How to Do Due Diligence Before a Company Sale

Sellers of a business need to do a lot to prepare for the sale. Along with looking for the right buyer, they should begin planning for the due diligence process well before they list the business for sale. This can help make sure they’re prepared once they do find a buyer, as everything can move quickly after that point. Failing to be prepared slows down the entire process and can mean the loss of a sale. So, how does a seller prepare for the due diligence process?

What is Due Diligence and Why is it Important?

Due diligence is the process in which the buyer and seller review all information about the business to determine if the buyer thinks it’s something they should purchase. Both buyers and sellers can request information from each other and can review the information to determine if the sale should move forward. Most information, however, will be requested by the buyer as they need to ensure they are purchasing the right business for their interests. It is somewhat like purchasing a used vehicle, where the buyer will have a mechanic do a thorough inspection before the purchase to minimize the potential for expensive surprises.

two guys shaking handyThe due diligence process can have a huge impact on whether the sale goes through and how much the business sells for. When a seller is preparing for the due diligence process, they will go through every part of their business carefully to ensure everything is ready. If they find any potential issues, such as liens that have not been removed or key contracts that have not been executed yet, they can fix these issues before the buyer discovers them. This ensures everything is ready to go when the business is listed for sale and minimizes things the buyer might notice that could lead them to request a lower purchase price for the business.

How Due Diligence Works

The due diligence process is done after the buyer shows interest in purchasing the business, but before the purchase is complete. During this time, the buyer will request information from the seller so they can evaluate the value of the business and determine if it’s the right business to purchase. The documents requested can vary depending on the type of business and the buyer, but the seller should have as much as possible prepared in advance to speed up this part of the buying process. Once the due diligence is done, the buyer may adjust the amount they’re willing to pay for the business or adjust some of the terms of the sale based on what they found during the due diligence process.

Preparing for the Due Diligence Process

Sellers, as noted, should begin preparing for the due diligence process before they list the business for sale. This allows them to minimize any potential issues that could impact the sale of the business. To prepare, sellers should gather all of the documents they believe will be requested or needed during due diligence and ensure they’re organized and ready for the buyer to review. The exact documents needed can vary, depending on the type of business and what the buyer wants to know, but there are standard components that the seller can begin going through to prepare for the sale.

The seller should also take this time to find the professionals they will want to work with through the due diligence process so they can have assistance with obtaining and sharing any necessary documents. This allows them to have the assistance they need through the process, so they don’t have to handle it on their own. When they have the right help, they can continue focusing on managing the business, so there are no issues because of the due diligence process.

General Categories for Due Diligence

Though the seller cannot predict everything the buyer will want to review, they can start organizing information that the buyer is likely going to need during the due diligence process. There are several categories that the seller should look into and gather any documents for. These categories include the following.

·         Organization and Operations – The buyer will need to know how the business is organized. This includes formation documents, board minutes, any equity agreements, ledgers, and other information that shows the structure and organization for the business.

·         Financial Records – Buyers need all financial information for the business, including balance sheets, income statements, audit reports, and tax documents.

·         Any Contracts – Any contracts that will still be in force after the sale should be shared with the buyer. This could include customer contracts, vendor contracts, loans or other financial contracts, and employee contracts.

·         Litigation or Regulations – Any permits obtained by the company as well as pleadings for pending litigation or notices of threatened litigation should be shown to the buyer during due diligence.

·         Employment Information – Buyers will need information about current employees, including their wages, benefit plans, bonuses, and any benefit policies that may be in effect.

·         Any Intellectual Property – Information about intellectual property owned by the business, including copyrights, trademarks, or patents, should be shared with the buyer.

·         Marketing Information – Buyers should be able to review current marketing information to help them determine how marketing is currently being done and what they might want to start if they purchase the business.

Common Documents Requested by Buyer

Though the buyer can request just about any documents they may need to decide to buy the business, there are standard documents that they will request. When the seller is getting everything ready, they may want to make sure they have the following documents prepared.

·         Financial Statements – Buyers will want full access to financial statements to make sure they understand how the business has performed previously, how it is performing now, and how it may perform in the future. They’ll look for anything that seems out of place or unusual.

·         Any Accounts Receivable – Potential buyers will want to look for accounts that are more than a few months old, any write-offs they may need to worry about, and check for potential allowances for bad debts that might be their responsibility if they purchase the business.

·         Current Inventory and Inventory History – The buyers will want to see the current inventory for the business as well as look into how quickly the inventory typically moves. They’ll want to see what the typical turnover rate is as well as look into the pricing practices for the business and any depreciation methods used.

·         Any Contracts and Licenses – Any contracts will need to be reviewed by the buyer as well as leases, vendor agreements, and any agreements with consumers. They will also want to look at any permits or licenses the business holds to make sure everything is legally operating.

·         Full Tax Returns for Prior Years – Buyers will want to check out whether there are any net operating losses for the business or other tax implications that they will need to be worried about if they take over the business.

Due Diligence for the Seller

Report der Financial Due DiligenceMost of the due diligence is for the buyer to make sure they are getting a good deal on the business and purchasing a business that’s right for them, there is due diligence for the seller as well. They should take this time to do their research so they can make sure they have found the right buyer for the business. They may want to look into the visions the buyer has for the company to ensure it matches their own or check to make sure the business is going to continue to grow and be profitable once it has sold. If the seller will be merging with the buyer instead of selling outright or will be owning stock in the company after it has sold, this information becomes crucial so they can ensure they will continue to bring in profits after the business has sold.

Common Documents Requested by Seller

During the due diligence stage, there are some documents commonly requested by sellers from the buyer. The seller should request these at the beginning of the due diligence process so they can ensure they receive all documents they need promptly and to allow for time to obtain other documents if they find they need further information before the sale.

·         Financial Statements – The seller will want assurance that the buyer is capable of purchasing the business. Financial statements from the buyer will show that the money is available for the purchase of the business.

·         Buyer’s Contracts – Sellers may want to check any contracts the buyer currently has to ensure nothing will be an issue after the sale and to make sure the contracts will not impede the purchase in any way.

·         Authorization for the Purchase – If the buyer needs to be authorized to make the purchase, the seller should ensure that the proper authorization has been obtained. Without this, the sale will not go through.

·         Authorizations to Sell Stocks – If the seller will be given stocks in the business as part of the sale, they need to make sure the buyer will have the authorization to provide them with the stocks. They should get this information during the due diligence process, so there are no surprises after the sale.

·         Other Documents – Depending on the details of the sale, there may be other documents the seller will need to look at during the due diligence stage. They should ensure they know what these documents are and be ready to request them during this process, so everything is available to them before the sale proceeds.

Preparing the Documents for the Buyer

During the due diligence period, the buyer will give the seller a list of the documents they need. At this point, the seller should take the time to prepare each of the documents for the seller to review. The seller needs to ensure everything is properly organized and that all documents are ready. The seller should already have several documents ready, as they should have the items listed here prepared in advance. They can then gather any information they did not already have ready and work on organizing the information so it can be presented to the buyer.

The seller will want to organize the information based on the request list for the buyer. This ensures they have everything and makes it easier for the buyer to find everything they’re looking for. It also makes it less likely that the buyer will request information they already have since the information is all organized in the order requested by the buyer.

