The Los Angeles Dodgers and Houston Astros take the field tonight to compete in Game 1 of the 2017 World Series. There’s so much energy here in LA, it feels electric! As an LA Native, I’ve been not only a Dodgers fan my whole life, but also a baseball fan. After college, a group of buddies and I traveled across the country visiting all of the MLB stadiums, and even appeared on the Tonight Show with Jay Leno to talk about our experience. #truestory
So, what does the World Series have to do with you and your business? Winning the pennant and reaching the World Series is the result of many years of relentless focus on continually improving personnel, processes and team dynamics, backed by a data-driven approach to decision making. As I help business owners prepare to sell, the entrepreneurs that achieve their goals and sell their businesses for the maximum possible price are the ones that have a championship-level commitment to preparing for the eventual sale, much like World Series-caliber MLB teams that never take their eye off the prize.
With that said, here are 5 key questions that business owners should consider taking before the playoffs, taking their companies to market:
1. Are We Playing our Best Ball Right Now? (In M&A terms, this would translate to Do We Have a Recent Track Record of Stable to Increasing Revenue and Profits?) As I highlighted in a previous post, buyers typically acquire businesses on the basis of expected future cash flows. Businesses that sell fastest and at the highest multiples tend to have increasing revenue and profits for at least the past three years.
If the financial performance is declining, buyers will often fear the worst and make low-ball offers for what they assume is a distressed business, requiring them to invest significant time and resources to turn the business around. If a business owner expects the maximum sale price, it is imperative that it can demonstrate a trend of increasing profits, which will both expand the buyer pool and create competition among buyers, improving price and terms.
2. How Deep is Our bench? For a company to sell at full price, middle management needs to be in place, or currently being groomed to replace the founder. A question to ask yourself is “Can I go on a two-week vacation and have the business run well in my absence?” If the answer is yes, your business is very likely to sell quickly for top dollar.
Years ago, I advised a client that his business wouldn’t be sellable until he was able to take a two-week vacation without it impacting his business. He and his wife just returned from a 3-week Panama Canal cruise and we are currently preparing the business for sale because he has a great team in place and the business ran successfully in his absence.
3. Are We Minimizing Errors? (Are our books clean?) Can financial reports (Profit & Loss statements, Balance Sheets, payroll reports, etc.) be quickly generated (for any time period), and any trends/variances easily explained? Can personal expenses in the business be substantiated with credit card receipts, invoices, etc.? If there are excessive personal expenses (e.g. boats, 2nd homes, alimony, etc.), the chances of the buyer getting bank financing are significantly decreased, as these expenses are not ‘adjusted out.’
I recently worked on a deal where the seller was unable to substantiate cash claimed to be collected. The buyer had no choice but to reduce his initial offer, reducing both the purchase price and the seller’s credibility. These are situations you can easily avoid with clean books and detailed accounting practices.
4. Are We Playing Solid Defense? (Are we Managing Risk?) When a business has an over-reliance on a specific customer, customer segment, key supplier or key employee, this is referred to ‘concentration’ and represents a perceived risk to buyers that often results in a discounted offer. The concern is that if the customer, employee or supplier, for one reason or another, doesn’t transition with the deal, then the performance of the business will be significantly negatively impacted.
Buyers may also reduce their offers if they see excessive turnover in key roles, especially sales roles. Before going to market, we help business owners identify such potential dependencies and create mitigation plans for each. We recently completed a strategic plan for an IT services company to diversify away from customer segments that could be hit hard, if, and when the next recession comes.
5. Are the Right Role players in place? It’s imperative that you have the right team of advisors around you. This will often include your CPA, corporate attorney, wealth manager and an M&A Advisor, who will serve as the team captain throughout this process, so you can continue to run your business.
Selling your business is hard work! In order to receive maximum proceeds and the most favorable terms, keep these important factors in mind:
- Playing Best Ball Right Now – Clearly demonstrate that the business is performing well both financially and operationally
- Deep Bench – Structured business and employee roles in a way that it can survive beyond the owner
- Minimizing Errors – Show clean financials, with trends and personal expenses easily explained
- Tight Defense – Ensure a lack of reliance on any specific customer, employee or supplier
- Strong Role Players – Be supported by a strong team of advisors (M&A Advisor, CPA, Attorneys, Wealth Managers) that are aligned and share a common view of success.
Let me know if you’re ready to “play ball!” If you have any questions about your company’s readiness to sell, please reach out to me for a confidential discussion. I’d love to learn more about your business and would be happy to share my thoughts.
Kevin Berson is licensed M&A Advisor with Kinected Consulting and is based in Los Angeles, CA. He specializes in helping business owners maximize outcomes in selling their businesses. He is also the founder of Kinected, a Management Consulting firm that advises companies with strategic planning, exits planning and merger and acquisition diligence. Kevin can be reached at kevin@kinected.com.
Kevin leads sell-side M&A engagements for businesses with $10M–$100M in revenue. He has advised on ~$1B in transactions and can be reached at kevin@kinected.com.