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Getting “House in Order” Aids Valuation in Business Sales

Getting ‘House in Order’ Aids Valuation in Business Sales

Entrepreneur’s Notebook

by Lawrence M. Braun

Selling a business, like selling a house, takes work and in uncertain times, the process begins with a campaign to spruce things up.

The key is planning, up to and beyond the end game of maximizing the value you get from your business, including after-tax dollars, estate planning, and continued employment for employees, family members or other shareholders. And, if you own the building out of which you operate, possibly a stream of income from a lease.

The good news is that data on mergers and acquisitions among middle market companies shows that solid businesses still sell on attractive terms.

Overall, dealmakers announced nearly 7,400 mergers and acquisitions involving U.S. companies in 2002, down from more than 8,500 deals the year before, according to Mergerstat, a research firm tracking mergers and acquisitions in the U.S. and Europe. The dollar value of the 2002 deals totaled about $442 billion, down from about $683 billion in 2001.

Much of the capital went to smaller, middle market deals, defined by Mergerstat as deals valued between $25 million and $250 million. In this arena deal makers announced 1,015 transactions valued at nearly $84 billion in 2002, down from 1,139 transactions valued at nearly $97 billion in 2001.

Clearly, although the number and dollar value of mergers and acquisitions have fallen in recent years, deals still take place.

To be sure, given the potential of war, very few transactions are taking place right now. But as conditions improve, activity will pick up again, and the question now is: How can you position your business to take advantage of the opportunities presented in this marketplace?

Cosmetic and substantive

Like selling a house, the first step is making the place look good with fresh paint, clean and orderly fixtures in your office and production areas, and the like.

Many other factors are critical:

– Setting sharply defined goals based on a clear understanding of what the word “value” means to you;

– Getting professional management in place;

– Obtaining audited financials;

– Bringing order to all company records and contracts;

– Obtaining top-flight help from investment banking, legal and accounting professionals to assist you at every step.

The payoff on these items is substantial.

Professional management is key. Without good people to replace you, you can’t retire. You can only quit, usually by closing down your business altogether. Professional management shows potential buyers that your company has a future beyond your tenure. If you must beef up your team, do it before you take your business to market. For example, if you now have a controller, it may pay you to recruit a chief financial officer to gain the strategic heft that position brings to the table.

You may also want to tie your key executives to the company with employment contracts, possibly fleshed out with stock options or other financial incentives. There are many alternatives in these matters; be careful not to hamstring your buyer’s options.

Audited financials lend credibility to the picture you give to potential buyers about your business; indeed, audited financials make your operations transparent, translating the peculiarities and details of your business for example, the value of your inventory and receivables into terms readily understood by outsiders, enabling them to make realistic comparisons between the opportunities offered by your business and those available to them elsewhere.

It can cost $15,000 to $40,000 per year, often more, to obtain audited financials from a reputable accounting firm a substantial outlay but well worth it. The alternative is to risk selling your business at a far lower price than you might otherwise command or possibly not selling it at all. If you run a business of substantial size, you will waste your time taking it to market with financial statements not in accordance with GAAP standards.

Have all records and contracts in order and, of course, disclose them to potential buyers. Beware of odd “side deals” with customers, vendors and suppliers. These can wreck any sale, so if you have such business arrangements in place, regularize them before you launch any campaign to sell your company.

Make sure the arrangements you leave in place are legal, since anything less will turn off any potential buyer. And understand that no potential buyer will take you seriously if someone has the right of first refusal in any sale of your company.

It takes time and money to get these elements in place sometimes a lot of time and money. But the payoff is that when you launch a campaign to sell your business, you will already have gone a long way toward establishing its real value and to making your representations about that value credible to your potential buyers.

This, in turn, will free you to spend your time negotiating the things you really value the real product of the time and labor you put into establishing and growing your company in the first place.

Lawrence M. Braun is chairman of the corporate and securities department at Sheppard Mullin Richter & Hampton LLP. He may be reached at

lbraun@sheppardmullin.com.

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