Lessons Learned in Sell-Side Readiness: Prepare for the Future Now

April 6, 2022

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Selling your business is a significant transaction, no question about it. For most, it is a one-time life event: selling a business built over time with ambition, sweat and tears. However, we find that most founder owned businesses are not adequately prepared nor positioned to sell when a buyer approaches them. Why? Most owners and entrepreneurs both own and manage their business and are heavily focused on daily operations, customer or employee issues, growth and an endless list of other responsibilities.

Still, not being in a selling state of mind doesn’t mean you should turn down the opportunity. While a longer timeline to prepare is ideal, it is rare to be ready to sell at any one time. Early and incremental preparation can help you move forward and take advantage of potential offers should they arise unexpectedly.

How is “Sell-Side Readiness” Defined?

You might have six months to get your papers in order and solidify your business value for a quick sale. Or you might have 18 to 36 months to plan and prepare to maximize value for a future sale. Either way, it pays to be prepared.

But what does it mean to be “sell-side ready?”

It means you have a clear vision of what your goals are for the transaction, and you’ve optimally positioned your company to achieve those goals.

Being ready involves:

  • Being financially and psychologically ready to endure the efforts required in a transaction.
  • Having realistic expectations and being educated on the transaction process.
  • Having the fundamentals in place to respond to due diligence efforts.
  • Having your team ready to continue business under new ownership.
  • Making the necessary adjustments to optimize the value of your business.

Why is Such Preparation Essential to Sell-Side Readiness Success?

When you’re positioned in such a way, you are able to run a more efficient process to minimize pitfalls, including:

  • Deal fatigue. Deal fatigue is psychological and emotional. It happens when sellers don’t anticipate and have a plan in place for the level of effort involved. Preparing for the reality of the process will help you avoid getting fatigued. Some deals fall apart because sellers reach this point and cannot continue – but they’ve already disrupted the business and spent time and money pursuing a sale.
  • Analysis paralysis. Sellers tend to get paralyzed by ongoing due diligence and analysis of financial statements. Sell-side readiness allows you the time to prepare and organize these documents, avoiding the stresses of figuring it out mid-process.
  • Late-stage valuation adjustments. For instance, in the thick of due diligence the buyer may uncover a critical detail that impacts their valuation. If the buyer uses this to cut the deal by a percentage, the seller might defer to the next quarter instead, keeping them stuck in due diligence.
  • Market timing. Committing to the efforts of sell-side readiness will allow you to capitalize on getting to market at an optimal time.

What Matters to Buyers?

Long-time and multi-generation business owners are often managing to bank statements and distributions, focused on minimizing expenses. To truly prepare, you need to flip your perspective. Put yourself in the buyer’s shoes and consider what’s important to them when acquiring the business.

In large part, adapting your business to buyers’ preferences will involve formalizing and “professionalizing” your business – clearly defining roles, understanding margin drivers, relationships and investing in people, processes, and technology.

Here are some common issues on the sell-side that don’t align with buyer values:

  • The management team isn’t formalized.
  • There’s a lack of investment in ERP systems and modern processes.
  • The business owner operates from a cash basis versus the buyer-preferred accrual basis mindset.
  • Contracts do not include documentation that guarantees transferability.
  • The business doesn’t have a monthly financial package for review or an efficient monthly closing process.
  • There aren’t any established, formal Key Performance Indicators (KPIs) or well thought out forecasts to measure performance from a financial perspective.

Critically important financial and operational issues will vary by industry. For instance, in the manufacturing industry, buyers want inventory availability and supply chain security to ensure they can continue the manufacturing process. They’re also drawn to achievable growth forecasts supported by supply chain and inventory capabilities.

In service and contract-based industries, on the other hand, revenue recognition for contractors and signed and transferrable contracts are most critical. Sellers should have well established accounting policies related to revenue recognition that are in accordance with GAAP. Transferrable contracts are attractive because, without them, the buyer must have customers re-assign contracts. This is tedious and runs the risk of customers dropping off or revisiting contract pricing and terms.

How Do I Think Like a Buyer?

