3 Steps to Prepare Your Business for an Acquisition or Liquidity Event

As an entrepreneur, you likely have a never-ending to-do list that includes meeting with employees, calling disgruntled customers, reviewing company finances, and more. While the list of to-dos never seems to end, you might have an idea in the back of your mind to someday exit the business you have built.

If you have plans to sell your company or a portion of it, anytime within the next 2 to 3 years, the time to start preparing is now. Do not wait until you receive your first letter of intent from a potential buyer. The more effort and time that you can give to preparing for your eventual exit, the smoother the transition can be when the time comes. You’ll likely feel that more work is piling onto your plate, but this is expected as exiting a business, via acquisition or liquidity event is always time-consuming.

Think of it as more effort now, less stress later. The more you can prepare your business for the possibility of an acquisition, the more value you are adding to the company today. Keeping in mind that the business will be better off when the time comes to transition.

Below are a few steps you can take to prepare your business from a financial perspective.

1. Allow Time to Maximize the Potential Value of the Company

From a financial standpoint, it is advised to begin preparing for a liquidity event at least two years before the potential exit. Doing so will ensure you have ample time to make changes that are necessary to improve the business and maximize the future value of your company.

While it is always important to optimize your company’s profitability and value, it is even more so if you are planning to sell. This can be accomplished by streamlining financial statements to ensure management can review them effectively.

For example, simplified and organized financials will enable you to evaluate profit margins by individual revenue stream, develop Key Performance Indicators (KPIs) and ratios applicable to your company, as well as identify and consistently report on the metrics that drive profitability and value. It is vital to begin this process in advance of any sale or liquidity event, as your management will need time to identify, implement, and benefit from the changes made.

2. Get Your Financial Records in Order

When preparing your company for an acquisition, it is critical that your financial records are well maintained. Keeping pristine financial records helps avoid any pitfalls that may be uncovered through the due diligence process.

If you believe your accounting department may not be technically strong, it is encouraged to hire an outside accounting consultant to help sort through the critical information. An independent consultant or team can ensure you’re fully prepared for the financial due diligence process. They do this by gathering information and creating a strong package of financial information that clearly explains the results of your business operations. Even if you believe your accounting department can handle this process, we recommend having a qualified consultant perform the initial review to provide an outsider’s perspective.

3. Plan Ahead with Sell-Side Due Diligence

While certainly not required, engaging an outsourced accounting firm to perform what is known as a “sell-side” due diligence (or a quality of earnings report) process could save you from significant headaches and distractions during this already stressful time.

Sell-side due diligence allows you the opportunity to go through the due diligence process in a more reasonable timeframe. Proactively doing this allows your management team more time to find, organize, and interpret the financial information. Throughout this process, leaders should identify questions that may be raised by potential buyers, so they are better prepared to respond to items in an organized manner.

The sell-side due diligence team will also identify what are known as “add-backs.” These are described as non-recurring or unrecorded revenues or expenses that are added back to the Earnings before interest, tax, depreciation and amortization (EBITDA) to generate a normalized figure. Add-backs can be subjective in nature; therefore, it’s valuable to identify them before the buyer brings them up so you can prepare how to argue for or against those items in question.

Having a prepared sell-side due diligence report could also limit the amount of investigative work that the buyer determines necessary as they may be willing to rely on some, or all, of the results of the report.

Next Step: Due Diligence

You are ready to sell your business, your financials are in order, and you have just received your first letter of intent from a potential buyer. Next, it’s time to prepare for what many believe is a terrifyingly brutal process – due diligence. Read our blog post on the financial due diligence process to learn what is required and how to prepare your business to ensure a successful acquisition.

Prepare Your Business for an Acquisition or Liquidity Event

If you have plans to sell your company, Signature Analytics can provide ongoing accounting support and forward-looking financial analysis to ensure you get the highest value for your business. Contact us for more information or a free consultation.