Eight tips to increase your company’s value before a sale

Get an audit

 Your financial statements are the foundation for the valuation of your company. If they are in a standard GAAP format, and have been produced by a CPA, then prospective buyers perceive your company as lower risk. This increases the amount they are likely to pay for your company and also speeds up the sales process as the due diligence required is quicker. You should have annual audits done on the last 3 years of business.

Consider a quality of earnings report

Quality of earnings dives deeper into your financials and provides documentation for supporting your adjusted EBITDA figure. Given that this figure typically drives your valuation, and buyers will want to challenge any adjustments you make, having solid documentation for adjusted EBITDA is very much in a seller’s interest. You need this for the most recent financial year.

Have an estate plan in place.

 When a company is sold, there can be a big tax bite. Proper planning can ensure that any transaction is as tax efficient as possible, but the key here is giving your advisors time. With 10 years, they have all sorts of tools to allow you to move your wealth to the next generation while minimizing taxes. With 3 years there are some things you can do that will help wealth transfer be more efficient. But even with 1 year of advanced warning, you can significantly address tax efficiency. If you wait until you’ve received an LOI before planning, however, most of your choices are off the table.

Manage any outstanding litigation

Litigation is part and parcel of business life in many industries. The presence of litigation is not necessarily a black mark against a company, but uncertain liabilities around litigation are. The very best thing to do if there is any outstanding litigation is to settle the matter before going to market. If that is not possible, quantifying the liability and providing a reserve against the liability is the next best thing. Buyers are extremely reluctant to enter into transactions with potentially uncapped liability and even if a deal does get done, it will take a long time and be on less favorable terms for the seller.

Discuss and gain consensus on the transaction with key owners and managers

In family-owned businesses, sometimes there is a difference of opinion between those who operate the business and those who don’t. Should the company be looking for a sale?

What is a fair price? What will operating owner’s roles be after a sale? These are questions on which reasonable minds can differ. It is important, though, to discuss these and reach consensus before going to market. Disagreement on key questions like this can discourage prospective bidders and reduce the price and terms of the bids you receive for your business.

Tidy up that balance sheet!

We’ve seen privately-held businesses with planes, ski chalets, intercompany loans, RVs, excess industrial real estate, and farmland on the balance sheet, none of which was necessary for the running of the business. When you go to market it is best to not have these items on the balance sheet, rather than explain why they are there, or let the buyer think they go with the business. Either liquidate them, or sell them to another entity so that your balance sheet has the assets, and only the assets you need for running the business.

Optimize your industry metrics.

One of the first things a buyer will do will be to spread your numbers against industry benchmarks to see where there might be some opportunity for immediate efficiencies. Outsourcing back office activities, excess inventory, and excess receivables are all good candidates. Beat them to the punch and make sure that your business is run as tightly as your industry average. Also, make sure your management accounting reports on the metrics that are key in your industry. The buyer will be looking at these. Make sure you do that first, and make any adjustments you need to before going to market. In short, put the money in your pocket, not in the buyer’s.

Get your size and timing right.

The single most important thing to maximize your company’s value is to go to market in a time and manner when your company is most attractive to institutional investors. As for timing, you want to go to market when your industry is being positively perceived by the investing community. If you go to market during an industry downturn, you will still get bids, but they will be quite a bit lower than you could get if you just waited a year or two. So in this instance, wait if you can. As for size, there is a bright line with institutional investors at $3 million of EBITDA, again at $5 million, and again at $10 million. The vast majority of institutional investors will not consider companies with less than $3 million as candidates for a platform investment. And they will pay significantly higher multiples for a company with $5 million and even more for $10 million. So again, if you are below these thresholds and on a growth trajectory, your best move is to wait until you are of a size that is attractive to the institutional market.

A note on EBITDA

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of profitability that allows us to compare businesses with different amounts of debt and different asset bases.

Privately held businesses are often structured to minimize reported earnings to minimize taxes. Therefore, lots of non-essential expenses might be included in the business anyway: e.g. family members on the payroll, generous marketing expenses, other expenses that are there mainly as tax write offs, executive compensation that is above what the market would normally charge for that position.

If this is the case, then reported EBITDA, or “book EBITDA” will be artificially lower than the EBITDA one would expect from a similar company run to maximize profits. To get an idea of the company’s intrinsic profitability, we adjust book EBITDA to back out non-essential expenses. After making these adjustments we reach adjusted EBITDA.

Adjusted EBITDA. Adjusted EBITDA is very important for a lot of businesses because most businesses are valued on a multiple of adjusted EBITDA. If a business, for example, had $3 million of book EBITDA, and $1 million of adjustments to arrive at $4 million of adjusted EBITDA, it’s “Enterprise Value” at a 6x multiple would be $24 million.

Sell with confidence

Banish the uncertainty of selling your business by hiring experienced professionals. At SSK Capital, we will help you control the process and get the full value. Whether you are ready to start a new business, or finally get more time with loved ones, we can help you move forward.