How to Share Documents Securely

Many times, due diligence for a business sale is done by presenting physical copies of all documents. However, it can be expensive to produce physical copies of every document, and having all of the physical copies is not very secure. It also means the buyer needs to visit the office during business hours to be able to view the documents. Instead, documents can be shared securely through a virtual data room.

All of the documents needed during the due diligence process can be uploaded to the virtual data room so they can be accessed whenever it’s convenient for the buyer and the seller. The buyer is free to access the documents after business hours as well as in a location that’s convenient for them.  All documents are kept secure and only viewable by those who are authorized to view them, and the documents are fully indexed for convenience as well as easy to view without new software needing to be purchased or installed.

If you’re planning on selling your business, the due diligence process is crucial and needs to be handled carefully to avoid any potential issues. Make sure you have the documents here prepared so the buyer can start reviewing over them while you obtain any other necessary documents. If you’d like to make the due diligence process as smooth as possible, consider using a virtual data room that enables you to share documents with the buyer securely and conveniently.

Financial Report

What is Financial Reporting?

In just about any industry, financial reporting will be crucial. This is the disclosure of the business’s finances and related information and is usually given to management as well as stakeholders. The financial reporting covers how the business is performing, usually on a quarterly or annual basis. There is certain information that needs to be included in the financial reporting and various guidelines that should be followed when creating the report.

Why is Financial Reporting Important?

Financial reporting is required by just about every stakeholder, and there are multiple reasons why they might need it. Some of the reasons it may be important will include the following.

  • Required by regulations – Local regulations and statues may require companies to provide financial reporting on an annual or quarterly basis. In these cases, the financial reporting will need to be published so anyone can read it.
  • Helps During Audits – When the finances of a business need to be audited, a financial report is required. This allows the auditors to get a clear overview of the business’s finances. They may need to access prior financial reports, not just the most current one.
  • Assists with Financial Planning – The financial report provides an overview of the company’s finances that can be useful when making decisions. It can also show a clear pattern based on changes made when the past few financial reports are compared together.

Business Building

  • Used to Raise Capital – Businesses that need a loan or to raise capital via investors will need to provide the investors or the bank with their financial reports. This allows potential lenders or investors to do their due diligence before giving the company money.

What to Include in a Financial Report

A financial report is typically a very long document that includes a variety of information about the company’s finances. There are certain parts of the financial document that must be included, though other documents can be included as well. Some of the crucial documents to include are the following.

  • Statement of Financial Position – This part is an overview of the company’s finances at the end of the quarter or the year. It includes assets, liabilities, equity, and more.
  • Profit and Loss Report – This is a more detailed part that covers the income, expenses, and profits or losses for the period of time covered in the financial report. This should include any sales or expenses during that period of time.
  • Changes in Equity – This part covers the changes in equity for the company during the financial reporting time period. Any changes in equity need to be in this section.
  • Cash Flow Statement – This is a report covering where the money came from and went during the quarter or year. More detailed than the profits and loss report, this covers investments by the business, sources of cash, and any other ways money was brought into the business or used by the business.

Objectives of Financial Reporting

When creating a financial report, it’s a good idea to keep the objectives of the report in mind. It should be organized, so anyone who needs to view it can find the information they need quickly and easily. The following objectives should be considered when creating every financial report.

Stakeholders next to a financial report

  • Provide Management with Financial Information – Management for the company will use the financial report to plan, analyze previous changes made, and make decisions for going forward. They will need to be able to see an overview of the finances with respect to the decisions they’ll be making.
  • Provide Investors or Creditors with Financial Information – Any investors or creditors will want to review the financial reporting to ensure the business is still bringing in profits and able to meet any obligations. They may also review prior financial reports before offering financing to the business to ensure they will receive their money back.
  • Provide Stakeholders with Information – Stakeholders will want to make sure the business is operating as intended and that there are no major issues they should be aware of. Much of the information they’ll want to review is covered in the financial report.
  • Provide Auditors with Information – When the business needs to be audited, the financial report should assist the auditors in finding the information they need. This can help the audit proceed faster and minimize the potential for any issues.

Across industries, businesses need to make sure they create financial reports on a regular basis. These reports are used in a variety of ways, so it is critical they include everything that might be needed by the people who use it. This way, the financial report can become an asset the company can use for management, lenders, governmental regulations, and more to show how the company is doing throughout the quarter or year.

Symmetric photo of a building

A Guide to Vertical Acquisitions: Their Benefits, Risks, and Alternatives

Vertical and horizontal acquisitions are strategies that businesses use to solidify their positions, increase market share, and turn more profits. Read on to learn more about vertical acquisitions and their advantages over horizontal mergers.

Vertical Acquisitions: What Are They and How Do They Work?

Vertical acquisitions, mergers, and integrations are competitive strategies by which companies assume control over various stages of production and/or distribution. It’s covered in most major business courses, including MBA degrees. A great example of a vertical merger is that of Carnegie Steel, which didn’t just buy iron mines to ensure a plentiful supply of raw materials, but also purchased railroads to strengthen their distribution network. This all-encompassing strategy helped Andrew Carnegie make cheaper steel, and it boosted the company’s standing in the marketplace.

What is a Horizontal Merger?

A horizontal merger or acquisition is another strategy companies sometimes use. The simplest definition is that a horizontal acquisition is the purchase of a related business. For instance, a fast food chain may merge with a company in a different country to gain access to foreign markets.

Vertical Acquisition Strategies

As we’ve seen here, vertical mergers combine companies with their suppliers (backward integration), or with their distributors (forward integration). For instance, supermarkets may buy farms to ensure a steady supply of fresh produce, or they may buy a fleet of vehicles to make it easier to get those products to market. There’s another type of vertical merger, known as balanced integration, which is an even mix of these two methods.

When is a Vertical Acquisition a Good Idea?

Multiple factors affect the decisions that go into forward and backward integration. Companies may use such strategies in these scenarios:

  • When their current suppliers or distributors are unreliable
  • If raw material prices are unstable or distributors’ fees are high
  • When distributors and suppliers earn sizable margins
  • If the company has the ability and resources to manage the supplier’s or distributor’s business
  • When the industry is entering the growth phase

The Benefits of Vertical Acquisitions

What are the biggest advantages of a vertical merger? Allow us to use the example of an automobile manufacturer.

With a vertical acquisition, the car-maker can smooth out its supply chain, make its service and distribution networks more efficient, and absorb profits that would have otherwise gone to parts suppliers and other entities. The automaker would, by assuming control of its supply and distribution networks, raise entry barriers for other companies while developing its own core competencies.

The Drawbacks of Vertical Mergers

Though vertical acquisitions are advantageous in most cases, there are some pitfalls to consider.

  • The quality of the goods (those once supplied by outsiders) may diminish due to scarcer competition.
  • The ability to decrease or increase raw material and component production might be lost as a company may have to sustain a certain production level in pursuit of an economy of scale.
  • It may be hard for a company to sustain its core competencies as it shifts its focus to the integration of its new units.

There are some alternatives to the vertical merger, such as market purchases (like auto parts) and long- or short-term contracts (with service stations and showrooms).

Strategic Examples of Horizontal Acquisitions

Horizontal integration is a firm’s acquisition of a competitive or similar business. It may purchase, merge with, or take over a different company to grow in capacity, grow in size, achieve an economy of scale, to reduce risk and competition, or to get into a new market.  The most prominent examples of horizontal acquisition are the purchase of numerous refineries by Standard Oil, or the purchase of Compaq by Hewlett-Packard.

