 tax return that are no longer available for 2021. Each dollar of profit for a company is multiplied during the business valuation process. The greater the profit the greater the value. This fact creates an incentive for the seller to mitigate discretionary expenses run through the business in the tax year prior to sale. A case can be made for adding back certain non-reoccurring and discretionary expenses by a persuasive, professional intermediary to try to preserve value, but it is always preferred to not have to go to court with the buyer and their professional advisors and explain how imbedded expenses are not necessary (The approximately 30 cents per dollar saved in taxes by running personal expenses through a business have the potential to cost 3 – 6 dollars each, if the addback is rejected). If addbacks are going to be made, it is recommended that transparent records exist to support the addbacks that can be shared with the buyer (e.g., Matching business leased Teslas provided to the shareholders of the company are corporate benefits of ownership and not necessary to run a manufacturing company with limited local customers). Outside of the income statement revenue activity (e.g., cash or barter not run through the business) should also be mitigated. Again, every dollar not reported could result in a loss of $3 – 6 dollars at time of sale. 2022 Sale Note: If a sale is desired in 2022, it is recommended that an entrepreneur be first in line to get their 2021 tax return filed with the IRS by their accountant. Q1 & Q2 business sales have the potential to be held up while a buyer, their CPA, and bank wait to review the final tax return for the prior year. Tax returns are valued higher than internal profit & loss statements and balance sheets by the buyer side of the transaction because the information is accountable to a third party, the Internal Revenue Service (IRS). It is also prudent to establish a receipt file that can be made available during due diligence to the buyer documenting any discretionary or one-time expenses that are being presented as addbacks in establishing the adjusted cash flow of the company.
You only get one chance to make a first impression in sales. This is true whether you are personally selling a used automobile or privately held company. Deferred maintenance and management activity will be reviewed by a buyer. It is recommended that a seller assess items like their website, equipment condition, and inventory prior to going to market. A website that is not up to current standards in terms of graphical presentation, navigation, E commerce, and security will be perceived as an opportunity by a buyer, it will not enhance value. Equipment in need of service & repair will be seen as a reflection on the management of a company and can result in a discount in business sale price. It is often cheaper to pay for and schedule service with known, trusted providers than to have the buyer value or ask for a credit for the activity as a deal term. No business buyer wants to purchase damaged, obsolete, or slow turning inventory. Best practice prior to sale is to sell or dispose of the items, so they are not taking up space or generate a discussion/negotiation subject. Insider Seller Note: The maximum a buyer will pay for inventory is the purchase or current wholesale market value. Sales to the public 5% above this value will be better for the seller than a sale to the buyer of the business. Sales of damaged, obsolete, or slow turning inventory can also enhance revenue and profit for the company immediately prior to sale. In a best practice sale, the seller should deliver, and the buyer purchase sufficient inventory, so business operations can continue without impact prior to and after the sale in a normal manner.
The less important ownership is to business operations commonly the higher the multiple of EBITDA paid by a buyer. In a strategically staged sale to maximize value, ownership will develop management underneath them that can run the company or assume executive positions in the future. It is also prudent to mitigate the number of employees lost at time of sale. A family run business can be successful and profitable for many years, however if five key employees (President, CFO, COO, and the two top salespeople) all want to leave the company at one time business operations will be impacted resulting in a buyer discount in value, if a buyer can be found at all. Strongly run companies have systems in place for transitioning leadership positions and retaining employees. A knowledgeable, experienced business broker can often be a source for ideas & strategies in this area.
Agreements can be significant value creating assets for a business. A long term, reasonably priced lease for a waterfront restaurant with a view can create stability and profitability that results in the business being sold for a premium value. Similarly, long term contracts with customers and suppliers can create competitive advantages that enhance value. Often existing ownership will have established personal goodwill that can help tip the scales toward achieving the best available terms for a contract. If a contract is expiring, it is often prudent to lock up a relationship prior to going to market. Seller Warning: It is true a long-term contract can increase company value, but long-term contracts can also enhance post transaction liability and risk. This most often occurs when a party requires a personal guarantee, most commonly in the situation of facility leases. It is often difficult to get personal guarantees removed at time of sale from contracts, so it is recommended as a long-term tenant that efforts be made to remove this lease component once it has been established the business is a good credit risk as a tenant.
The sale of a privately held company or family business is a sophisticated, nuanced process. It is prudent for an entrepreneur seeking to sell their company at a premium value in a transaction employing best practices to surround themselves with a quality team of professional advisors to help navigate the path. The better lit the path and detailed the road map, the higher the probability for achieving desired transaction goals. If you are looking to sell your Pacific Northwest business in 2022, 2023, or 2025 IBA would welcome the opportunity to interview for the position of lantern bearer and trusted guide for the journey.
Gregory Kovsky, the President & CEO of IBA since 2000, has personally facilitated over 300 transactions involving privately held companies. He is recognized nationally for his knowledge & experience as a “sell side” broker in the manufacturing, international import, industrial, marine, construction, technology, and horticulture industries and a commonly published author and seminar speaker. Mr. Kovsky has held a real estate brokers license in one or more states since 1994 and has the ability to comprehensively represent entrepreneurs in the sale of their privately held companies and commercial real estate. He is honored to represent IBA as a member of the Seattle chapter of The Professional 50 along, Bill Southwell, and have Stephen Cohen represent the firm in The Professional 50 chapter in Portland.
Contributed by Gregory Kovsky