Blog written by Eide Bailly, a Greater Mankato Growth Bronze Investor.
Sell-Side Readiness: How to Prepare for a Successful Business Transition
Most owners are not adequately prepared nor positioned to sell their business when the time comes. Instead, they are heavily focused on daily operations, customer or employee issues, growth, and an endless list of other responsibilities.
Even if transitioning seems like a far-off event, early and incremental preparation will be extremely beneficial to the long-term success of your organization. In fact, we encourage you to start planning for transition at least two years in advance of your exit.
What Does it Mean to be “Sell-Side Ready”?
Planning for the sale of your business takes time, effort, energy, and strategy. Sell-side readiness involves:
- Being financially and psychologically prepared to endure the efforts required in a transaction.
- Setting realistic expectations and becoming educated on the transaction process.
- Having fundamentals in place to respond to due diligence efforts.
- Preparing your team to continue business under new ownership.
- Making the necessary adjustments to optimize the value of your business.
In general, organizations should consider performing the following to prepare for a successful transition:
- Present financials utilizing accrual accounting on a monthly or quarterly basis.
- Negotiate payment terms and prices with vendors and customers to drive value.
- Ensure contracts with vendors and customers are transferable.
- Maximize the use of working capital.
- Increase prospective capital, like investing in new equipment to reduce reliance on vendors.
Positioning your organization in such a way helps to minimize common transition pitfalls, including:
Deal fatigue. This is a condition in which the seller or buyer begins to feel frustrated about the transaction. The pace of the deal, the amount of detail involved with a sale, or the fact that the seller was not emotionally prepared for the sale can all lead to deal fatigue. If left alone, deal fatigue could lead to a deal falling through altogether.
Analysis paralysis. Sellers tend to get overwhelmed 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 mid-process.
Late-stage valuation adjustments. 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 instead, keeping them stuck in due diligence.
How Can You Think Like a Buyer?
Adapting your business to buyers’ preferences involves formalizing and “professionalizing” your business – clearly defining roles, understanding margin drivers and relationships, and investing in people, processes, and technology.
Though critically important financial and operational issues will vary by industry, common issues that do not align with buyer values include:
- The management team is not formalized.
- There is a lack of investment in ERP systems and modern processes.
- Contracts do not include documentation that guarantees transferability.
- The business does not have a monthly financial package or an efficient monthly closing process.
- There are no formal Key Performance Indicators (KPIs) or forecasts to measure performance.
To put yourself in a buyer’s shoes, conduct a similar exercise for your own business, ideally working with a professional advisor. Acquire reports and analyze your operations through the same lens. This will help you better conceptualize your business, including how you make and lose money and where you can make changes to improve your sale. This is considered Sell-Side Quality of Earnings (QofE).
An advisor can also go beyond QofE to help you prepare for and conduct the sale, especially if they have experience working with clients on the sell side of mergers or acquisitions. They will start with understanding your timeline, goals, and the strategic aspects of the sale. Then, they will analyze your current structure and determine the necessary next steps.
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 remediate issues.
Advisors offer an invaluable and informed perspective. Outside advisors, be they attorneys, bankers, or 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 bandages on things. It enables you to address problems head on. 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. Advisors can be helpful in guiding you to set realistic expectations to better understand the task ahead.
Prepare for a Successful Future
Selling your business is more than a tour of the office, a handshake, and handing over a check. It can be complicated and messy, and there is certainly not a one-size-fits-all approach. For a successful and stress-free transition, it’s critical to get advice from trusted business advisors who have experience advising clients on sales and transitions. They can help you understand your transition options and map out an effective exit strategy that ensures you accomplish your goals.
Visit Eide Bailly website to learn more about how their team can help you plan for a successful business transition.