When Should a Business Consider Horizontal Acquisitions?

A firm may think of a horizontal integration in one of these situations.

  • When an industry is entering a growth phase
  • When its rivals lack a similar level of expertise
  • When an economy of scale is attainable
  • When it can manage the other company’s operations after the merger is complete

Some cubes and one of them is highlightedThe benefits of a horizontal merger are the economy of scale, an increase in differentiation (aspects that help a company stand out from the competition), and the ability to tap into new markets. These benefits are explained here.

  • An economy of scale: The bigger, horizontally-integrated firm can produce more than the merged company at less cost.
  • An increase in differentiation: The firm can offer more features and services to customers.
  • Increased market share: Because of the acquisition, the new firm will become a bigger buyer for its suppliers. It will have a bigger market share and it may have more power over the distribution network.
  • Entering new markets: If a merger is with a foreign company, the new firm will have another ready-made market.

The Disadvantages of Horizontal Mergers

As we briefly mentioned earlier, a company’s managerial staff should be able to handle the larger firm if it is to realize the benefits of the merger. The acquisition’s legal consequences will have to be considered, as most countries have stringent antitrust laws: if the combined entity will force competitors out of business, those laws may be used. Taking Standard Oil as an example, the company was later broken into more than 30 competitors.

As companies grow with horizontal mergers, they may become excessively rigid, and practices may become set in stone. This may prove dangerous to the company’s future. Additionally, predicted synergies may be scarce or even non-existent (for instance, the failed merger of a software and a hardware company in the expectation of compatibility between products). Here is how you avoid common mistakes during the Post Merger Integration Process.

In Closing

The decision to employ horizontal or vertical integration has a long-range effect on a company’s business strategy. Every firm will have to select the most suitable option based on its position in the market and the value it offers to customers. With an in-depth analysis of its resources and strengths, a company can make the appropriate choice.

The Future of Asset Management

Predicting the future of asset management remains a difficult task. However, when combined with a global political environment that remains volatile, the process becomes even more of a challenge. Technology advancements complicate the process as well, and asset managers recognize the only stable thing in their business is change. While this task continues to be difficult, this doesn’t mean it is impossible. What is asset management and what are some trends managers are following to see where this field is headed?

What Is Asset Management?

Who is the right fit for the search fund model?When a client turns over the direction of all or part of his or her investment portfolio to a financial institution or individual, this is referred to as asset management. Investment banks, among others, offer this type of service along with other traditional and alternative products otherwise frequently unavailable to the average person. Asset management functions to mitigate the investor’s risk while increasing the value of his or her portfolio. Investments that may be found in the portfolio include mutual funds, real estate, commodities, and alternative investments among others.

Driving the Industry

Before considering what the future holds, investors need to be aware of the current landscape as well as what is driving the transformations. Stagnancy and narrow profit margins have jolted the industry, leading to a challenging atmosphere for those in the field.

While underlying conditions affect any industry, nowhere it is truer than in asset management. Three core drivers help to explain why this is the case. Asset managers must always operate within a regulatory framework while keeping the preferences of customers in mind. Furthermore, artificial intelligence isn’t the only way in which advancing technology is impacting the industry.

All three factors frequently intertwine and affect each other, which influences future trends. For example, regulatory frameworks must be adjusted as a result of advances in technology and younger investors regard technology differently than those who have been in the game a while. This needs to be taken into consideration by asset managers.

Major Trends to Be Aware Of

What is the current landscape with regard to asset management? Of the three drivers, which are influencing this sector currently? Every investor and asset manager needs to be aware of the big trends that are presently being seen and have been for the past few years.

Low-Cost Investment Funds

The Deloitte 2018 Investment Management Outlook report stated the industry has adjusted to changing investor preferences in recent years. Investors now want passive and low-cost funds while reducing their interest in front-end and back-end load share classes. Exchange-traded funds remain hot today, although the focus has been on everything from smart beta testing to factor investing.

The Reorganization of Companies

interior of an business comapnyThe changing regulatory framework continues to lead asset management providers to boost their organizational agility. Countless companies now choose to break existing tasks into separate components to ensure they are adaptable and flexible, especially with regard to technology. For instance, numerous managers have adopted cloud computing to enhance their agility while relying on virtual data rooms to increase their capabilities.

The European Union and Its Role in Asset Management

Asset management providers need to look globally when it comes to regulatory compliance. The EU opted to introduce the General Data Protection Regulation (GDPR) and asset managers around the world responded. The only exception to this is America. Under President Trump’s leadership, regulations are expected to ease considerably, according to Oliver Wyman.

Looking to the Future

Once an asset manager understands current trends, such as those described above, he or she needs to look to the future. What trends can one expect to see in this sector in the coming years? How will the drivers play a role in this?

Changing Demographics

The world’s population is growing older and the focus of aging individuals will be on increased healthcare and retirement solutions. In contrast, the younger generation is very tech savvy and will want to know more about the investment opportunities available to them.

The PwC Asset Management 2020 report states this move in the investor base will lead to sovereign wealth fund growth. Furthermore, local governments will push for individual retirement plans in response to the aging population.

Data Analysis Will Increase in Importance

Although data analysis has been around for some time now, experts predict it will go beyond different asset options and the study of markets in the future. The KPMG report ‘Investing in the Future” announces successful asset managers will make use of client profiling with the help of technology. The marketing of assets will be streamlined and allow more investors to be reached.

While the current market remains under the control of western consumers, this appears to be changing. As a result, asset managers need to understand a much broader audience. This is due in large part to Asia and Africa and their improving economies.

Sustainable and Social

Asset managers currently recognize the importance of corporate accountability when it comes to social, environmental, and governance issues and feel this trend will increase in the coming years. In fact, Morgan Stanley conducted a survey in 2017 which found that 86 percent of millennials want to learn more about sustainable investing. While companies are aware of this, regulatory and legislative pressure will make this more crucial in the future.

Portfolio Management in the Future

Asset managers need to improve their portfolio management services to react quickly to specific developments while taking the big picture into consideration. With the help of a virtual data room, managers find they are able to benefit from the latest technologies while harnessing them to better manage assets. Furthermore, responding to regulatory pressure becomes easier and customers benefit as they are offered a quality portfolio.

Virtual data rooms provide real-time analysis of data coming in and enhance access to this data. Furthermore, they improve the relationship between the client and his or her asset manager while responding to the informed client. Research conducted by Greenwich Associates found that this relationship is of great importance and asset managers must possess outstanding presentation and persuasion skills to succeed. Furthermore, transparency and openness need to be present in the partnership. Fortunately, the regulatory pressure being placed on the managers makes the entire industry more transparent.

Asset managers can no longer focus on their home country. In the future, the industry will go international and make the management of portfolios more challenging. Fortunately, with the right tools, complexities become easier to navigate and staying ahead of trends remains a possibility.

Looking Out for Deal Breakers During Mergers and Acquisitions

While both sides of a merger or acquisition hope the deal will go through without any issues, that’s not likely to happen. Issues are expected during this process, but they shouldn’t be enough to cancel the deal. Buyers, however, will want to make sure they understand what could be a deal breaker and what they should watch out for during the entire process so they know if they need to walk away.

What is a Deal Breaker?

