Filed under: Mergers & Acquisition, Quality Of Earnings Report
The last two years of COVID-19 have compressed business deals and created a backlog of buyers and sellers. Deal activity is expected to be strong in 2022 as corporate buyers have strong balance sheets, and private equity needs to put funding to work. However, recent fears over a coming recession may soften the market, and increased interest rates will impact valuations.
So, in light of these developments, how do you set yourself up for success when making the decision to sell your business? And, what creates value?
I had a chance to talk with James Cartales, Managing Director at Cascadia Capital, who offered advice on the steps one can take to successfully sell their business. Here are the key takeaways from my conversation with Cartales:
Start the Process Early
“It’s a long sales cycle in the mergers and acquisition (M&A) world,” Cartales said. “So, get your team involved early.”
Onboarding your advisors early in the process will allow you to get the valuable outside perspective you need to bring your business to market. With the help of your team, figure out how your company benchmarks against others; develop an understanding of your key differentiators; and bring up value detractors so you can address them prior to going to market. Finally, make sure your team understands the vision for the company and where it is going.
Having a strong grasp on the answers to these questions will help your organization put its best foot forward when going to the market.
Have the Right Team Behind You
Who should be on your team when going to sale? Cartales recommends including specialists such as an investment banker, an M&A attorney, a CPA, and an investment advisor.
“The M&A space is different from corporate business, so having advisors who specialize in this space is crucial to the success of any transaction,” he said.
Start your team building early and find those who you work well with. The acquisition process can be long and building trusted relationships with advisors outside of the pressures of a sales process will ensure that you are getting candid and consistent advice as you navigate toward the final sale.
Check Your Infrastructure
Buyers want to see a stable business and a stable investment—making sure your business infrastructure is strong is one way of accomplishing this. Businesses that are attractive to lots of buyers will have established and consistent processes in place to handle their many functions.
“Patchwork systems and processes that require upgrades to scale can be perceived as a fixer-upper, which ultimately detracts from the story of a company and can lead to lower value in a transaction,” Cartales said.
Perform a review of your company before going to market and look for ways to improve your current systems. It’s possible that workable, but ineffective, business habits have accumulated over time and some housecleaning will be needed. Having best practices in place will make for a more durable and sustainable growth story when bringing yourself to market.
Make Sure Your Financials Hold Up
Strong financial controls and reporting, including consistent and timely creation of financial statements and other key metrics, will increase the organization’s value. Being able to effectively share your story using this data will create an optimal outcome for you.
Many companies have mountains of data but are unable to use it effectively when it comes to selling their business. Cartales recommended harnessing all that information to paint a clearer picture of the state of your company and its present and future durability. Doing so will make you more attractive to buyers in the market.
He also warned that as concerns about the economy grow and capital markets become more volatile, he’s starting to see more disagreements between buyers and sellers when it comes to valuation. With COVID-19’s fallout and the elevated inflationary environment skewing many of the standard benchmarking metrics, investors are developing some skepticism when it comes to a company’s true worth.
One way to effectively mitigate a misalignment of buyer and seller expectations is having a clear, data-driven way of presenting the financial health of your business.
Invest in a Quality of Earnings Report
A Quality of Earnings (QoE) report can go a long way towards building trust with buyers and establishing the true value of your company.
A QoE report will vary greatly by company, since each report is tailored to the specifics of the business. But, in general, these reports examine the financials of a business to determine its stability. A typical report will include sections on adjustments and normalized earnings, trends and customer base analysis, and the amount of working capital. If a company conducts a QoE report proactively, they’re further along in the process when a buyer does appear.
QoE reports can even pay for themselves if the reviewer finds adjustments that boost the value of the company. They also help establish a stronger case for the seller.
Ready to Sell?
There are many moving parts when selling your business. Bringing the right team to the table with you is the best way to walk away with a strong and fair valuation. If you’re considering selling, contact us and we’d be happy to help you get started. Many thanks to James Cartales for being generous with his insights.
© Clark Nuber PS, 2022. All Rights Reserved.
