Sell your business the Private Equity Way

 
Photo:  Zoomar

 A reader asks:  In the next six months I'm going to try and sell my business.  As a private equity investor can you suggest things I should do to prepare?

Here are my Top Ten suggestions (and I'm sure fellow readers can add others):

1. Hire advisers who buy and sell businesses for a living.  Yes, they'll charge a lot more than Fred who does your tax return, or the neighbourhood lawyer who sold your house, but it will be money well spent.  
2. Dividend out all excess cash well before the sale process begins. Smart buyers will always go after the cash sitting in your business.
3. Try to resolve outstanding or pending litigation. It may even be worth taking a financial hit to remove litigation which could scare off potential buyers or result in a tough warranty/indemnity/escrow regime.
4. Address leadership succession issues well before the sale process begins. No smart investor wants to buy a business from a retiring founder. (See my previous post on this topic).
5. If your inventory controls are loose, complete a professionally supervised stock take. Your goal is to build buyer confidence, and that means avoiding surprises.
6. Make an effort to collect overdue debtors. It's unlikely that the buyer will pay for accounts receivable which are dated (depending on your industry, this typically means 90+ days).
7. Sell obsolete or slow moving inventory, as well as any surplus assets. Again, the buyer probably won't give you value for these, so try and monetise them before you start marketing your business.
8. Remove those embarrassing “personal" assets from the balance sheet. Come on, you know what I'm talking about. Your daughter's computer, the boat you never used for customer sales events, the car you ex-wife drives . . . time to clean it all up.
9. Ensure that property leases are arms-length. Buying a company where the seller is also the landlord is an uncomfortable, but common, situation. If your company's buildings are sitting in the family trust, at least put in place a proper lease on typical market terms.
10. Run a competitive sale process.  As a private equity investor I hate to admit it, but I've rarely seen an exclusive sales process which generated the best possible financial result for the seller.  Getting an offer from several buyers will not only almost always drive up the sale price, but it may also give you a range of different transaction structures to consider.  I've seen situations where a seller went into a process expecting one outcome ("I'm selling out to the highest bidder and retiring") and ended up choosing a totally different structure ("I'm selling half my stake and staying on for five more years").

Comments

[LL]

Your #10 tip raises an interesting point. I think people often sell businesses with a focus only on the money and then later look back with regret after six months playing golf.

So my tip would be: work out why you are selling and let that drive the structure. It may be that a partial exit is better for you than a sale would be.

[GP]

Couldn't agree more LL.

It's surprising how often we work with a vendor and find that half way through the sales process he/she totally changes his mind about what he wants from the exit.

The sale is often as much about achieving a fundamental life change as it is about money.

[Dan Carter-S]

Couple of obvious ones:

1. Get your books in order. Ideally you should have three years of audited accounts ready to show the buyers.

2. Get your premises in order. Sounds very obvious I know, but when I was an i-banker I was often amazed by the terrible firm impression given by dirty workshops, offices with 20 year old lighting and carpets, no signage on buildings, etc.

[Dan Carter-S]

Sorry, meant to say "first impression" !!

[OH&S consultant in Seattle]

Dan,
Similar point to your one on workshop appearances: I think that the sale of a business is a useful time to reconsider whether your OH&S practices would stand up to outside scrutiny.

I often visit factories and, even in this more OH&S conscience time, am often not given ear plugs, saftey vests, etc. And sure enough, on the shop floor the saftey practices are as poor as the place is dirty.

[GP]

A lawyer friend sent me a text with a useful tip:

assume that potential buyers will want to read your board minutes from the past 12 months . . . write them accordingly.

[FB]

Make sure that employment contracts are in place for all important members of the management team

[nkalakatha]

The most important one for me is to ensure that the accounts are in order - both statutory and management accounts. It is worth making an investment in a decent accounting firm to ensure that the accounts are in as good condition as they can be before buyers pitch up.

Nothing more embarrassing for a seller to find that their earnings are much lower than they had thought because there is a stock write-off, an uncollectable debt, or whatever hiding in the books.

[Florida Business Brokers]

Very good post with some excellent advice. Business owners should be running their businesses with an expectation of building a business to sell.