A deal breaker can be just about anything that causes the buyer or seller to cancel the merger or acquisition. Buyers are going to want to make sure the merger or acquisition is going to go as smoothly as possible and that it will be a success in the end. To try to reach this goal, they’ll want to look for anything that could be a large problem. These large problems are the deal breakers that could mean a merger or acquisition is just not a good idea any longer.

Knowing When to Walk Away

When a lot of time has been spent working on a merger or acquisition, it can be easy to think that large problems will be solved eventually. The issue is, it may cost a lot more in the long run to solve the issue or it might be impossible to actually solve. Deal breakers should be carefully considered to make sure the deal could be successful and that the merger or acquisition is not going to be the end for either of the businesses. Buyers and sellers will want to make sure they know when to walk away from any deal that could be potentially a poor decision.

Miscalculations or Higher Than Expected Costs

When price starts to be discussed, there’s a lot to go into it. Buyers can be shocked when the seller prices the business more than they expected. Sellers might be surprised when buyers value the business much higher or lower than they expected. The value often goes hand in hand with forecasting the potential financial future of the business, which can be difficult to do.

Miscalculations can come when there are inflated numbers for the business or the financial history doesn’t equal the financial past of the business. It’s better to be conservative with the calculations for the future of the business to get a more accurate idea of the current and future value of the business. Since mergers and acquisitions can take time to complete, miscalculations can become apparent during the deal. If this happens, careful consideration of what was miscalculated and the impact it has will need to be done to ensure the deal is still a good deal.

Unclear Terms for the Merger or Acquisition

The Letter of Intent (LOI) is basically what the final deal will include. This should include more than the price. It should include all of the terms of the deal, the closing date, any protection if the deal falls through, and more. This is often more important than the price because the terms are what both sides will need to agree to. With the LOI, make sure all terms are as clear as possible. Unclear terms could lead to issues down the road where one side believes something is happening and the other side believes it should be handled differently according to the terms. Unclear terms in an LOI should be rewritten before it’s accepted or the deal may not be able to go through.

Business Erosion During the Process

Mergers and Acquisitions can take up to a year to complete, which can lead to huge changes for the business being sold. Employees, clients, and vendors may be uncertain of the business’s future, so there may be changes with them during the deal. Advisors should be able to handle this during the negotiations, but it’s possible the business changes to the point it’s no longer a good deal. If this happens, it’s best to walk away.

Irreconcilable Differences Between Businesses

For mergers and acquisitions to be possible, the businesses need to be able to blend together. Looking into the cultures of both businesses is crucial as this enables buyers and sellers to ensure the deal is going to be one that is beneficial for most businesses. It’s important to find this out as early as possible, before the negotiations get too far. If the businesses have mismatched strategies, the systems applications cannot be combined, or if there will be any other major issues between the two businesses, it may not be a good deal for the buyer.

Insufficient Planning Before Merger or Acquisition

The planning that goes into a merger or acquisition is crucial. Proper planning makes the entire process possible and can help attract more buyers or help the deal go smoother. Sellers will want to watch out for deals where the buyer is not prepared for the merger or acquisition and doesn’t know what the business is worth, the true value of everything the business has, or what needs to be done to complete the merger or acquisition.

Inflexibility of Seller or Buyer

Mergers and acquisitions involve a ton of negotiations. There are points that the buyers and sellers will need to discuss before they can find a common ground to agree on. If the buyer or seller is not willing to negotiate, it could be a sign that there is a lack of seriousness in the deal. Buyers who are not willing to negotiate might mean they aren’t really interested in buying the business and sellers who won’t negotiate might not be ready to commit to the sale yet. Inflexibility on either side can mean the end of the deal.

Buyer Financing Issues

Buyers need to be able to purchase the business. Many times, they need to be able to get a loan to cover the cost of the business. However, it’s possible the buyer will have trouble getting funding to purchase the business. When this happens, it may end up being a deal breaker if the funding is not eventually obtained. Sellers will not want to delay the sale indefinitely while they wait for funding to be arranged.

Data Privacy Issues

Data privacy will be crucial for both businesses. Before the merger and acquisition can be completed, this needs to be discussed between both sides. There should be a discussion over how information is collected during the merger and acquisition process, what happens to the data after the deal is complete, and how the data will be kept secure during and after the process. If the information that needs to be kept private cannot be secured and kept private, the deal may not be viable.

Issues Meeting Regulations

Some businesses will need to meet laws and regulations. This is common in highly regulated businesses like those in healthcare, finances, or businesses that deal with children as consumers. The business should already meet all regulations, domestic and international, and should provide disclosures about the regulations for the buyer. If regulations are not already met, it could mean the business is going to have issues in the future that the buyer will need to deal with. This could mean the deal is not a good deal for the buyer and it may be better to walk away.

Extended Delays Throughout the Process

Wann Firma verkaufenThe entire process can take up to a year or longer. When the seller isn’t prepared, the buyer cannot obtain financing, or there are other issues that delay the process, the deal may not be able to be completed. Some delays are expected through the process and should be handled as they occur. However, if there are too many delays because of one side, if the delays go on for too long, or there just isn’t progress being made in the deal, there is more time for potential issues to occur. Delays can be a sign that the deal should not go through or that one side is not really ready for the sale. Extended or numerous delays can definitely be a deal breaker.

Due Diligence to Find Deal Breakers

There is a lot that goes into the sale of a business. Buyers and sellers should be aware of potential deal breakers and which ones they can impact to make it less likely the deal will fall through. During the merger and acquisitions process, the buyer needs to ensure they do their due diligence. This enables them to find deal breakers like incompatibility that simply cannot be fixed to allow the deal to go through. Doing this enables them to make sure they can find these issues before it’s the final hours of the deal to minimize the time and money spent on a deal that simply won’t work.

If you’re planning on going through the mergers and acquisitions process, understanding potential deal breakers will allow you to see when you should negotiate further or when you should walk away from the deal. Pay attention to the potential deal breakers here and do due diligence to ensure you know how to handle the process and what could happen during the merger and acquisition.

Non-Disclosure Agreements: Important Facts Every Seller Should Know

Non-Disclosure Agreements (NDAs), sometimes referred to as Confidentiality Agreements, are universally binding contracts intended to ensure the confidentiality of shared information. They are frequently used in a wide variety of business transactions, including Mergers and Acquisitions (M&As).

It can be difficult for those who don’t have dedicated legal experience to understand exactly what information needs to be included in a Confidentiality Agreement. Given that these forms are considered to be binding contracts, it’s important for buyers and sellers to know what they’re agreeing to when they sign on the dotted line, though. This article will introduce the key terms of NDAs, including the most striking differences between standard form NDAs and M&A MDAs.

The Basics

As stated above, NDAs are designed to ensure the confidentiality of information being passed from one party to another. There are two basic formats for NDAs: mutual and non-mutual agreements. The former is typically used in business transactions where both parties will likely be sharing confidential information, while the latter is often more appropriate for M&As, in particular.

Since sellers are the ones who typically release confidential information during the M&A process, NDAs are designed primarily to protect their interests. Often, though, the terms of NDAs are negotiated prior to the sale. Thankfully, sellers do typically have substantial leverage when it comes to negotiations and sending out form NDAs is an accepted part of the sale process.

Why Go Non-Mutual?

