Preparing your Business for an Acquisition or Liquidity Event

If you have plans to sell your business, or a portion of it, anytime within the next 2 to 3 years, you need to start preparing nownot wait until you receive your first letter of intent from a potential buyer.

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

Allow Time to Maximize the Potential Value of the Company

From a financial standpoint, it is often advisable to begin preparing for a liquidity event at least two years prior to the potential exit so you have ample time to make changes that will improve and maximize the future value of your company.

It is always important to maximize your company’s profitability and value, but even more so if you are preparing to sell your business. This can be done by streamlining the company’s financial statements to ensure management is able to effectively review them. For example, streamlined 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 will drive profitability and equity value. It is important to begin this process well in advance of any sale or liquidity event, as management will need time to–not only identify, but–implement and benefit from the changes made.

Get Your Financial Records in Order

When preparing your company for an acquisition, it is critical to ensure that your financial records are well maintained so you can avoid any pitfalls that may otherwise be uncovered through the due diligence process.

If you already know that your accounting department may not be technically strong, it is advisable to hire outside accounting consultants to help sort through the information. They can ensure you are fully prepared for the financial due diligence process by putting together a strong package of financial information that clearly explains the results of the operations. Often, even if you believe your accounting department is strong, it may still help to have an accounting consultant at least perform a first review to give an outsider’s perspective.

Plan Ahead with Sell-Side Due Diligence

Although 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 the due diligence process.

Sell-side due diligence gives you the opportunity to go through the due diligence process in a more reasonable timeframe, allowing your management team to find, organize, and interpret the financial information. Through this process, management will identify the questions that might be raised by a potential buyer so they will already be well-prepared to respond to such items in an organized and methodical manner once the official due diligence process gets underway.

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. It is valuable to identify these add-backs before the buyer brings them up so you are prepared to argue for or against those items that may be subjective in nature.

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.

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