6 Things to Do Before Selling a Business | Mergers and Acquisitions (M&A)

Hi, this is Brett Cenkus. I am an M&A adviser. I do that out of company called Braaten Woods, and i am an M&A corporate attorney. I do that out of Cenkus Law. Today we were talking about preparing your business for sale or steps you can take to ensure a successful M&A- at hopefully maximum value and maximum sales price. If you like what you hear today, you want more of this: there are ton of free resources. There's templates, there's checklists, there's infographics, there's articles and videos, at merger - resources com so check that out. Ok, steps you can take to prepare your business for sale. Now, I'm gonna give you six of those today. One of those is something you can do right now, even if you're gonna sell tomorrow. The other ones require a little bit more time. Some of them require up to a couple of years. There's no time too early to start preparing your business for sale if you know you want to exit at some point in the future. And taking some of these steps may not make a difference, but if they make all the difference in getting a deal done or not getting a deal done, and it may make a difference at the margin help you get a higher sales price. So definitely be thinking about these things because they're very helpful and in my experience, sellers show up ready to sell one day, haven't thought about any of this stuff. So spend some time on this in the next year or two. Again, even if you're selling next week I'm going to give you something that to do that will improve things. And so that first something, which is something you can do right now if you're selling immediately is to get your back office in order. To get your contracts and your records complete and organized. Now, this isn't a very sexy suggestion, but it is really important. There's a process when you're selling your business called due diligence. The buyer will produce a checklist of all the things they want to see. Usually it's after you have a signed letter of intent and you're moving down a path with one exclusive buyer and they're gonna ask for all this information. You post it in Dropbox or there's other sites, but Intra Links and ones that are built for due diligence- they're called data rooms. Online data rooms. You'll have to upload all this information. Having that all organized and ready to go is really helpful. And by that I mean if you've got if your business is very contract driven, make sure your contracts have every page. Make sure that they are signed, that you've got that all in order. Make sure that your corporate records, your minutes of meetings resolutions, things like that are organized. That you've done some of that If you've got a corporation, in every state that I'm aware of, you have to have an annual shareholders meeting. You have that documented, so there's a little bit of clean up there. Again, not super sexy. But get things in order so it makes the process much easier later on. It will also make ensure that the buyer doesn't feel concerned about how you've run the business. Now I know it's very common for business owners to have their head buried in growing a business and sometimes the record-keeping is kind of an ancillary consideration. I get it. It doesn't mean we should read a ton into that. But buyer doesn't have a lot to go on. And that would be one data point. If all of a sudden the contracts aren't complete, you don't seem to know where things are, it's taking time, you know, where are the signature pages? It's like, yeah, what else is there under the hood? It's the equivalent of when you go to buy someone's car and they've got perfect records of every time they'd have the oil changed on time, that sort of thing. It's like gives you a lot more confidence than person who doesn't. Doesn't actually mean that much in the end, but it carries- it could carry a lot of weight. If there's undocumented deals things like: you've granted some equity to people, there's promises that aren't on paper, gets that stuff on paper if it exists. It makes buyers really uncomfortable when it's like oh yeah well we promised to give someone some equity. Yeah, we got to do that at some point. It just... whoa that's a serious thing. It should be documented. What else could be out there? So get the back office in order. So that's number one. And you can do that today. No matter when you're selling, you can get at that. Number two; and this takes a little bit more time, but it's sort of an a type of record-keeping issue. You're specifically improving, sprucing up, and cleaning up your financials. So your profit and loss statement, your balance sheet, things like that. So I'm not suggesting yeah, that you cook the books or anything like that. I mean there's only so much you can kind of do but in a lot of times this small business the financials are not super-tight. There's things that aren't classified necessarily properly. A lot of the CPAs and sometimes like in Austin owners might go to... there's something called tax... I think it's called the tax trailer. If we go down it's like H&R Block kind of. I'm not saying they're not good to people to file tax returns, but like there's not a lot of input from people who are looking at the quality of the financials, and how things displayed, how are they categorized. They're just trying to get taxes filed. I would encourage you to spend some time with a CPA and accountant that really knows their stuff to think about, like how are these presented? Are they clear? Are things properly categorized? You don't want to confuse buyers. You don't want to generate a lot of questions. It doesn't help engender confidence. And then there's things that are run through the business that are that you can justify deducting that you may choose not to deduct, perhaps. Certain perks and things that may be a little bit aggressive to begin with, could be gym memberships and things like that that maybe you're on the line to start taking those out. We'll make the financials look a little bit better. When we present the financials we recast them. Which means we already make adjustments for those things, but it would be better if we didn't even have to show it. Now there's a business cost to that. So you have to be kind of thoughtful about that and what you do but again, there might be some opportunities to make the vendors look a little bit better by not having the same amount of expenses. Some business owners I encourage to be very careful about this, but some business owners will spend a little less money on marketing and things like that. Be careful. You don't want to harm the business in any way. A lot of buyers are sophisticated enough to spot those issues so there's only so much that helps but there may be some things that you can you can kind of do. An issue that comes up often is whether or not the