The majority of M&A sellers prefer non-mutual NDAs, especially if they do not anticipate receiving confidential information from their buyers. The use of a non-mutual NDA offers prospective buyers the assurance that the seller will not be requesting access to restricted information, as well. The majority of serious, cash buyers don’t intend on sharing confidential information, to begin with, so although the use of a non-mutual NDA is of primary benefit to the seller its use generally goes unquestioned by buyers, as well.

Essential Elements

NDAs don’t have to be absurdly lengthy and complex documents. In fact, well-structured NDAs are typically only a few pages long. There are a few essential elements that should be included in every NDA, especially those issued in the process of M&As.

Every NDA should begin by identifying the seller and the buyer. It should also offer a precise definition of what is considered confidential information in the context of the M&A and what the scope of the confidentiality agreement will be for the recipient. Often NDAs include terms obliging the buyer to either return or destroy certain information that has been deemed confidential when it is requested by the seller.

The NDAs used in M&As typically contain a set term, as well. When that term expires, the agreement will be voided. If there are any exclusions from confidential treatment that will be in place throughout Defining Confidentiality.

Woman making a phone call and smilingSellers should make a point of carefully defining what information is considered confidential, as disreputable buyers may intentionally seek out loopholes that allow them to start using the company’s valuable secrets before the term of the NDA has expired. Decide in advance whether oral information can be deemed confidential or if, by definition, confidential information must be actively defined as such in writing. Since orally conveyed information can be a tricky subject, many M&A NDAs contain stipulations that the confidentiality of any information conveyed orally to the buyer must be confirmed in writing within a certain period of time.

Non-Use Agreements

The purpose of sharing confidential information with potential buyers prior to executing an M&A is to facilitate negotiations. Most NDAs go one step further than just requiring recipients to keep confidential information to themselves, though. They also contain clauses specifying the intended use of confidential information, which is exclusively to be used for evaluating and negotiating the specific M&A transaction in question.

Explicit Exclusions

Sellers may not be happy about it, but the fact is that almost every NDA, no matter how beneficial to the seller, contains at least a few exclusions. These are intended to release the recipient from the terms of confidentiality and non-use in certain circumstances that may place an unreasonable burden on the buyer.

Letter Of IntentExclusion clauses typically cover, at a minimum, information that was already available to the recipient prior to signing the NDA and not explicitly subject to the obligation, information that was publicly available prior to signing, and information disclosed to the buyer by a third party with no obligation of confidentiality.  Some NDAs also allow for the use or disclosure of information that has been independently obtained by the buyer without the use of any information covered by the NDA.

Sellers should also bear in mind that there may be circumstances under which buyers will be forced by court orders to disclose confidential information. Even an NDA offering the maximum possible amount of seller protection cannot require buyers to break the law by withholding information. However, it can require the recipient to offer adequate advance warning prior to releasing information under a court order.

Return or Destroy Provisions

Every NDA, whether drafted in the context of an M&A or used for other business transactions, will include a provision that requires confidential information to be either returned or destroyed upon request. In the context of M&As, this provision is designed to protect sellers in the event that the acquisition does not move forward.

Sellers should word their return or destroy provisions carefully. They should ensure that the NDAs recipient is required to delete electronic files in addition to paper copies and to turn over any analyses that have been performed in-house using confidential documents.

Additional Provisions

The NDAs used for M&As may also include a number of additional provisions, although they are not required. It is not uncommon for sellers to include injunction clauses governing how breaches of the NDA will be handled, for example. Many sellers also require provisions that explicitly remove the contractual obligation to go through with the M&A except as provided in any future agreement and just about all of them include disclaimers regarding the accuracy and completeness of the information being provided, as well.

Find the Best Business Broker to Sell Your Company

It’s time to sell your business. You may be looking to retire, ready to launch a new business, or ready to move to an exciting new city and see what’s waiting for you. No matter why you’re ready to sell, the top thing on your mind is likely getting the best price for your business. You’ll want to have enough money to make that next move. As you get ready to sell your business, consider hiring a business broker to sell your company. While you will need to spend some money to pay the business broker for their services, this can help you get a lot more for your business in the long run.

If you’re planning on selling your business soon, start today to find the right business broker. You don’t want to end up working with one who can’t get you the money you need for the company or that takes forever to find an interested buyer. You don’t want to wait years for the business to sell. Finding the right business broker means you’ll have help fast, you’ll get personalized assistance to sell your business, and you’ll be able to find the right buyer as quickly as possible. It may also mean you’ll get more from the sale of your company.

Benefits of Working with a Business Broker

The main downside to selling a business on your own is that you don’t have experience. You may have an idea of the type of buyer you want to sell your company to, but you won’t know how to find the right buyer, how to make sure the sale is successful, or how to get as much as possible for the company. This is where a business broker comes in. They offer a ton of benefits that can help you get more when you sell your company. Some of the benefits include the following.

  • ClockFree Up Your Time – Selling a company on your own requires you to spend countless hours marketing your business, looking into potential buyers, and dealing with the actual sale once you find the right buyer. A business broker handles all of this for you. This gives you more time to maintain your business and continue doing everything you’ve been doing up to the decision to sell.
  • Determine the Sale Price – How much is your business really worth? It can be incredibly difficult to determine the true value of your company and figure out how much you should get from selling it. Business brokers have experience and access to information that helps them determine the value of your business. They’ll make sure they can get as much money as possible with the sale.
  • Provide Marketing for the Sale – Marketing the company is a crucial step to help bring in many potential buyers. A business broker knows how to make the company look good to potential buyers to sell the company fast and get more money for it.
  • Make Sure the Company Sells – Once a buyer is found, there is still a lot to do to make sure the sale goes through. The business broker works on making sure the company is sold as fast as possible to minimize potential issues. They’ll work with you to create a deal with the buyer then finalize the sale of your company.

How to Find the Best Business Broker

Like any industry, some business brokers are far better than others at what they do. Some have more experience overall or more experience in your industry and some are going to work hard for you while some may just try to sell the business fast, without much concern over getting you the best price. When you’re looking for a business broker to sell your company, there are a few things you’ll want to look out for. Keep an eye out for a broker who has the following before you decide to hire anyone.

  • Experience Selling Businesses – Check the experience a potential business broker has. Business brokers should be able to provide you with a list of previous clients as well as examples of the work they’ve done in the past. Look into the references they provide to see what kind of work they’ve done previously. This gives you a good idea of what to expect them to do for you.
  • thumbs upGood Reputation – Reviews are available for everything, even business brokers. Look online to see if there are any reviews for the business broker you’re considering and read through them carefully. A business broker who has a good reputation is likely going to be a better option as you can trust they’ll work hard to sell your business.
  • Specialization in Your Industry – General business brokers are available, but they might not know about certain details in your industry that can impact your sale. Look for a broker who has experience selling businesses in your industry as well as in your area. This can help you get more when you sell your business because they already know how to sell a company like yours.
  • Uses a High-Quality Marketing Plan – How they market your business makes a big difference in the potential buyers they’ll find. Learn more about how they plan to market your business and ensure they’re going to create a high-quality marketing plan specifically for your business to attract the right buyers.
  • Ready to Tell the Truth – Make sure the broker you choose is going to tell you the truth, not what you want to hear. It may be hard to hear that you won’t get as much money as you want for the company, but you need to be able to trust that your broker is being honest about the value of your company and issues you might face during the sale.

