HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: Preparing Your Business for Sale/Enhancing Value – Summary
By Ralph Fain

Ralph Fain is a principal in the brokerage firm, R/Fain Group. Mr. Fain also has over 20 years of broad business experience with Fortune 500 companies. R/ Fain Group is a professional business brokerage firm which confidentially represents the interests of various sellers and buyers. Each week Mr. Fain will give tips on Business Brokering, and how to sell your business.

Our last series of articles have dealt with the general topic of preparing your business for sale and of enhancing the value of a business (i.e. optimizing its saleability) utilizing different strategies/methods. We’ve discussed the importance of early planning and preparation and what is entailed therein.

Early Planning and Preparation means

• Having the basics in place (basic systems, policies and procedures, business/strategic plan, etc.
• Having good financial records and a good financial record (not the same thing)
• Having a good management team/organizational structure (a structure not overly dependent on the current and one which will continue with the new owners)

Remember, you are trying to instill buyer confidence and trust.

We’ve also discussed how critical it is to have certain information available for review (put yourself in the buyer’s shoes – what documents would you need to determine the value of a business?).

Documentation/Information needed

• Financial documents (income tax returns and financial statements for the last 3 years; current financial statements, asset listings, budgets, etc.)
• Legal documents (leases, insurance policies, customer/vendor contracts, patents, pension/profit sharing plans, bank/loan agreements, etc)

Remember, buyers do not like surprises; having the requisite documentation and information readily available speaks well of your organizational/business skills and will further enhance buyer confidence and, ultimately, will facilitate the sale on more favorable terms to you (the owner).

We’ve also written about the need to present the best possible image of your business to prospective buyers. This encompasses both physical and non-physical factors such as the following:

Tangible Factors

• Maintain premises in good condition (engage in good housekeeping continuously)
• Maintain inventory at reasonable and appropriate levels (keep inventory current)
• Maintain equipment in good working condition (invest in updated equipment)

Intangible Factors

• Emphasize your business history and reputation (if favorable)
• Highlight proprietary products/services (if your company’s products/services are difficult to duplicate, mention it)
• If relevant, stress barriers to entering the industry your business is in (these barriers, whether technical, licensing, capital, etc. lessen competition)
• Highlight recent investments/upgrades made in your business

Remember, the point is to make your business unique (in a positive way) in the eyes of the prospective buyer.

Most recently, our latest series of articles dealt with the financial aspects of enhancing your company’s value – incorporating such topics/areas as variance analysis, financial strategies, and the financial presentation of your company.

Strategies/Methodologies

• Perform variance analysis to identify expenses/areas which are unusual and/or “out of line”
• Contain or cut costs (do not cut costs at the expense of future profitability)
• Limit owner’s/family compensation/benefits/perks to reasonable amounts
• Eliminate private expenditures from the company’s financial records
• Ensure the accuracy and reliability of the company’s financials
• “Re-cast” the financials to correctly reflect the true cash flow of the business (“add-back” non cash expenditures, excessive owner/family salaries/benefits, non-recurring one time expenses, “perks”, etc)

Remember, you are attempting to properly present your company in its most favorable light and, consequently enhance its value and optimize its saleability.

The above summarizes some of the steps to be taken to prepare your business for sale and to enhance its value. Correspondingly, the following lists some of the factors/attributes which indicate the value of a company.

Indicators of High Value

• High sustained cash flow (greater than industry averages)
• Unrealized potential (room for business to grow)
• Expected industry growth
• Anticipated population/city growth (if business population dependent – e.g., retail)
• Competitive advantage
• Business niche
• History and reputation (well established; favorable)
• Low failure rate in industry
• Modern, well maintained facility and equipment

Indicators of Low Value

• Poor financial results
• Distressed circumstances
• Few assets
• Too much reliance on owner
• Poor customer distribution (i.e., concentration of a few major clients)
• Poor outlook for industry – regulations, foreign competition, price sensitivity (“commoditization”), etc
• Product or service sensitivity

By following the steps as outlined in this series of articles (dating back to February of this year) and as also discussed on the Houston Business Show (Sunday @ 12:00 on 650 AM), your business will no doubt be among those with Indications of High Value.

See you in this same space for our next article. As always, should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.