Even if you don’t plan to sell your company in the short or medium term, your company should always be prepared to launch a sales process without a lot of incremental work.
Events beyond your control often drive the optimal timing for a sale of a company. M&A activity goes through regular cycles and some sectors can be hot at one moment, and not the next. At the same time, your company also has periods of relative strength and weakness often depending on market dynamics. As such, you would not want to miss a window of time where M&A activity is high, buyers are paying premium prices for businesses in your sector and your company is experiencing strong momentum.
There are also other importance circumstances. In the event you receive a very attractive inbound inquiry you would want to be in a position to respond in a timely manner. Alternatively, if you encounter an unforeseen life event that may require a rapid sale of the company such as disability, death or divorce you may not be in a position to manage the sale process so you need the company to be prepared to protect the downside.
Putting your company in the optimal state of readiness to engage in a sale process could take 18-24 months. Whether it is undertaking an audit for the first time or utilizing strategies to reduce tax payable in the event of an eventual sale takes time to plan and implement. It is important to note that tax strategies often need to be in place for a minimum period of time, often at least 2 years, in order for them to be fully effective.
By preparing your company so that it could be sold at any time, will likely result in a more successful transaction in terms of a higher price and a smoother sale process. I also believe, in the interim, it will enable you to manage the company more effectively by providing you with greater visibility on your company’s performance.
Taking the time to optimize your corporate structure and ensuring talented leaders are in place in your organization will lead to both an enhanced outcome in a sale and performance in the interim.
A strong leadership team will help you drive enhanced performance of the business today. In addition, during a sale process buyers will want to develop relationships with your key executives. As such, these executives will become important advocates for your company. Furthermore, when you embark on a sale process you will be able to share the material incremental workload across your team rather than bearing it all yourself.
Another important consideration is CEO succession. Many buyers, particularly private equity funds, will want you to stay on as CEO post acquisition and retain a substantial portion of your ownership (~25-35%). If that is not your preference, you will be able to exit earlier if the buyer has confidence that the company’s performance will not be materially impacted without you given the strength of your leadership team and that there is an internal executive who can successfully step into your shoes to provide important continuity.
The most important element for a buyer is complete and credible financial numbers.
A company’s financial statements tell the story of the company. Whether it is sales, margin and/or capital investment trends, a buyer can quickly develop a view on the company and areas of strength and opportunity. If the numbers are presented in a robust, crisp and consistent manner, the buyer will have greater confidence to maximize their bid and the sale process will also likely go much more quickly and smoothly.
As such, it is ideal to have at least three years of financial statements that are prepared with full, plain and true disclosure. Three years of financial statements is the minimum required to provide a basis to see trends in the company, such as sales growth and margin expansion. It will also provide the basis for understanding the investment required in working capital and capital goods to operate the company.
A successful sales process hinges on the availability of high quality financial numbers. The sooner you put the systems and processes in place to ensure robust numbers, the better. Weak financial disclosure is the most common cause of a broken sales process.
Financial statements do not need to be audited but in most cases the incremental investment in time and money to have the financial statements audited is well worth it.
Having financial statements with a clean opinion by a reputable auditing firm, provides two key benefits in an auction process: (i) bidders will have greater confidence in the underlying financial numbers enabling them to maximize their price; and (ii) bidders, can put less conditions in their offers making any auction more competitive with greater certainty of outcome.
In addition, a corporate buyer with audited financials would have a strong preference for audited financial statements. When integrating your company into their own post-acquisition, the financial consolidation will be much cleaner and more straightforward.