Red Flags to Watch Out for When Choosing a Business Broker

It’s just as important to know the red flags to watch out for as it is to know what to look for in a business broker. If you see any red flags when you’re meeting with the broker for the first time, skip that broker and work on finding a much better one to help you.

If the business broker requires the majority of their fee or all of it upfront, go ahead and walk away. While you may have to pay some of their fee at the beginning, you should never pay the full price until your company is sold. This is a major red flag that the business broker is not going to actually help you sell the business but, instead, is going to take your money and disappear.

Brokers need to take advantage of many different marketing techniques to reach out to buyers for you. If they don’t have a website, it’s a sign they might not be up to date and may not be able to reach out to nearly as many buyers. This could lead to a much lower sale price for your company if they’re able to sell it.

Hand shakeTalk to the business broker about the price for your company. If they seem overly confident, they might be trying to get too high of a price for the company and may have trouble actually finding potential buyers. Also, ask about how they are going to do the valuation for your business and what it includes. You want them to be able to explain to you and to potential buyers why your business is worth as much as they think it’s worth. If they can’t explain how they came up with the number, it’s possible they’re trying to reach for too high of a selling price.

What to Expect After You Hire a Business Broker

After you’ve found a business broker you want to work with, expect them to get started working on trying to sell your business right away. They’ll need to determine the market value for your company so they know how much it should sell for. Then, they should start working on finding the right buyer. They’ll need to use a high-quality marketing plan to let potential buyers know about your company and to get them interested in buying your company. They should be able to find a buyer fast, though the amount of time this takes does vary. Once a buyer is found, the business broker should work closely with you and other professionals to facilitate the sale and have everything finalized as fast as possible.

The decision to sell your company is a huge one. You want to get as much as possible from your company so you can move forward with your retirement, starting a new business, or anything else you want to do in the future. Use the tips here to make sure you’re working with the right broker. The right business broker is going to work hard for you and strive to make sure your company sells quickly. They’re going to make sure your company sells for as much money as possible so you’re happy with the outcome of the sale.

How to Prep Vital Documents Before a Company Sale

Potential buyers for your business want to see the numbers. They want to see how profitable your business can be for them, what they should expect if they buy your business, and what your business includes. Otherwise, they won’t be interested in it. To show potential buyers what you have to offer, you’ll need to prepare a number of different documents you can share with them.

What Documents are Vital for a Company Sale?

You’ll need a variety of different documents to prepare for the company sale. These include documents describing the business, legal documents, financial statements, inventory lists and more. Make sure you have these documents as well as any other documents that might be useful for the buyer on hand before you start looking for a buyer.

  • Information About the Business – You’ll need basic information about your business to get buyers interested and wanting to learn more about what your company offers. This should include photos of your business, opportunities for improvement with profit projections, descriptions of your products or services and prices, your business plan, your marketing plan with samples, and your business procedures manual.
  • Legal Documents – Some legal documents will be needed before entering any agreement with a buyer, while some are going to be current legal documents for your business. Documents needed to prepare to sell the business include a non-disclosure agreement, a financial statement the buyer completes, an offer-to-purchase agreement, and information about seller financing. Other legal documents to have on hand include patent, trademark or other intellectual property documents and business formation documents.
  • Financial Statements – Potential buyers want to see your business is making money and that they can make money from the business as well, so financial documents are especially important. These include statements for recent earnings as well as tax documents. You’ll want to have on hand financial statements including the present year as well as the past 3 years, statements showing cash flow, description of financial trends, aging reports for accounts payable and receivables, and your tax documents for the past 2 to 3 years.
  • Inventory and Assets – What does the buyer get if they purchase your business? You’ll want to provide an inventory list detailing the value of all inventory, and a list of what they’ll get with the business, like the fixtures and equipment, with the value listed. All of your assets should be listed to ensure the buyer knows exactly what they’ll get if they purchase your business.
  • Contracts – Your buyer will need to know about any contracts, loan agreements, or liens they will need to handle if they purchase your business. This includes contracts for suppliers and distributors, a list of current clients and contracts for major clients, any outstanding loan agreements or liens, the building lease if applicable, any equipment leases, and any maintenance agreements.
  • Employee Information – Your employees will likely stay with the business through the change of ownership, so the buyer will need to know about them. With your documents, include a list of employees with hiring dates and salaries, any employment agreements, and the employment policy manual.
  • Certifications – You may have certifications, licenses, and other documents your potential buyer will need to be aware of. They’ll want to find out about business licenses and certifications, any professional certificates you might need, and any insurance policies they’ll need to keep for the business.
  • Other Unique Documents – It’s possible you’ll have other types of documents not listed here that are vital for your business. Keep these with your documents to have them ready to show potential buyers.

Assemble Documents Early to Prep for Sale

Go ahead and start assembling all the documents today to ensure everything is ready when you start to look for a buyer. You’ll want to have everything ready long before a potential buyer becomes interested in your business. They’ll want to see these documents right away to determine if they’re interested. If you don’t have everything organized and ready, the buyer might decide they don’t want to purchase your business.

How to Organize Physical Documents Before the Sale

Depending on your business, there may be quite a few documents you have hard copies of on hand. Physical documents should all be organized in a box, separated into files by the type of document. All files should be labeled so you can easily see what’s in the file and so your buyer can look through everything. You should keep informative documents about your business at the front so they can look through these first and have all other documents organized behind these so they can see what your business offers.

How to Organize Sensitive Digital Documents

Many businesses today keep their vital information stored digitally instead of having a hard copy on hand. It’s important to make sure all of the data is stored carefully so it cannot be accessed by anyone without authorization. This is crucial for documents that include sensitive information, such as legal documents or information about trademarks and patents.

For these types of documents, use a virtual data room like Docurex. A virtual data room allows you to store and organize documents with sensitive information, yet easily provide access to potential buyers who will need the information to determine if they want to purchase your business. The data room should be highly secure to ensure your documents are protected and able to be shared with only potential buyers you want to have access to them.

If you’ve made the decision to sell your business, start working on the accumulation of essential documents today so you’re well prepared when you do have a buyer who is interested. This ensures you’ll have everything you need on hand and easily accessible for them. Whether you choose to store hard copies or you’d prefer the security of a virtual data room, organizing documents today gives you the peace of mind you’ll be ready when a buyer does choose to learn more about your business and what it can offer them.

Business Building

10 Effective Ways to Raise Business Value Before Selling

Your business is your baby. Before it even got off the ground, you had a clear vision of the end result. Over the years, you nurtured it and watched it grow and thrive. All along, you knew the time would come to let it go, but like most entrepreneurs, you’re bound to encounter a common roadblock at this point. To you, this company you built from the ground up and drove to success is priceless. Unfortunately, prospective buyers approach the matter from an entirely different perspective.

Determining the True Value of Your Business

When the time comes to sell your company, calculating its worth takes a more neutral tactic. This is where business valuation comes in. Several different strategies are used to determine a business’ value, and a wide range of factors are figured into the equation, such as:

  • Price versus earnings
  • Future revenue potential
  • Past gains
  • Assets after liabilities are subtracted
  • Multiplying share prices by shares outstanding

These are only a few of the common aspects considered when figuring a company’s true. Various calculations can be used, and industry, size of a business and other elements work their way into the mix as well. Once the numbers have been crunched, many entrepreneurs find their business’ market value is quite a bit less than they’d imagined. If that’s the case, certain steps can be taken to boost your company’s financial appeal before actually placing it on the market.

