When buying a company, buyers are looking out into a business’s future. They’re trying to determine how to leverage the business as a way to enhance something else that they own — by adding a new technology, product, process or presence that will drive that business in the years to come.
“What buyers are really looking for in a potential acquisition target is transferable value,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.
Middle-market business owners selling for the first time are often taken aback by the rigor in a buyer’s due diligence process. That process also determines a company’s value, so it’s important for owners to plan well in advance of taking the company to market and ensure the business, and the owner, are ready.
Smart Business spoke with Altman about how to prepare a closely held business for a sale.
How do buyers assess a company’s value?
Assessing value in a business involves scrutinizing some common traits. Buyers will want to understand the state of the management team, conducting inquiries to determine their strengths and weaknesses, and if key members of the team are sufficiently compensated or have their compensation tied to company performance. This is important because a buyer often will rely on them to continue operations after the owner has exited.
Buyers want to know if the company has a plan to achieve growth within the context of their industry’s dynamics. They also want a company that can demonstrate durability around cash flow, has clear value in the market, as well as leverage with their customers.
Scalability is another factor. The search is for a company that, if given more capital and/or resources, could grow. Readiness for an acquisition also has an appeal. Too many owners neglect planning and preparation, and that can lower their value in the market.
How can a company improve its value?
It’s best to get professional help when preparing to take a company to market for a sale. An experienced M&A attorney is very well-equipped to handle a process. Similarly with accountants, business owners should look to employ a firm that can ensure the standard data that buyers want to review is available and in order. That team of professionals can often work with a company’s existing professional service providers — accountant, corporate attorney, etc. — to help an owner look for any gaps in the business and address them. That could mean fixing internal controls, filling a gap in a management team or working to diversify the customer base.
To maximize the company’s value when it’s ready to sell, the market for the business needs to be strong. This is where a good investment banker can help. They should be familiar enough with the company’s industry to know how the business is positioned within it, know who is in the buyer universe and the multiples that are being paid for similar businesses. Sometimes the state of the market can affect a seller’s timeline for an exit, but the end result, especially if an owner has planned appropriately, should be a healthy return for the business.
What else should go into the sale preparation?
Owners also need to prepare themselves for the transition. That often means working with a wealth adviser, someone to help with personal financial planning around the often once-in-a-lifetime liquidity event that comes from selling a closely held business. Through this event, owners typically want to walk away with enough money to live a lifestyle they will be satisfied with. It also means addressing family issues — for instance, how to treat family members who benefit from but don’t participate in the business — as well as any philanthropic ambitions.
Too often owners fail to properly prepare for the process and end up leaving money on the table, or in some way or another don’t achieve their goals for the sale. The best way to maximize value in a sale is to prepare. ●
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