financials are GAAP compliant: generally accepted accounting principles. Most small businesses aren't at least when it comes to footnotes and things in my experience but there may be some things you can do with your CPA to get them a little bit tighter or and maybe make them entirely GAAP compliant. So it's a conversation to have about the financials. Again, some of that requires some more planning to get that where you want it to go. Okay, action item number three and this requires more planning-it depends on how long- but a few months six months a year is: to eliminate unknown issues, resolve open matters. I'm specifically referring to risks or you know the litigation, lawsuits, proceedings investigations, things of that nature. Buyers are very risk-averse. They're scared of the unknown. They're scared of things they don't know and just generally risks and open issues in the business that aren't resolved are going to be, they're gonna cost you more as a seller than they're probably worth because the buyer's just not wanting to step into that unknown. There's a lot of other businesses they can look at. So if there are you know open tax investigations, or open proceedings, or environmental issues, or litigation, those things can sometimes can be resolved like that. Or if you or the only way to resolve them would be really not favorable to to give in on certain things. Remember it's it's it's not as simple as oh well we'll just escrow for it. We'll just explain it to the buyer. They'll adjust. It's like it would be better to eliminate the things that are open and for which it's hard to really quantify or know exactly how it's gonna go. It would be much much much better to just get it off the table. So if you can do that, if you're close to getting something resolved, it's one more reason to resolve it and to close those open issues and take away those unknown risks. Because buyers, just again, there's other businesses they can buy. They tend to be very risk-averse. They're going to hold that against you probably in the form of not doing a deal if it's a big enough issue rather than reducing the purchase price but they might do it either way and it's just they might want a higher escrow, which is to hold on to your money for longer which wouldn't be the end of the world, but not a great thing you know if you could take care of the issue. So think about the risks out there and think about whether or not you can clean those things up. There's some specific things you want to take a look at in your business. One is intellectual property. So this is kind of relates to record-keeping a little bit but the general state of intellectual property law in the United States is that if an employee produces work product for you, produces intellectual property on the job for the business that you own it as the business owns it. But if they're independent contractors, right, they're not w-2 employees- they own it. So if someone built you a website, someone produces marketing collateral like that's theirs unless you get the right language in an agreement to get those things assigned. So you may be able to go back and clean some of that stuff up. Certainly starting now if you have some cleanup, now is a better time to do it then when you're a week out from closing a deal and you've got no leverage with whoever you're talking to. Whether or not maybe you don't have any anyway, depending on whether or not the work they've done for you is all done, but again planning now gives you more time and more ability and you know less desperation to get some things cleaned up. So there I'm talking about trying to get the proper assignments of the intellectual property before the buyer brings that up as a problem. And you know, the important intellectual property it's gonna be really significant stuff. I mean a website it's probably just files and copy that you could you could probably redo in most businesses without that big of a deal or the buyer might not even want but an app you know the business is a it's in in that if everything was built everything was developed by outside developers and you never got that done- that's that's an issue. If there's a major contract that's coming up for renewal yeah you want to get it renewed. Again, that's kind of an uncertainty and a risk that you might just think oh well hey the buyer will handicap for it or something. Like yeah, I mean they may but they're going to over handicap. Again, unknown does not help you. You know you might look at it, you know your business. You know it's not that big of a deal. They only know so much. Right? So try and eliminate all those unknowns: if there's a big contract coming up for renewal, try and get it renewed. That's one that you can work on today if you're selling very soon. An issue that takes a little more time to work through but is worth working through if you have the time is to try and eliminate key dependencies. Um this is an operational issue. And by this I mean if you are highly dependent on a particular supplier or vendor for something or highly dependent on a particular customer, they represent a large portion of your revenue or a large portion of the supplies you purchased you need to take some steps not just for an M&A deal, for the health of your business to try and become less dependent. So it's generally considered above ten percent if more than ten percent of your revenue comes from one particular customer you have a customer concentration issue. Now is it a major issue at ten percent or eleven percent? Probably not, right. But at a 40 percent 50 percent, you're gonna trouble beginning a deal done. So take some steps what can you do to work on that. So I'm sure that's probably already on your mind but can't encourage you enough that now is the time to take care of that. Those are really reasons that businesses do not sell those kind of dependencies. Action item four is systematize your business and get yourself out of it. So this is a particular problem down in the Main Street part of the market. So we're talking businesses that sell for two million dollars or less. They are often run by a sort of force-of-personality CEO who's in the middle of everything. Might be in the middle of everything because they cannot delegate anything. Or because it feeds their ego, or because no one knows how how to do anything. And so that's a risk, and it will come up when you're deep during your deal. So take some steps to make your business work without you. Maybe you can have someone else sign the checks. Maybe other people can sign off on certain things like get delegations of authority to other people. The more you can show your the buyer that there's other people here doing things it's not all about me. Especially if you want to cash your check and head off and sip cocktails on a beach for the rest of your life and not work for the buyer