Effective Ways of Boosting Business Value

Though you’ve most likely invested a great deal of time, energy and capital into your company, there’s always room for improvement. This is especially true in the eyes of prospective buyers. Plenty of measures can be implemented to raise your business’ value before placing a “For Sale” sign out front. Some of them are more costly than others, but all of them are sure to generate a noticeable ROI.

1) Set Yourself Apart

In the business world, being unique carries a great deal of weight in its own right. Consumers tend to appreciate distinction when looking for a company to do business with in terms of products, services, customer support and a range of other aspects. Public interest gives potential buyers greater incentive. With that being the case, they’re going to look for businesses capable of holding their own in their niche.

Today’s business landscape is so fraught with competition, even the smallest detail could be the one that propels your company to the top. Any aspect setting you apart from others in your field is crucial to success, but it’s equally vital to drawing buyers’ attention.

Research your top competitors to better understand their weaknesses as well as your own. Improve upon your shortcomings and play on your strong suits to further boost your status in your industry. Purchasing prospects are sure to take notice and respond with more lucrative offers.

2) Promote Your Strengths

Plenty of people are uncomfortable with self-promotion, but in the business world, it’s a must. Refining your products and services goes a long way toward building business value; still, some assets can’t be seen on the surface. In some cases, those underlying elements are the ones in which buyers may be most interested.

Have you patented a product competitors are trying desperately to imitate? Are you dominating a seemingly tiny sector of the market others can’t seem to reach? Does your research and development team have a revolutionary idea in the works that could prove incredibly profitable to future owners?

Be sure to let potential buyers know about those unseen aspects. Keep in mind, though, it’s only empty bragging if you can’t back it up. Have clear documentation to support your claims and concepts.

3) Streamline Your Operations

Efficient businesses are productive ones, and productivity tends to boost profits. Do a deep dive on the internal operations of your company, and evaluate it from every possible angle. Bringing in an efficiency expert could work wonders in this regard.

Man reading a financal plan

Whether you do this on your own or turn to a professional for help, the ultimate goal here is to find areas where your business is faltering. Then, develop and implement new practices to make things flow more smoothly.

Doing so should ramp up productivity and revenue while lowering the cost of operation without sacrificing quality. All these elements add up to higher earning potential and lower overhead, both of which are highly attractive to potential buyers.

4) Hand over the Reigns

If you’re like many entrepreneurs, you’re an integral component of your business. While there’s nothing wrong with inserting yourself into every aspect of the company, it could bring up a red flag in the eyes of prospects. They’re most likely going to be leery of buying a business if it stands to crumble once its current owner is out of the picture.

No one is saying you have to walk away before placing your company on the market, but it’s important to start weaning the business off your guidance and vice versa. Create a detailed hard copy of daily operations for future owners’ reference. At the same time, be sure everyone in the company’s hierarchy is well-versed in specific procedures and protocols. Pass your knowledge and experience on to someone qualified to oversee the business in your absence.

You can still play a fundamental role in the company right up until it’s signed over to a new owner, but make sure it can run smoothly without your help as well. Seeing the business is capable of retaining its strength when you’re gone is sure to be a significant confidence boost for prospective buyers; as such, they’ll probably be motivated to make a higher offer.

5) Bring in New Customers

Long-running customers are critical to all businesses regardless of size or industry, but having a steady stream of new ones is also vital. Creating a nice balance between the two ensures continual cash flow and keeps the company from growing stale. Targeting new prospects is the key to generating fresh clientele, so ramping up your marketing efforts is bound to boost potential buyers’ interest as well as your company’s market value.

6) Don’t Ignore Existing Clients

Whether they’ve been with a company for a month, a decade or several generations, repeat customers form a strong foundation for any business. After all, being able to retain clients shows newcomers you’re worthy of their attention. It also proves to prospective buyers you’ve developed ongoing sources of revenue they can count on.Man typing on a laptop with a business suit case

While you may not necessarily need to market to long-time faithfuls, they shouldn’t be ignored. Your continued marketing efforts will carry over to the next owner, offering benefits from a couple different angles. For one, those customers will have a certain level of reassurance they won’t be taken for granted once new ownership takes over. Secondly, prospective buyers will feel more confident in those clients remaining loyal to the brand rather than its founder.

7) Pay Special Attention to Prospective Clients

As you’re well aware, customers fall into a wide range of areas along your sales funnel. Those further along in the process play a key role in not only your bottom line, but that of potential buyers. They’re already primed for conversion, and they’re far closer to becoming paying customers than those just beginning to take an interested in your products or services.

Place extra effort in closing all those pending deals before setting an asking price for your business. Also emphasize follow-ups with any newly integrated customers for retention purposes. Having a diverse and dynamic clientele gives possible buyers plenty of variety to work with.

8) Keep Moving Forward

Continuing to invest in a business you’re planning to sell might seem counterproductive, but nothing could be further from the truth. Letting your company stall out will cost you in a number of ways, not the least of which is incoming revenue before ownership changes hands.

Don’t stop forging ahead just because you’re putting the company on the market. Keep updating equipment, improving manufacturing processes, developing new products and services and carrying out other upgrades just as you would under normal circumstances. Continue funneling funds into new marketing campaigns and SEO strategies as well.

Ignoring all these aspects will only lead your business to fall behind the competition. It’ll grow stale in the eyes of customers and prospects, causing your clientele and cash flow to run dry. In turn, it’ll lose a great deal of luster for potential buyers. Aside from seeing dwindling profits, they’ll be repelled by the thought of having to make numerous upgrades on their own after purchasing your business. Though these issues may not be deal breakers, they’ll definitely lead to much lower offers.

9) Hold onto Your Workforce

TeamFully trained and qualified employees hold a great deal of power. Regardless of rank, they’re the backbone of any company. Having to train an entirely new team generally spells losses for pending business owners where both time and profits are concerned, so don’t send your personnel packing if you’re planning to sell your business.

Giving prospective buyers a well-trained and highly skilled crew to work with once they take over provides a great deal of stability and assurance. Granted, some new owners wipe the slate clean and start from scratch when they acquire a business, but this should be their choice. Don’t make the decision on their behalf because it could add up to greater losses for you as well as them.

10) Give It a Facelift

This could easily be one of the least costly but most profitable options for heightening the value of your business. It’s an age-old tactic of the real estate world and has helped countless property owners ramp up their going rates.

interior of an business comapnyPlenty can be said for the power of fresh flooring and a new coat of paint. Spruce up warehouses and manufacturing spaces if applicable. Have your reception area renovated or new fixtures installed. Little changes can go a long way toward making a business more attractive to buyers.

On the outside, make sure parking areas and driveways are in good repair. Have new landscaping features incorporated across the property and give your company’s exterior a modern makeover. First impressions are crucial, so improving curb appeal is sure to help your bottom line.

Businesses operating solely on an online basis aren’t out of luck here, either. Virtual storefronts are just as important as physical ones. Having your website redesigned and thoroughly tested to ensure all its links are working as they should may very well help draw in higher bids from potential buyers. Since online presences are immensely and increasingly important to today’s businesses, this could be a positive pre-listing move for any company.