For their due diligence processes, buyers analyze revenue and margin by customer, product, distribution channel, as well as operating expenses and monthly reports. They examine historical performance for fluctuations and potential future cash flow. This is typically done with the help of a due diligence partner.

To prepare for this, conduct a similar exercise for yourself, ideally working with a professional advisor. Acquire similar reports and analyze your operations through the same lens. This will give you a full view of your operations so you can better conceptualize your business, how you make and lose money, and where you can make changes and improvements to improve your sale. This is what is considered Sell-Side Quality of Earnings (QofE).

An advisor can also go beyond the QofE to help you prepare for and conduct the sale. Advisors who also work with clients on the sell side of mergers and acquisitions can supply that buyer’s perspective and help you flip your perspective. They’ll start with your time horizon for selling, your goals in selling and the strategic aspects of your sale. Next, they’ll analyze your current structure and, depending on your time horizon, determine the steps you need to take. The goal is to right-size your financials and formalize your management team as well as decide what major near- to mid-term steps you could take to make the business more valuable.

How to Prepare For a Successful Sale

When it’s time to get sell-side ready, take off your operational hat and put on the seller hat. With the seller hat on, you can consider your business from an external perspective and factor for buyers’ interests.

  • Present financials utilizing accrual accounting on a monthly or quarterly basis.
  • Negotiate payment terms and prices with vendors and/or customers to drive value.
  • Diversify your customer base and product mix.
  • Understand the market and where your industry falls in the current market dynamics.*
  • Create contracts with related parties on payroll to formalize management.
  • Ensure contracts with vendors and customers are transferable.
  • Maximize how you’re using your working capital.**
  • Increase prospective capital, like investing in new capital equipment that reduces reliance on vendors.
  • Adopt a capitalization policy, having capital assets capitalized on the balance sheet versus expensing all assets.
  • Perform due diligence analysis on your business once you’ve made the adjustments to assess your readiness.

*Business owners have access to industry insights to inform benchmarking. But third-party experts often have access to a broader set of data. They can analyze your performance against others in the industry and help you understand the true risk and reward on your contracts and relationships to prepare for an attractive sale.

**Sellers often overlook how the net working capital of their business impacts the valuation. Determining how much to leave in the business, the role of debt in a transaction, where deferred revenue is defined and whether credit card liabilities are working capital or debt are all “gray areas” expert advisors can help sellers better position themselves.

Quality of Earnings is an important term on the sell side. But what does it mean to get a QofE report? What does the process entail? And what are the benefits of acquiring one?

Lessons Learned in Sell-Side Readiness

  • Prior planning prevents poor performance.
  • Careful planning will help you avoid pitfalls, such as uncovering issues at the same time as the buyer. The more time you have, the more you can influence your value and rectify issues.

  • Advisors offer an invaluable and informed outsider’s perspective.
  • Outside advisors, be they attorneys, bankers or professionals like us, are invaluable. The earlier you involve them, the better. They can help quarterback the process. They’ve been through it before and they understand the M&A world, so they can help you identify and avoid bumps in the road.

  • Sell-side readiness reduces the probability of post-closing adjustments.
  • If you prepare properly and understand your business from the buyer’s perspective – accounting properly, knowing where the business is headed, outlining your working capital – there’s a lower likelihood of post-closing adjustments or issues that would lead to litigation down the road.

  • More time is always better.
  • Time allows you to go beyond putting Band-Aids on things. It enables you to actually address problems, right-size accounting and other functions. You get more value out of fixing a problem because a buyer will pay more if they don’t have to fix it themselves.

  • It’s easy to underestimate the energy, effort and emotions involved.
  • Avoiding deal fatigue and analysis paralysis comes down to managing emotions around the sale and being more generous when you estimate the effort involved in the selling process. Advisors can be helpful in guiding you to set realistic expectations to better understand the task ahead.

Get Started with Your Sale

Selling your business is not one-size-fits-all. Experienced advisors can help you optimize your selling experience – and sale price – so it fits your industry, your expectations and your objectives moving forward.

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About the Author

Amber Ferrie

Amber J. FerrieCPA, ABV, CFF, CM & AA

Partner/ Private Equity Industry Leader
Kyle Orwick

Kyle OrwickCPA, CMAA

Partner – Transaction Advisory