Mar 10, 2015

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Thinking about selling your business? Conventional wisdom in the investment banking community says you’d better do it soon — that the market will soften sooner rather than later. We at P&M Corporate Finance have a different view — that businesses have 24–30 months to finalize any deals.

While the sky’s not falling yet, it’s still important to prepare your business for its eventual sale. The good news is that your focus will be on sound business practices that companies should be doing anyway (for example, optimizing company value by tying the owner’s financial objectives to the company’s business plan).

It comes down to two considerations. First, ensuring that the owner’s assessment of the company’s value coincides with the market’s assessment and, if a gap exists, determining how to bridge it. Sometimes the disparity can be significant, but incremental improvements over time can drive significant changes to equity value. This includes things like a plan to grow revenue, improve gross margin (via product mix or pricing strategy), reduce leverage, optimize working capital investments, and improve the multiple that the market will assign to your earnings.

Second, you have to determine how the market will assess certain risk factors. And we’re not talking about “Do the books balance?”

(The books have to balance — that’s a given.) Although risk factors vary by company, examples include:

• Strength of the management team and planning for succession within those ranks
• Alignment with customer supplier strategies
• Strength of strategic plan
• Strength of IT/ERP system
• Existence of effective management tools
• Strength of key performance indicators — overall equipment efficiency, scrap, labor efficiency, etc.

The more buttoned up your company is relative to these factors, the lower the risk for the buyer and the higher the valuation.

Although most owners, once they make the decision to sell their companies, want to do so immediately, it typically takes a good six to eight months from deciding to sell to that highly anticipated wheelbarrow of money. This is the single largest economic transaction business owners will conduct in their lives. It’s way too important to take the risk that a better outcome could’ve been achieved with a little preparation and planning.