For sale: Steps to sell business adds real value to bottom line

In December 2002 the McBride family sat down to discuss plans for 2003. The family’s business, Intrex, located in Louisville, had grown to become one of the largest Swiss screw machine operations in the United States – manufacturing precision components for the medical, technology, defense, auto, and recreation industries.
For multiple reasons, despite having a highly profitable business, the McBrides decided to place their business on the market. Fortunately, the McBrides had operated their business so that it was prepared for sale.
Because of the McBride’s preparation for sale, the sale process was not delayed, nor was the purchase price lowered. Each business is different and has unique preparation needs to address.
Can you do as well as the McBrides did?
Below I discuss steps that may be needed to prepare a company for sale. Some of the issues were gleaned from a book published by Warner Books that I co-authored, titled “Cashing In – Getting the Most When You Sell Your Business.”

? Establish financial credibility
With news headlines of accounting fraud at prominent companies such as Enron and allegations of executive theft at several large companies, the credibility of the financial records of middle-market companies is under increasing scrutiny. And new laws such as Sarbanes-Oxley make public corporations responsible for increased due diligence of the accounting records of acquired companies.
Long before thinking about selling a company æ at least three years æ tidy up your financial records. Use the highest standard of accounting service that your business reasonably can afford based on its size and profitability.
Logically, most private businesses operate to legally minimize taxes. While continuing the tax minimization practices, we recommend maintaining credible records to recast your company’s financials to reflect profit and cash flow comparable to a larger company whose objective is to maximize earnings.

? Get expert advice
Like the McBrides, most entrepreneurs who sell their businesses quickly and profitably hire a good advisory team. In addition to the CPA who helps with financial statements and tax preparation and planning, good legal counsel is crucial. Oral promises by the buyer mean little after the transaction is complete. Remember that representations and warranties generally required from the seller about the condition of the business can require a seller to pay back all or a substantial portion of the purchase price.
Should an entrepreneur hire a representative to help with negotiations? Most successful entrepreneurs are good negotiators. However, during the typical period it takes to sell a business – six to nine months – the entrepreneur’s most critical function is to continue to run the business profitably.
In smaller businesses, your legal counsel, certified public accountant, or trusted financial advisors are generally good representatives. For larger businesses, investment bankers should be used. Not only are most investment bankers experienced negotiators who understand the sales process; they also can provide good advice on marketability and range of values.

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? Clean up your business: make a nice package.
Every business can develop lax practices or encounter unresolved problems. When marketing a business, efforts to make a nice package are often repaid many fold. Three areas to consider are discussed below.
1. Maximize earnings.
Businesses are most frequently valued for sale on a basis of a multiple of earnings. Absent a case of strong growth, past earnings is the yardstick. Excess expenses, very low-margin customers, and subsidizing unprofitable product lines are the most frequent areas needing change. If the average pre-tax multiple earnings of a business is five, every $100,000 saved increases the value of a business by $500,000.
2. Business continuity.
While a buyer may use past earnings to value a business, they will buy only if there is a high probability of those earnings continuing. Look at your company’s customer concentration and management depth. Several years ago we made a preliminary exploration for marketing a business where more than 40 percent of sales and 50 percent of profits were from one customer. Loss of the key customer would have reduced profits substantially. There was a strong possibility that the only buyer would be a major competitor.
After two years of adding customers who provided more than 30 percent of sales and profits, the company was sold for an excellent price.
3. Nagging injuries.
Often companies have issues not related to day-to-day operations that provide a significant impediment to sale, but should be cleaned up before putting a business on the market. Litigation is one of the leading nagging injuries. Other examples are a disorderly appearance of plant, warehouse, or office; inadequate insurance, high turnover of key personnel, lack of tax planning, personnel practices that do not comply with government regulations, and poor environmental stewardship.
Not surprisingly, most of the steps taken to prepare the business for sale make the business more profitable and valuable for the owner, even if no transfer occurs. By preparation, the entrepreneur will be in a position to negotiate from strength, not weakness.