It is interesting to see how many entrepreneurs risk all of their economic resources and the most productive years of their lives in order to start their own company. During the past decades, it was common to have a 60-hour working week to grow a business but health and time spent with family and friends were common sacrifices. However, when it comes the time and need to sell the company, people do not invest the resources and time enough to prepare the firm in order to complete a sale at the best possible price.
It is exactly the same when the bride is going to get married; she is prepared to look gorgeous but she also prepares a perfect wedding celebration. The idea is to design a “sales strategy” or an “exit strategy” for your company before this (the sale) happens. In this regard, it is important to take the following items into consideration.
1. Non-operating expenses
It is common to find these expenses in firm’s financial statements. Some of them could be family employees like housekeepers and drivers, family trips, cellphones, cars, farm’s maintenance and even yachts and airplanes. Specifically, this is done with the aim of reducing the company’s accounting profit, therefore decreasing the tax base to pay less tax.
Usually, the investment bankers adjust the “EBITDA” to reflect just the operational expenses. Nevertheless, it is advisable to decrease these kinds of practices some years before the expected sale in order to show the buyer the firm’s real capability to generate cash flow.
2. Real Estate
Regularly, it is very attractive to the company owners to sell just the firm´s operational assets and keep the property in which the company is operating. Afterwards, they sign a lease contract with the new owner for long periods of time at market prices. This requires that the property belongs to another company or a family investment vehicle before they announce the sale of the company. Furthermore, this practice is a useful risk-diversifying tool that helps anyone avoid “placing all their eggs in one basket”.
3. Diversification of customer base
A company can also become very profitable by having an important concentration of customers in which the Pareto Principle shows. For example, 1 or 2 customers may represent 40% or more of the total sales. This is a highly punished factor by buyers because it represents high risk in future cash flow generation.
If this is one of your company’s weaknesses, ideally, you should design a marking plan that allows for the diversification of your customer base. The more diversified the sales are with credible profit margins, the better.
4. Organizing the house inside
Most companies have “skeletons in the wardrobe”, which means generating risk because of incorrect practices related to accounting, tax administration, staff recruitment and outsourcing. In the years prior to the start of a sale process, it is recommended to plan internal “due diligence” by hiring lawyers and specialized accounting firms in order to start organizing all the issues. As a result, the buyer is more willing to approve the company because all of the risk factors were mitigated, therefore improving the firm’s price.
5. Eliminating the dependence of shareholders into the administration
Commonly, some companies depend solely on the approval of the CEO (if the CEO is a shareholder) in order to operate. In this case, all important decisions are made by the general manager when there is a shareholder or other owners involved in the company’s operations.
The buyers generally look for enterprises that can work despite the requirements of shareholders. That is why it is very important to prepare an internal line of succession, empowering employees to show leadership and preparing them to lead in every area (production, marketing and sales, human resources, among others) so shareholders do not have to be present in everyday management. In order to achieve this, you must find properly qualified staff, train them to know how to lead your area and sign contracts to assure their loyalty and stability in the company even after the retirement of shareholders or funders.
6. Manuals development and process management system
What would happen if your production manager or your systems manager quit your company without delivering his position to the person who is going to replace? Would it create an unrecoverable loss of knowledge? It is VERY important to create operating manuals and make a detailed survey of all the key company processes through flowcharts to will allow the company to not rely on any employee. For this, it is important to take good advice so that the processes are well raised but can also be protected from reaching the wrong hands i.e. the competition.
Investors generate a lot of confidence from receiving historical audited financial statements that are signed by recognized auditing firms. If an individual audits your company’s financial statements, we recommend well in advance of the scheduled sale to hire a reputable firm that helps maintain the accounts according to international standards. This certainly makes the analysis of the company easier for interested buyers closing a transaction with easier and better valuation multiples.
8. Information Systems
It is common to find many information ERP (Enterprise Resource Planning) systems that are obsolete or poorly managed. Such systems are designed to control all the resources of the company (accounts, inventory, logistics etc). It is ideal to have a company with updated systems and current information so that all current and historical information is well organized and documented. This facilitates the ‘due diligence’ process and gives the buyer confidence.
Further on, we will be writing about important aspects to have in mind when thinking about selling your company at the best possible price therefore bringing to life the result of a life time of work.
Author: Simón Restrepo Barth, holds a Master in Finances from Andes University, Finance professor undergraduate and postgraduate degree programs in EAFIT University, manager and shareholder of Artika Banca de Inversión.