Phase 3:

The Prep

Transparency Makes Selling a Business Easier

We know from experience that the selling process, from valuation to due diligence, is fraught with ambiguity, uncertainty, and differences of opinion. So, we want everything to be out in the open from the start. Any difference of opinion or inconsistency can cause a buyer to back out, so you want to eliminate (or illuminate) potential problems up front. Besides, what you might consider a problem could be a benefit for your buyer. Problems do not necessarily kill deals or lower the price a Seller will pay; surprises do, and with the amount of due diligence done on even small deals today, everything comes out eventually.

This means being transparent. Probe, assess, and, systematically ensure that every detail is made plain as day every step of the way. The buyer will uncover problems and inconsistencies, so it’s in your best interest to uncover or divulge them first.

In our 20 years of doing Mergers and Acquisitions, we’ve learned that transparency is always the best policy. And, for us, transparency means…

  • Being educated: Understand how businesses like yours are valued and sold so that there are no surprises, and you can sell when you’re ready for the best possible terms.
  • Being honest: If we think you can get more, we’ll tell you. We’ll also tell you if we don’t think your business will sell for your desired asking price, or for your desired terms.
  • Being patient: Today might not be the best time to sell. We’ve helped some clients go from the selling agreement to close in six months, and we’ve worked with some clients for up to ten years before they were ready to sell.
  • Being systematic: There’s not an established marketplace for mid-market businesses. Selling a mid-market business requires a systematic approach with well-defined timelines and processes.
  • Being thorough: Everything should be out on the table before you or we contact potential buyers. We close engagements far faster than the industry average because we spend less time in due diligence. We’ve already got the answers to their questions.
  • Being firm: Transparency doesn’t mean that you always cater to the buyer’s wishes. It means giving them the information they need to make a decision, and telling them when their request is irrelevant.

Selling a mid-market business is complex, but it doesn’t have to be painful or hard. The key is understanding that it is an opaque process by its nature, and then taking steps to make the process more transparent, systematic, and understandable.

So how does KO prepare you for the Sale?

We begin by assuming the role of a buyer, as this is the safe and confidential way to “test the water”. Your business must look good to your prospective buyers. Since the first thing they’ll look at is your financials, that’s also the first place we’ll go. It’s also usually the easiest and most cost-effective way to build value in your business. For example, you are probably not using what’s called “Twelve Trailing Month Accounting” (TTM). However, that’s how banks typically make loans, so implementing TTM actually increases the “value” of your business for a buyer because it’s easier for them to get bank loans.

We’re going to review all your accounting issues first, including having “reviewed” versus “compiled” financial statements, divisional reporting, inventory reporting, and expense and revenue recognition. You can, for example, make your business more attractive by separating out the various divisions in your accounting, allowing buyers to see specifically where they have the most to gain or lose.

Compiled financial statements are also referred to as unaudited statements. There is no certified or reviewed examination of the statements, and therefore no guarantees about the accuracy of the data. Reviewed, financial statements have been reviewed by a certified public accountant (CPA). The CPA offers their opinion on the quality and accuracy of the financial statements and performs a comprehensive analysis of the company. Investors can use the reviewed financial statements with confidence when evaluating a company. When financial statements have been reviewed they have been reviewed to ensure the information is correct, true and reliable.

We’ll then run through the same process on your leases, IT, personnel and items that are unique to your business. These reviews can be fairly quick and can uncover potential problems or issues that would hinder the sale or reduce the value from the perspective of the buyer.

Proceed to the “Cleanup” Phase M&A Advisors often refer to the preparation process as “cleaning up” your business. This cleanup process can be quite extensive, and if you do everything that’s sometimes recommended, it can take you years.

Rather than give you a laundry list of cleanup chores, we’ll provide a recommended list, starting with the low-hanging fruit, combined with a cost-benefit analysis so that you can determine which tasks, if any, you’ll take on. Here are a few of the other areas that you may be asked to consider:

  • Assets. There may be assets which you wish to retain, or which your buyer may find objectionable, such as a vacation home, car, or other company-owned items. In fact, this is a good time to create a comprehensive list of all the company’s assets.
  • Clear, clean records. You’ll want to ensure that your financial and corporate records are in good order. Make any year-end accounting adjustments prior to the sale, and make sure that you have up-to-date minutes of all meetings.
  • Trademarks, patents, and copyrights. Along with cleaning your financial records, make a list of all your trademarks, patents, and copyrights.
  • Spic and span legally. Be sure to settle any lawsuits and terminate any unfavorable contracts before going on the market. You don’t want to give anyone an opportunity to devalue your business.
  • Close agreements. If you’ve got any verbal agreements in place, this is a good time to terminate or honor those agreements. The buyer will see these as a red flag.
  • Issue all stock shares. Again, it’s a matter of making things neat and tidy for a potential buyer.
  • Document all loans. Document all outstanding loans that have been made to or from shareholders and employees.
  • Warranties. Gather information about any service warranties or warranty claims.

And Don’t Forget About Technology

IT (Information Technology) is often an overlooked area. The buyers will want to know that your hardware and software are up-to-date, and able to handle their expected growth. Your goal (and ours) in preparing your business for sale is to place your business in the best possible light in the eyes and minds of the buyers. We look at your business from their perspective, and outline the most effective ways to make your business look better to the buyer.

The result is a significantly increased chance that your business will sell, sell to the best possible buyer, and with agreeable terms for you.