The typical owner of a successful small or middle-market company is generally very focused on operations during the near to intermediate term. An owner of a successful company that has the potential to be sold should devote some time planning for that sale, even if there are no immediate plans to transfer ownership.

For many business owners, the business is the most valuable asset in the family, so value preservation and enhancement should be a primary goal as strategic operating decisions are made. Further, while sale of the company may be a long-term goal, it must be considered that not all business exits are planned. A competitor or partner could make an offer that is too good to refuse. Alternatively, an unexpected event such as death may occur, forcing the owner’s heirs to sell the company. Given the value that is at stake, a business should always be run like it is for sale.

Is my business ready for sale?

If your business is ready for sale, make sure you are running the company as lean as possible and do not comingle personal and business assets. This is important for maintenance and preservation of value for two reasons:

  1. Paying for personal expenses out of the company may give an impression to a buyer that the company is not professionally operated.
  2. Buyers are leery when sellers ask them to adjust year-end financial statements for personal or quasi-business expenses, unrecorded cash sales or related party transactions that are not at fair market value. In other words, keep the balance sheet and income statement as clean as possible.

It is important to reinvest in fixed assets and advisable to purge nonessential balance sheet items such as idle or non-operating assets, obsolete inventory, bad debts, and shareholder notes.

Finally, buyers prefer financial information that is audited or reviewed by a CPA firm. This decision will have to be made by the owner on a case-by-case basis and will depend upon size of the company. As a decision is reached to sell the company and the plan to sell is formulated, the owner should give strong consideration to having an audit or review of two or more years of financial statements.

Minimize Risk to Maximize Value

Owners who minimize risk reap a higher return. Future earnings appear more secure if the company is current on all leases, licenses and contracts, including employment and non-compete agreements that have been signed by all employees.

Note: Laws regarding non-compete agreements vary from state to state.

Owners can further lower risk by reviewing insurance policies on a regular basis to ensure they have purchased the right types of policies and coverage amounts.

Due Diligence Record Keeping

The documents required in today’s M&A environment can be extensive. If your record keeping has been subpar, it can be difficult or impossible to compile the information wanted by a potential buyer or partner. Owners should maintain documentation needed for the due diligence process long before a sale. A modern approach to the buying process is to begin with some serious preliminary due diligence before submitting a Letter of Intent “LOI.” Pre-LOI due diligence is so important.

Above all, operating sale-ready means understanding what the business is worth today and identifying key value drivers. By focusing on these factors, the business will be more attractive to prospective investors and fetch a higher price in the marketplace.

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The importance of pre-LOI due diligence

How to get your business ready for sale

There are some key areas of review that will help you get your business ready for sale. These include:

  • Last Twelve Months (LTM) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
  • Backlogs
  • Quality of Earnings
  • Sales / Revenue
  • Gross Margins
  • Accounts Receivable and Bad Debts
  • Accounts Payable and Purchasing
  • Inventories
  • Compensation and Bonuses / Staff Levels
  • Ability of the company to extract information such as profitability by product, customer, division, region, etc.
  • Non-recurring and infrequent transactions such as extraordinary professional fees, severance costs, inventory write-offs, and unusual bad debts
  • Evaluation of the management team

Whether you are getting ready to buy or sell a business, the key to success is finding the right partner.

LBMC offers business valuation services using an in-depth understanding of accepted valuation methodologies to produce a defensible report for appraisals and fairness opinions. We have the certifications and expertise to analyze and communicate the valuations of companies, intangible assets, and compensation arrangements. We also understand regulatory compliance issues that impact healthcare and other industries.

Combining LBMC’s valuation services with our tax, transaction advisory services, and financial expertise within LBMC’s Family of Companies, we can effectively customize services across divisions all under one roof. Contact our team today to learn more.