Selling a business is a complex process that requires substantial effort, experience, and sophistication. There are business functions to consideration, personal considerations, and market-feasibility considerations. It is not uncommon for a seemingly successful business to have hidden red flags or risks that the owner is unaware of. How can a business owner address these risks and increase the value of your business?
Realize That the Process Will Take Time
Selling a business is an intricate process. It can take 6-12+ months to find a buyer for a business, and get the deal done in a manner that’s beneficial to both parties. Business owners who anticipate a quick sale are severely affecting the chances that a successful deal happens, and at a price that they are happy with. An experienced team of M&A advisors will effectively describe what the full process will entail, and help a business owner arrive at realistic timeline expectations.
Get Your Financials in Order
In order to receive maximum value for their company, business owners are advised to make sure their financial processes and accounting methods are strong, and they should have a third-party firm do a quality of earnings review. One of the first questions that an M&A team will ask a business owner is if their books are reviewed or audited by a reputable CPA firm. Accurate financial reports will help the business valuation and make sure that red flags are made known and are addressed before due diligence occurs. It can ruin a potential deal when a buyer discovers a risk that was not discussed previously.
Great Management Team
It’s common for business owners to try to run every part of their business. They may be very good at that, but there’s risk perceived on the part of the buyer if there isn’t a solid management team in place that ensures that the business would run smoothly in absence of the owner. The value of the company becomes lower to compensate for that risk. An organization’s value should be in the organization itself — not what the business owner perceives it to be.
It takes time to develop a strong management team, which is why many advisors and M&A firms suggest to clients that they should be preparing for divestiture years in advance. Unless you plan on owning your business until the day you die, you should always be thinking about your exit strategy.
Post-Transaction Plans
When thinking about selling their business, business owners should acknowledge what they’re trying to accomplish with a sale.
- Where do they want to be in 5 years?
- What involvement will they have after the sale?
How a business owner answers these questions will have a major impact on how an M&A team will position the business to the market. PE firms will typically require a management team to stay on board; if the management team wants to leave, then it’s time to focus on strategic buyers. A strategic buyer will likely tolerate a weaker or more uncertain management team because they’ll have the ability to insert their own people.
About Madison Street Capital
Madison Street Capital is an international investment banking firm committed to integrity, excellence, leadership and service in delivering corporate financial advisory services to publicly and privately held businesses.
Over the years we have helped clients in hundreds of industry verticals reach their goal in a timely manner. Our experience and understanding in areas of corporate finance and corporate governance is the reason we are a leading provider of financial advisory services, M&A, and valuations. With offices in North America, Asia and Africa, we have adopted a global view that gives equal emphasis to local business relationships and networks.