Improving business before selling can add value
Edward A. Granka
Managing Director and President of BBG
Reprinted from the Capital District Business Review, Vol. 25 No. 7
Mud, tar, splatters of dead bugs - images of what you need to clean up when thinking about selling your vehicle for the best price. Now what about the "splattered bugs" in your company! If value is what you want, then it is necessary to do some "detailing" on your company. Let's start with inventory. This includes the number of units, fair market value and age. Inventory affects your company's value not so much by what you have, but by what a purchaser believes is economically prudent to purchase. A purchaser will buy inventory at a level that the company's cash flow will support and not beyond.
If your inventory is greater, you may experience severe inventory discounting in the purchase price. Using data from your trade organizations, find the level of inventory turnover that is appropriate. Next, clean up your inventory by selling older units, then operate at that level.
How many accounts are splattered in the 90 plus day category? Your answer will tell you how your company's value will be perceived by a purchaser. You may think that the total amount owed by customers is a valuable asset. However, a purchaser will not assume that money will be collected from late paying customers.
A long collection period may mean high delinquencies, creating little value for these sales. Look closely in your industry at the generally accepted trade terms offered to customers to guide you on the appropriate accounts receivable levels for your firm.
You might also think that simply itemizing the value of your assets will determine at least a minimum value of your business. This is true only if your assets can be supported by the business cash flow. Control the level of furniture, fixtures, machinery, equipment and spare parts so that you own only what is needed for sales and growth. Don't scrimp on the assets that will make you money. Trade groups often will help you find the best asset levels for your type of business. This is important since your business purchaser will be concerned only with the assets that are necessary for business operations. Now that you have looked at the assets on the balance sheet, take a look at your personnel assets. Ask yourself, "Who will run the business when I am gone?" Develop a management team and train other employees to operate the business. Try to achieve a balance of wages, age, and expected retirements. If your work force is unionized, don't try to sell when there is uncertainty in your contract renewals. Build company value by ensuring continuity of income with a skilled staff.
Decide what you are in business for and who your customers are. Aim to reduce your reliance on a few large customers. Better yet, develop a larger number of repeat customers with a good mix of account size, geographic and industry distribution. The customer mix may be obtained through multiple stores, catalog operations, commercial accounts, new products, or even different markets. It may also be obtained through exclusive dealer and distributor arrangements or even franchise agreements. By having a good customer mix you will have increased the likelihood that business income will continue.
Do customers view what you sell as the equivalent of mud, tar, and splatters of dead bugs? You will want to offer good value with limited customer quality concerns. Or better yet, the customer should see an exceptional and recognized superiority of your products and services. Keep your company growing even if you are considering a sale by developing new products and services. Protect what you have with patents, trademarks or copyrights.
Your pricing policies should continue to create value for your firm based on the markets that you are selling to. Don't compete on price alone, if you can help it. Let customers know that they are receiving much more than the competition could provide. Sell experience, confidence, and reliability. Prices may be more than the competitor, but this may allow your company to thrive and hold a higher value.
Invest in a good set of financial statements to present your company. If you have a smaller business, at least develop detailed internal schedules that will explain your tax return. You should have statements available for at least the last five years.
Any aberration in expenses should be easily explained as a one time event. Your gross profits should be consistent or better than your industry. Examine your cost of goods in order to shave expenses and find lower cost suppliers. A higher than average gross profit shows that you are controlling your costs and maintaining a fair price for your product or service. This will help you present an income stream that is not at risk for a business purchaser.
Your financial statements should clearly show an owner's salary. If it is either above or below market, explain why. Be prepared to explain why there are excess or insufficient salaries, family employees who are not needed, excess rent or property expenses, unnecessary travel, entertainment, and auto expenses. Are there expensed items that should have been capitalized? Are your bad debt write-offs reasonable?
Watch your end of fiscal year invoicing practices that could adjust sales. Likewise, examine your end of fiscal year purchasing practices that could adjust your gross profit. Try to eliminate any inter company transactions that cloud your company's performance.
Your objective prior to selling your company should be to establish a good value for the company beyond the base level of company assets. By following these suggestions you will sell a profitable and well-run company at a price that is fair for both you and your purchaser.
Granka is Managing Director and President of The Business Brokerage Group, Inc., an Investment Banking Firm, located in Albany, NY that specializes in Mergers & Acquisitions Advisory and Private Equity Investment - valuation, financing, negotiation and sale of privately held and public businesses.