Strategies for Maximizing Company Sale Proceeds: The Importance of Pre-sale Grooming
When it comes to selling a company, the journey to realizing maximum returns begins long before the actual sale process kicks off. In this blog article, we'll delve into the important concept of “pre-sale grooming”—a strategic exercise that can span months or even years before your business hits the market. The goal? To enhance your company's allure and boost its value in the eyes of potential buyers. Let's explore some key concepts involved in this process.
Positioning
In the early stages of preparing your business for sale, it's important to thoroughly assess the potential purchasers who may express interest and how they are likely to appraise the company's value. This assessment can include a close examination of previous sales in your industry to identify several potential buyers who have historically shown interest in similar businesses. Using this evaluation as a guiding principle, the focus should be directed towards enhancing the company's appeal to this specific group of potential buyers, which may include those who have demonstrated a keen interest in similar acquisitions.
Reviewing Profit Margins
When a company assesses its profit margins, it often sets product prices with the aim of ensuring long-term sustainability and deterring potential competitors from entering the market. However, if a business holds a strong position in the market, it may consider a short-term price increase before selling the company. This strategic move can lead to increased overall profitability, and hence increase the value of the company.
Cost Assessment
A comprehensive cost assessment is important to pinpoint all expenses that would not be borne by a prospective buyer upon acquisition. While it's generally understood that a buyer may not be willing to allocate the full value of these cost savings to the seller, in a competitive bidding scenario involving other potential acquirers who stand to gain similar cost efficiencies, the buyer may need to compromise and share some of the cost-saving value with the seller to secure the deal.
Furthermore, the seller should embark on a cost optimization initiative aimed at eliminating excessive and superfluous expenses. In cases where a purchaser is willing to pay the seller a premium, such as ten times earnings, each dollar saved in costs can translate into a significant $10 increase in the company's overall value.
Lastly, a careful examination of research and development expenditures and advertising costs is important to ensure that these investments are primarily geared toward yielding short-term results with immediate, rather than long-term, impacts on profitability. This strategic approach can enhance the company's appeal to potential buyers and contribute to a successful sale.
Enhancing Earnings Quality
One of the most impactful ways for a company to boost its overall value and appeal to potential buyers is by elevating the quality of its earnings and reducing associated risks. Typically, smaller companies carry a heightened level of risk, often due to their reliance on a limited number of customers. In some instances, they may also be overly dependent on just a couple of suppliers.
A company whose most significant customer contributes less than 10 percent of its total revenues will be perceived more favorably compared to one where the largest customer accounts for over 50 percent of its revenue stream. In the latter scenario, losing the major customer could potentially lead the company into severe financial distress. In the lead-up to a sale, it becomes imperative for a company to exert substantial effort in diversifying its client base, even if this involves reducing business volumes with key customers.
Asset Assessment
When a business possesses assets that may not be essential or fully appreciated by a potential buyer, such as surplus properties and investments, it's recommended to consider their removal before initiating the sale process. Additionally, it's important to minimize working capital to the bare minimum necessary to sustain the company's profit generation. To achieve this, it's essential to review policies related to stockholding levels, accounts receivable, and accounts payable early on to ensure there is no excess "fat" in working capital. Selling the company with excess inventory or an abundance of outstanding accounts receivable due to poor credit collection effectively amounts to gifting the surplus to the purchaser. It is important to eliminate such surplus and either extract the resulting cash or, preferably from a tax perspective, incorporate it into the purchase price.
Furthermore, it's important to identify any concealed or undervalued assets within the business. If the value of property assets is understated in the company's balance sheet compared to their actual worth in the market, addressing this disparity is essential to accurately represent the company's value to potential buyers.
Legal Examination
A comprehensive legal assessment, carried out in collaboration with a business lawyer, should, at a minimum, ensure the following:
- Thoroughly review all leases
- Examine trading contracts to confirm the absence of change of control restrictions or prohibitions. Such clauses can act as potential deterrents for purchasers and should be minimized if possible.
- Verify the registration of intellectual property rights.
- Review shareholder agreements and articles to assess provisions related to a potential sale.
- Ensure that corporate filings are current, along with up-to-date board minutes and other statutory documents.
- Resolve any outstanding litigation. Even when covered by insurance, significant legal disputes can dissuade potential buyers.
- Simplify the ownership structure of the company to the greatest extent possible. This may entail acquiring minority or joint venture interests. Simplicity in ownership is highly valued by purchasers, and overly complex structures can diminish the overall appeal of the business.
The more thoroughly prepared a business is before embarking on the sale process, the higher the potential proceeds from the sale. However, it's important to strike a balance and avoid overly aggressive grooming for sale or attempts to artificially inflate profits that might be uncovered during due diligence. Such tactics can have adverse consequences for the seller and could erode the trust established between the seller and the buyer. Moreover, commencing the grooming process well in advance of the sale process is important because the effects of efforts to enhance profitability typically require some time to manifest in the company's financial records.
About the Contributor: Roberts & Obradovic Law Firm, a law firm focused on providing prompt expert legal advice and representation on various corporate, privacy, employment, and litigation matters for businesses and individuals. To contact a business lawyer, visit their website.
Opinions expressed here by contributors are their own.
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