Last month we talked about whether now is a good time to consider selling your business. Presuming that you’ve decided it might be, there’s a lot you can do in advance to maximize value. I’ve listed some of the most common tasks here but a thoughtful business analyst who knows your company will likely have additional and more specific “to dos.” Wherever you get these suggestions from, put them into one of two categories: quick hits that can create value within several months and slow hits that take longer.
Quick hits
You are particularly alert to quick hits because they occur early enough in the usual six-month sales cycle to generate convincing evidence of value in the eyes of buyers. On the other hand, if you accumulate a lot of critical slow hit suggestions, you may want to get them at least underway before you start teeing up the company for sale.
Another caveat: your quick hit may be another company’s slow hit. For example, you can show the benefit of replacing an unproductive sales manager in two months but your large competitor needs 12.
Quick hits enhance “curb appeal” and get your business looking more … businesslike. Buyers develop confidence in the quality (value) of your company when they see evidence of meticulous attention to detail. If you’re tending to the small things, you must be on top of the big ones, right?
The reasons for undertaking quick hits are obvious. They’re of two types: clearing out the underbrush or spiffing up the company’s image. But some deserve a more detailed explanation.
Items like getting legal and tax disputes off the books, dumping obsolete inventory, collecting or selling past-due accounts receivable, bringing accounts payable current and correcting technical loan covenant violations — all these things eliminate ambiguities about the value of your company’s assets or liabilities. Ambiguities tend to be resolved in the buyer’s favor. If they don’t actually ding your value at close, you’ll be asked to represent that they will eventually conclude in your favor. If they don’t, and they’re material, the buyer may later “claw back” funds you received at close, a process as unpleasant as it sounds. Better then to resolve matters now. At least that way, you know where you stand and your purchase agreement is less likely to be riddled with expensive legalese and “gotchas” designed to put a fence around these uncertainties.
While many owners run personal expenses though their business — and such practices are routinely accommodated by “adjusting” EBITDA when it comes time to value the company — the more of this that goes on, the less buyers believe that what they see is what they get.
Besides complicating calculations of how profitable the business actually is, lots of intermixed personal and company expenses and assets raise uncomfortable questions. If the owner’s doing that, what else is going on? Certainly avoid the spectacle I once encountered where a prospective sellside client had extracted so much personal expense from his company that he took to stretching his payables, thereby sparking supplier lawsuits. Who wants to do business with this guy?
Even worse is the owner who solicits client payments otherwise due the company. One of these colorful characters once had the chutzpah to argue that I should add his hidden income to EBITDA, thereby increasing company value. Outside of the accounting issues this raises, most buyers greet this news by putting as much distance between them and the seller as possible. Advice to such sellers: forgedaboutit. You’ve already made your ill-gotten gains: time to move on and pray you’re not audited.
The issue of terminating long-standing but ineffective or “courtesy” employees — like Fred who’s been with the company since its inception, or privileged family members — can be sensitive. It is not mandatory that you let Fred go before selling the business: just know that keeping him around complicates things. Either you accept the fact that his presence reduces your EBITDA (and therefore the company’s value by whatever multiple is being applied to EBITDA, like 5x), or you propose to adjust EBITDA upward to finesse his cost.
If you decide to adjust EBITDA upward, now you’re into a debate over just how dysfunctional Fred actually is. Is he overpaid by 50 percent, 100 percent or some other number? Worse, is he gifted with the rare ability to destroy value by his mere presence? Even more extreme, do you feel so strongly about protecting sacred cow Fred that you insist he remain in the employ of the new owner? While motivated buyers can accommodate such demands, it will not be without cost.
What about the reverse case — the retention of highly productive employees? Buyers who want your key managers to remain on board and motivated after you sell can be keenly interested in what sort of incentives you have in place to maintain morale. This is particularly true of financial investors like private equity and later-stage venture capital groups who don’t bring their own managers to the table.
So have you motivated your key managers to cooperate with the sale process? Would the company’s sale appropriately reward them for their past contributions? Or, if they feel their interests are being ignored, will they throw up obstacles to the sale process or start edging toward the exits?
Wise owners enter into contracts with valuable employees before sale that grant stock, or vest stock options at close, with enough value that the employee can see the juicy carrot dangling within reach; and, alternatively, award them a flat bonus upon sale. Of these two approaches, private equity firms and venture capitalists (“institutional” investors) prefer stock awards since they can be rolled over into ownership stakes in the acquired business. Whatever the arrangement, it shouldn’t be so generous that everybody’s made rich and moves to Bali Hai.
The question of management team morale can be so important to some buyers that they effectively insist upon a “fair” key manager compensation plan as a condition of sale. Surprisingly, some sellers take umbrage at this — what business is it of the future owner how I treat my employees now? But since most of the value of your going business lies in its future cash flow, if you imperil that by your actions or inactions today, the buyer will find a way to express her discomfort.
Slow hits
Movements in the underlying bedrock of your business can unleash huge energies when they hit shore. But rather than destructive tsunamis, slow hits boost sales and margins.
Because of their fundamental nature, many slow hits are comparatively expensive and risky (like starting up a new product/service line or replacing your ERP system). But not always: some slow hits are simply slow. Examples in this category are:
- Edging out less productive senior managers piecemeal.
- Encouraging managers to run for trade group offices.
- Rewriting each new or renewed client contact to permit assignability (particularly valuable in asset sales where the buyer may otherwise have difficulty taking over a client or tenant relationship).
- Negotiating shorter-term leases with the option to renew.
- Streamlining your shareholder group and board. Whittling down these entities to lean, mean decision-machines allows you to negotiate sale transaction minutia faster and with less risk of overstepping bounds. In contrast, herding hydra-headed boards and dissident shareholders into agreement can be exhausting or even fatal to deals. Then there’s all that paperwork to process at close.
Whether your slow hits are expensive or just require the fullness of time, only you can weigh whether their promise is so compelling that delaying your company’s sale is worth the trade-off.
Next up: how to build a winning M&A project team.
Ryan Kuhn is a partner at Westbury Group, a mid-market investment bank. He has shepherded business owners through the sales process for over 20 years. Beforehand he was associated with a large private equity firm, investing in software and data companies, and before that he ran the M&A department of a Fortune 500 company. He graduated from Harvard Business School with a concentration in Finance. He can be reached at (847) 457-4766 or [email protected] .
