There are numerous issues facing owners who are considering a sale of their business, which is why it is imperative to prepare for the sale well in advance. We interviewed Richard Snyder, Director, Audit & Accounting, for the January issue of Insights from Kreischer Miller, about how to properly plan for a sale and how to identify individuals who can assist with the transaction.
Why should I prepare before selling my business?
The sale process can be more complex and involved than expected. If you anticipate a future transaction, you can take steps (as many as several years before the planned sale) to prepare. The preparation allows you to think like a buyer and address potential opportunities to maximize the value of the company.
What kinds of things should I consider in the planning process?
There are several areas of focus for buyers that deserve a seller’s attention in advance. You will add significant value to your business by providing strong, cohesive information in each of these areas:
- Review your business’ financial reporting. A buyer will look for a good financial reporting package, well-maintained financial records, and financial statements that are supportable by detailed schedules and information. Also, you may want to consider conducting an annual audit if you haven’t already done so. The process of the audit can help identify internal control issues and provide a higher level of financial reporting, which can give a buyer more confidence.
- Identify key business contracts and understand how they may be impacted by a sale. Certain customer and vendor contracts may have terms, such as change of control provisions, that could add complexities to a transaction.
- Human resources is a key area. Buyers will need an up-to-date organizational chart and employee listing identifying positions, hire dates, compensation, and other important data. If you have made significant changes in the few years leading up to the sale, be sure to explain those and the impact on both costs and output.
- Cyber security issues can pose significant risks to a business. This is an area that can shut down a transaction if not addressed properly. It is vital to conduct a cyber security assessment in order to protect your business. In preparation for sale, you must have a clear action plan to address any cyber vulnerabilities.
- Review corporate governance and documentation. Locate all important documents such as stock certificates, by-laws, and articles of incorporation. Missing information should be addressed immediately and outdated information should be updated.
- Identify any key legal issues or contingency matters. Potential contingencies, disputes, or legal matters should be identified and addressed, since these may be areas that can impact a transaction. Understanding these matters thoroughly will allow a seller to discuss and negotiate them with a buyer instead of being caught off guard. As you consider contingencies, think about whether you would be better off resolving some before selling. This is a wise step to take, especially when you are confident you can resolve any existing issues favorably, but it may be hard to convince a buyer you’ll succeed.
Who should be involved to assist business owners with M&A transactions?
Whether buying a business or selling your existing business, the process can be complex and time consuming. Having the right experts such as investment bankers or brokers, tax advisors, and attorneys is critical to making sure the transaction and the process are successful. It is important that each of these professionals has transaction experience. You want to partner with a team that can help you find the best potential buyers, consider your goals for the sale, and streamline the process for you.
The more time and effort an owner puts into preparing their company for a transaction, the better their business will look to a potential buyer. Buyers will perform their own due diligence on the target business, which will be comprehensive and time consuming. By addressing areas that need improvement, identifying issues that can impact the transaction, and enhancing the financial reporting component, a seller will add value to their business and lay the groundwork for a smoother transaction process. ●
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