Many of you are contemplating the sale of your company without the use of an experienced M&A advisor. If you do proceed on your own, it will be critical that you develop accurate and detailed documentation for buyers to review. If you don’t, chances are good that your sale could take far longer, and deals will fall apart repeatedly, as buyers ask you questions you are unable to answer.
In order to make theprocess go more smoothly, we highly recommend that you take the time necessary to thoroughly document your entire operation.
Begin with your history. It is vital that your financials be recast to reflect the company’s true profitability. Without doing this, you may be radically under-valuing your company.
Simply put. a company with non-recast EBITDA of $500K will generate lower offers than a company with recast EBITDA of $750K. The recasting process identifies items such as excessive and discretionary expenses and nonrecurring revenues and expenses. However, any amounts you recast will need to be thoroughly documented so that buyers can see the justification behind each specific line item.
In addition, you will need to be able to explain any fluctuations in revenue and profitability that have occurred historically. It is far better to document these in advance than try to explain them during negotiations.
Next, it is a very good idea to document your company’s operational procedures. Unfortunately, most middle-market companies do not have manuals, written procedures, or any other formal written documentation on their processes.
Every company has procedures that it has developed that are unique to what it does. Too often, however, this information is located in the minds of keyor the owner. This does not give buyers a comfort level that the business will continue to run smoothly should the current owner the business. Take the time, as painful as it might be, to thoroughly document your unique operational procedures.
Another key area to document is your relationship with your key customers. Do you have written contracts? If not, how long have the relationships existed? Who maintains these client relationships within your organization? Again, having answers in advance in these areas will only help you close your deal.
You will also need to create believable pro forma financial statements. This means projecting revenue and cash flows out 3-5 years. And these projections need to be based on reality and be achievable.
This is especially important if a buyer negotiates part of the deal to be in the form of an earn-out.
An earn-out means that the deal will be structured so that you receive a portion of the payout based on the company achieving the projections you have developed. So if your deal structure includes an earn-out, you better be able to deliver on it.
Radical projected growth, especially when compared to historic growth, will be discounted by any buyer. Keep your projections realistic and believable and something your company can achieve. If you have multiple revenue streams, document the growth of each clearly. If you have key customers that represent significant portions of your revenue, be sure to document their growth as well.
Why Hiring a Firm May Help
Space does not allow me to expand beyond just these few basic helpful hints in this post. Given how complex the sales process is, and how long it takes (plan on 1,000 hours of your own time spread over 9-18 months) we highly recommend that you obtain the services of experts to help you.
At a minimum, if you are not going to be using an M&A firm, you will need a CPA experienced in recasting financial statements and an attorney with experience in M&A transactions. Make sure that they have actually worked on deals that have closed.
We regularly meet middle-market business owners who tell us horror stories about mistakes they have made in trying to market their company without the aid of an experienced M&A advisor. Don’t make these same mistakes.
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