Sounding Off! March 2005, Issue 3

Prepare Your Company for Sale
by Allen R. Stott, Managing Director and Principal of Executive Sounding Board

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Too often, we get referred in to meet with an owner about selling after the company has been in decline. While many of these companies are “saleable”, they sell at a discount, not a premium. The time to sell is when business is good and the outlook is positive. For business owners considering selling their business there are a number of steps that they should take today to make sure the sale process is successful and ultimately maximize the sale price.

• Prepare Audited Financials. A buyer is most concerned with the financial performance of the selling company. Audited financials reduces the buyer’s risk, meaning the buyer will pay a higher price.

• Show Real Earnings. Buyers do not get excited about companies operating on a break-even basis with a list of add-backs. $1 million in earnings is more desirable than $500,000 of earnings and $500,000 of adjustments. Many buyers look for a minimum profit margin of 10% of sales.

• Diversify and Lock Up your Customers. Buyers prefer recurring revenue versus one-time, and place a higher value on recurring revenue. Long-term customer contracts are a positive. If the largest customer represents more than 15% of sales, work to lower your customer concentration. If your #1 customer is 25% or more of sales, it is a serious negative (high risk) to most buyers.

• Build a Management Team. The existence of a solid management team reduces the buyer’s reliance on any given member of the team. As a result, the buyer is more comfortable that the future success is not dependent on the current owner.

• Growth is Good! Most buyers like and are willing to pay for growth in revenue and profits. Historical growth makes future growth more certain. Conversely, buyers will discount the price if revenue is declining.

• Allow Sufficient Time to Prove Results. To receive full credit for any positive changes in the business, the selling company needs to provide quantitative proof of the change’s impact on the financial performance of the company.

The selling process is complicated, and to maximize value an owner should assemble a team, including an attorney, accountant, financial planner and M&A advisor.

New Opportunities

Business For Sale - Niche Manufacturer/Distributor - supplies a non-lethal defense spray to the law enforcement market. Significant Intellectual Property. Revenue of $1.5 - $2.0 million, very profitable. Operates with a just a few employees. Relocatable.

Business For Sale - Ambulatory Anesthesiologist Practice - services provided to Ambulatory Surgical Centers (ASCs). The company has grown rapidly in part due to the dramatic growth in ASCs in recent years. Revenue of $5 million and $2 million in EBIT.

Business For Sale - Building Maintenance Company - janitorial and speciality services, based in the Mid-Atlantic. Revenue of $20 million and $2 million in EBIT.

Growth Capital Investment - Private Equity Firm seeks "non-control" investments in Maryland-based companies requiring capital to realize their growth potential.