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Seller Diligence as a Value Driver

Posted by sb_admin on September 6, 2018
| Blog
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It’s a familiar tale virtually every M&A firm has encountered: a family-owned chain is successful, but with multiple areas of improvement that may be red flags for buyers. Not wanting to miss out on a strong market, they go to market anyway. And after six months, there’s still no buyer. Worse still, the company is so consumed by the deal process that they’re unable to make improvements or continue building value.

This is a common real-world scenario, and an important cautionary tale for owners of all varieties. Thousands of owners are preparing to retire and transition ownership. If you are proactive, you can do your own pre-sale due diligence, maximizing value and improving your chances of completing a successful sale. Here are the things you must consider:

Business Value Drivers

Profits and growth potential are the most obvious drivers of business value, but increasing overall quality and reducing risk can dramatically increase value. Owners should review all aspects of their business operations. There are three common and critical areas that deserve close scrutiny:

  • Human capital, including recruiting and hiring a talented team, taking HR issues seriously, offering competitive compensation and benefits, and upgrading advisors as you grow.
  • Financial, including considering a quality of earnings engagement to ensure accurate numbers. It’s important also to limit owner personal expenses, resist depressing earnings to minimize taxes, and set up appropriate internal controls.
  • Information technology issue, including quality security, a disaster recovery plan, proper access control, state-of-the-art technology to handle reporting and operations

Strategies for Owner Diligence

At all stages, these activities are important—not just when you’re going to market. The same factors that drive value in anticipation of a sale will drive growth. But when there are not internal controls for financial issues, it’s a recipe for disaster. It’s likely that the buyer will discover unanticipated issues that greatly reduce value. Even if you don’t plan to sell, your company may grow more slowly than expected because you haven’t engaged professional advisors. Many buyers simply walk away when they encountered poor compliance, delays, lack of project tracking, and conflicting or missing information.

What’s more, you could sell at any time. What if a can’t miss opportunity presents itself? You never know when you might receive a pre-emptive offer, and you must be ready for one at all times. Some simple steps you can take include:

  • Seeking help from an experienced M&A firm
  • Working with a large, capable CPA firm to reduce costs
  • Purchasing automated project tracking software to handle a higher project volume

Selling a business is hard enough. Don’t make it even harder by failing to conduct pre-sale due diligence. If you do, you’ll leave money on the table and make your odds even worse. And once a sale falls apart or loses momentum, it can be harder to get another one going. Well-run companies stand out. Be one.

About Sunbelt Atlanta

Our team is composed of seasoned professionals who have deep expertise working with both Middle Market and Main Street businesses. We leverage our 75+ years of collective experience to maximize the value of your transaction.

With offices in 9 countries, Sunbelt is the largest business brokerage network in the world. We encourage you to view some of the resources our expansive network has to offer. Whether you are selling a business or buying a business, our experienced team of business brokers can help.

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