you kind of real issue on your hands. The fella called John Warrillow, he's got something called a value builder system, and it's great. It's got really good structure and jargon around some of these issues and how to make your business more sellable and he calls this one the Hub and Spoke. And it's definitely a problem when you're the center of everything. And then systematize your businesses. Try and get things working better. Get scopes of authority. Get processes. Get things, you know, more streamlined. Get things working online better. Have things be just easier to hand off to a buyer. Less dependent on you and more systematized. It'll really help you get a deal done. Help you get a deal then help you get better value for your business. Number five and also this one takes time probably the most time of everything we're talking about but it is also the greatest payoff in my mind and that's there's two really really important concepts that that a buyer is looking for when they're purchasing a company the first is recurring revenue and the second is growth potential. So recurring revenue. There are some businesses like law firms or M&A advisories that don't have recurring revenue. We don't generally, we get paid by projects, we get paid when we do work. But even those kind of businesses there are opportunities to move some clients to retainers. To have clients buy hours in advance. To do things maybe not M & A advisory, but in the law firm world or to create you know it could be courses or books or something. It doesn't have to be a lot of what you're doing. I mean your business if you're professional services it's really gonna be highly contracted long term recurring revenue. I mean some businesses but like in law firms never gonna get there in most cases. But they could take some steps to at least make it look a little bit better. Right? And that's really valuable and can go a long long way. So this is one of those ones that if there's just nothing in your mind or nothing you can figure out can work I mean there's just you can only just jam the round peg in a square hole so much. I mean, if it's just not there. But there might be something you're thinking yeah you kind of thought about having a retainer option. Or I've know lawyers who basically the clients pay a flat fee and they hang out about hot line and make a call for an hour or two every, I mean it's kind of like a retainer. But it's basically something they sign up and that's longer term revenue. I know startup lawyer who basically gets his startup clients to commit to a certain amount of money over the course of the next year, year and a half. And it's like it's not a small amount of money. But they don't have to pay a big check upfront you know it's committed over time and they have a lot of their needs met and it's sort of an easy buy for a lot of startups who don't want to cut a check for 5 or 10 grand or something for a lawyer to do all this stuff. Instead they commit to basically paying 20 over the course the next year and a half. It's kind of not that simple but the point I mean it's not just about paying more and deferring it, there's a little more in the way of service. But my point is every month like he's got stuff coming in. So that goes a long way if there's things you can do. Growth potential. Another one where there's only so much you can do if there's really nothing in your mind or you're just not gonna get around to actually making some efforts to do something. But what the what we do as M & A advisors is we will present the opportunities of the business. The low-hanging fruit. What a buyer can do. Things that the seller's not currently doing. That always looked at partially with a skeptical eye. It looked at with a skeptical eye because it's what every seller says. Oh we can do XYZ. Everyone's got the list of things and so it's discounted by buyers a lot. Some of the items might be more credible than others, the reason the seller hasn't cop- hasn't already taken advantage of these opportunities sometimes more credible reasons than other times but again all of it will be discounted pretty heavily if none of its underway. But you don't have to actually have completely entered a new market right to get some benefit out of showing a plan to enter new market. That you've looked for some office space. That you've identified a lead in a region. That you've taken like some steps, right? That helps show hey not only are they saying there's this big opportunity, they're actually moving on it, right? Even if they've if you've moved a lot, it can really help with credibility. Put your split yourself in the shoes of a buyer. They're discounting everything. They know you want to get a deal done. They know your advisor wants to get a deal done. They're not expecting you to outright lie, but they're expecting you to be puffing and maybe kind of like really polishing the, polishing the turd so-to- speak, right. I mean the making things look a little bit better than they are. So you get credibility by showing any concrete movement on a plan. Any! Right? So think about that. Back to my recurring revenue. If you're gonna generate a course and you're gonna sell it to people you're not gonna get really credit for revenue that doesn't exist today. That really is gonna be buyers gonna have an expectation that that's theirs to capture for the most part but you might get some credit about some that growth potential or recurring revenue if you can show steps to moving down that path. So something. And, hey you might not sell your business and you might actually get down that path sooner than later so those things are really important to think about from the standpoint of getting a deal done improving how your business looks. So the sixth action item and this one's really easy and you could start, if you're selling tomorrow you should be on this one. If you're selling in a year it's not too early to start thinking about who your advisors will be. To start developing relationships, have some conversations. There's no point in reaching out to an M&A lawyer two years in advance. But you know, six months out certainly a CPA or a really good M&A adviser who talked about as we talked about earlier with the financials is there something I can do get some advice from them about specific things. Get them engaged, build those relationships that will help tremendously and probably give you some excellent advice and feedback. Those are six action items. They are all of some value. There are others. If you sold the business, or you practice in this space and you've got an idea, and I didn't hit on it please drop a comment- would love to hear from you and check out merger - resources there's a lot more of this over there - all free so checklists and ideas and all sorts of stuff if you'd like to what you heard here, so thanks for stopping by today.