Bottom Line

When you invest your heart, soul and savings into taking a vision from the concept stage to a fully operational enterprise, the fruits of your labor are bound to be priceless in your eyes. Once the time comes to move on to the next phase, though, countless entrepreneurs are stunned to discover their businesses are worth quite a bit less than they expected.

Several different factors go into determining the value of a business when it goes to market. Even the most successful and profitable companies often fall short when the valuation results come in. If you find yourself in a situation like this, you don’t have to settle for less. Certain steps can be taken to boost your business’ worth.

Set yourself apart from others in your niche both on the surface and through underlying aspects. Increase efficiency in every way possible to improve productivity and profitability. Give your business the capacity to operate without your intervention. Foster relationships with customers and prospects in every level of your sales funnel. Don’t stop forging ahead with new ventures. Renovate the company itself rather than its workforce.

Some of these measures require a certain amount of effort on your part whereas others depend on leaving well enough alone. All focus on promoting strengths, transforming weaknesses into assets, lowering operational costs and spurring earning potential. In doing so, you’re guaranteed to heighten your company’s value in the eyes of prospective buyers.

 

Preparing your company for a sale: Tips, strategies & tools to keep in mind

When deciding to sell your company, you can either choose to sell it in its current condition or prepare for a Merger and Acquisition (M&A).

A strategic M&A plan can considerably increase the sale value of your venture and should ideally be your chosen plan of action. You will make your company more attractive to potential buyers if you address your businesses weaknesses well in advance of any due diligence or negotiation processes. Here are a few simple steps that can help you maximize the value of your business.

Create a pre-M&A improvement plan

Before devising an M&A improvement plan, you must first take stock of the different aspects of your company such as:

  • Identifying areas that are doing well, those that are performing below average and need your intervention, and those that need a complete overhaul.
  • Creating a timeline and dedicated project to address any identified concerns and complete upgradations.
  • Assigning resources that you are willing to allocate for handling the M&A process and internal performance improvement initiatives.

Remember, recognizing the needs of your company early on will help put you in a better position during negotiations. Investors are usually looking for small companies with the potential for larger projected growth in the future. Many owners often make the mistake of discontinuing investments to improve a company once they decide to exit. Instead, this is the time where you must attempt to increase the value of your company by investing in equipment and upgrading processes to lead to higher performance. Your company’s value is directly linked to how it performs in the period leading up to, and during the M&A.

Keep your plans to yourself

Avoid disclosing your plans to enter an M&A until after the deal is sealed. While consulting with your legal advisors and accounts department, emphasize the need for discretion even if their profiles are contractually bound in non disclosures.

The news of your plans to sell the company might induce panic in your staff, generating uncertainty, which in turn might devalue the business right when it needs to be performing at its peak. Instead, train your employees to be able to carry on tasks in the absence of your supervision. Develop repeatable processes and create quantifiable parameters to ensure that your business continues to grow even after your departure.

Pay close attention to managerial staff and resolve any internal conflicts. Take every measure possible to avoid high turnover before M&A. Remember a high rate of employee retention is the sign of a healthy business!

Increase your EBITDA

Your company’s earnings before interest, taxes, depreciation and amortization will be the most likely metric used to evaluate its worth. The higher your EBITDA, the larger settlement you’re likely to receive. Thus, instead of focusing on gross revenue, attempt to push your EBITDA. Analyze your expenses to highlight funds that can be reallocated to increase your working capital, BPS, and boost EBITDA. If needed, hire extra marketing personnel and increase your top-line growth to maximize earning potential.

An investor is likely to evaluate your company’s track record of sales to estimate its projected earnings. It then makes strategic sense to expand your marketing team while preparing for an M&A. You can also choose to set up a revenue juggernaut in this phase to help realize hidden potential.

Prepare for a financial audit

A financial audit is a likely requirement before an M&A. Hire a reputable firm to conduct your own audit before entering negotiations in order to help improve the financial health of your business

A professional audit will also enable you to better understand what potential buyers might be looking for, give you a sense of what a GAAP audit constitutes, and having this data at your disposal will grant you an advantage during negotiations.

During the M&A process make it a point to highlight a history of compensation. Many entrepreneurs tend to combine their personal financial portfolios with their company’s. It is always advisable to clearly demarcate a separation early on and pay yourself a salary which adequately covers your expense and leaves behind a safety net to sustain your lifestyle.

Prepare a 3-year financial projection

A plan which includes clear financial projections is critical to garnering credibility for your company during M&A presentations. While surpassing quantifiable goals and milestones can add value to your company’s acquisition offer, failing to meet set financial targets can seriously jeopardize a sale. Hence, be certain that the projected numbers are achievable in the proposed period.

There are a couple of measures that you can put into place before framing your proposal. These must include knowing the Strengths, Weaknesses, Opportunities and Threats (SWOT) of your business. A SWOT analysis is critical before attempting to prepare a financial projection. Setting achievable goals and highlighting your competitive sustainability attests to the business acumen of your enterprise, while a well-planned execution of the presentation puts the ball in your court during negotiations.

Identify potential buyers

Networking in the right circles is key to finding investors that best suit your agenda. Keeping up-to-date with industry trends, and potential investors’ investment portfolios can help you pitch your company for sale. Identify a list of potential buyers, establish contact, and foster their interest in your enterprise.

Treat buyers like clients, highlighting how your company can best serve their interests. Share your projected milestones with prospective buyers and highlight a potential business that might profit from partnering with your company. Paint them a larger picture of where you see your company in the years to come, focusing on how they would benefit from processes that you have already put into place and in motion for a seamless transition/integration.

Prepare for final negotiations

If you’ve successfully made it to this stage, you will now be the best judge of the value of your company. Armed with a SWOT analysis, a successful 3-year projection, and favorable EBITDA, here’s the last negotiation tactic to note so you have the upper hand, ensuring you have addressed any misdemeanors from your company’s past.

Investors will jump at the opportunity to poke holes in your company’s reputation in order to offer a lower buyout. By acknowledging any mistakes from the past, you can gain control of M&A negotiations. Remember to state things as they are, and not provide explanations or empty apologies. Set-up the circumstance that might have led to a disruption and focus on the measures you put into place to contain an unfavorable situation and prevent future occurrences. Assign a short duration to address these concerns right before commencing M&A proceedings, effectively warding off any possibilities of them being brought up later to throw you off track.

Assess the best exit option

Ultimately, while selling a business for considerable profit is the dream of many contemporary entrepreneurs, when the opportunity finally presents itself it can prove to be a surprisingly emotional decision. Before making the final leap and handing over a company that you have worked several years to build, it is important for you to consider other options that might be at your disposal. Signing over all rights to your company is only one among a plethora of alternatives to capitalize on your hard work. For example you could:

  • Opt for a part liquidation, where you can either maintain control of operations or become a silent investor. This will enable you to retain a stake in the business which you can decide to sell during a larger buyout in the future.
  • Open your company’s portfolio and raise capital through equity, helping your company become larger before exiting at a higher value in the future.
  • Hire a CEO and play an advisor role. If you are feeling overwhelmed by the growing size of your enterprise and feel like you are not being able to contribute to its growth and take it to the next level, you can hire a CEO with relevant industry experience and take on an advisory role for yourself, focusing on the parts of the business process that catch your fancy.

With many points to consider, preparing your company for a sale is by no means an easy task and can be very emotional! However, following these aforementioned steps will at least allow you to realize the full value of your business and give you the due credit for all the years of hard work you’ve put in.