May 9, 2022

This paid piece is sponsored by Eide Bailly LLP.

By Amber Ferrie, CPA, ABV, CFF, CM & AA and Kyle Orwick, CPA, CMAA

A version of this article appeared on eidebailly.com.

Selling your business is a significant transaction, no question about it. For most, it is a one-time life event. However, we find that most founder-owned businesses are not adequately prepared nor positioned to sell when a buyer approaches them. Why? Most owners and entrepreneurs both own and manage their business and are focused heavily on daily operations, customer or employee issues, growth and an endless list of other responsibilities.

Still, not being in a selling state of mind doesn’t mean you should turn down the opportunity. While a longer timeline to prepare is ideal, it is rare to be ready to sell at any one time. Early and incremental preparation can help you move forward and take advantage of potential offers should they arise unexpectedly.

How is ‘sell-side readiness’ defined?

You might have six months to get your papers in order and solidify your business value for a quick sale. Or you might have 18 to 36 months to plan and prepare to maximize value for a future sale. Either way, it pays to be prepared.

But what does it mean to be “sell-side ready?”

It means you have a clear vision of your goals for the transaction, and you’ve optimally positioned your company to achieve those goals.

Being ready involves:

• Being financially and psychologically ready to endure the efforts required in a transaction.
• Having realistic expectations and being educated on the transaction process.
• Having the fundamentals in place to respond to due diligence efforts.
• Having your team ready to continue business under new ownership.
• Making the necessary adjustments to optimize the value of your business.

Why is such preparation essential to sell-side readiness success?

When you’re positioned in such a way, you are able to run a more efficient process to minimize pitfalls, including:

• Deal fatigue. Deal fatigue is psychological and emotional. It happens when sellers don’t anticipate and have a plan in place for the level of effort involved. Some deals fall apart because sellers reach this point and cannot continue – but they’ve already disrupted the business and spent time and money pursuing a sale.
• Analysis paralysis. Sellers tend to get paralyzed by ongoing due diligence and analysis of financial statements. Sell-side readiness allows you the time to prepare and organize these documents, avoiding the stresses of figuring it out midprocess.
• Late-stage valuation adjustments. For instance, in the thick of due diligence the buyer may uncover a critical detail that impacts their valuation. If the buyer uses this to cut the deal by a percentage, the seller might defer to the next quarter, keeping them stuck in due diligence.
• Market timing. Committing to the efforts of sell-side readiness will allow you to capitalize on getting to market at an optimal time.

How to prepare for a successful sale

When it’s time to get sell-side ready, consider your business from an external perspective and factor for buyers’ interests.

• Present financials utilizing accrual accounting on a monthly or quarterly basis.
• Negotiate payment terms and prices with vendors and customers to drive value.
• Diversify your customer base and product mix.
• Understand the market and where your industry falls in the current market dynamics. Business owners have access to industry insights to inform benchmarking. But third-party experts often have access to a broader set of data. They can analyze your performance against others in the industry and help you understand the true risk and reward on your contracts and relationships to prepare for an attractive sale.
• Create contracts with related parties on payroll to formalize management.
• Ensure contracts with vendors and customers are transferable.
• Maximize how you’re using your working capital. Sellers often overlook how the net working capital of their business impacts the valuation. Determining how much to leave in the business, the role of debt in a transaction, where deferred revenue is defined and whether credit card liabilities are working capital or debt are all “gray areas” where expert advisers can help sellers better position themselves.
• Increase prospective capital, like investing in new capital equipment that reduces reliance on vendors.
• Adopt a capitalization policy, having capital assets capitalized on the balance sheet versus expensing all assets.
• Perform due diligence analysis on your business once you’ve made the adjustments to assess your readiness.

Lessons learned in sell-side readiness

• Prior planning prevents poor performance. Careful planning will help you avoid pitfalls, such as uncovering issues at the same time as the buyer. The more time you have, the more you can influence your value and rectify issues.
• Advisers offer an invaluable and informed outsider’s perspective. Outside advisers, be they attorneys, bankers or accounting professionals, are invaluable. The earlier you involve them, the better. They can help quarterback the process. They’ve been through it before, and they understand the M&A world, so they can help you identify and avoid bumps in the road.
• Sell-side readiness reduces the probability of post-closing adjustments. If you prepare properly and understand your business from the buyer’s perspective – accounting properly, knowing where the business is headed, outlining your working capital – there’s a lower likelihood of post-closing adjustments or issues that would lead to litigation down the road.
• More time is always better. Time allows you to go beyond putting Band-Aids on things. It enables you to actually address problems, right-size accounting and other functions. You get more value out of fixing a problem because a buyer will pay more if they don’t have to fix it themselves.
• It’s easy to underestimate the energy, effort and emotions involved. Avoiding deal fatigue and analysis paralysis comes down to managing emotions around the sale and being more generous when you estimate the effort involved in the selling process. Advisers can be helpful in guiding you to set realistic expectations to better understand the task ahead.

To learn more about preparing to buy or sell a business, visit eidebailly.com.