A 25-Point Checklist to Being a Smart Seller

As managing director and founder of MHT MidSpan, L.P. – a leading, employee-owned national investment bank with enterprise values ranging from US$25 million to US$500 million – Mike McGill knows a thing or two about buying and selling companies.

A member of Young Presidents’ Organization in Texas since 2007, McGill offers 25 best practices to help you prepare the sale of your company. Starting 24-36 months out, here are strategies to help you facilitate a successful exit:

24-36 Months Before the Sale

1. Metrics Matter
Understand how your industry is valued and position yourself to that metric even if you disagree. This is not to say you should toss out all your experience and judgment about how to run your business, it just means be sensitive to market reality.

2. Historicized Financials
For the US$15,000 you’ll spend in audit fees, it’s worthwhile to have several years of documented history.

3. Favorable Comparisons
A buyer will want to identify trends in the business – keep the P&L categories consistent from year to year and make comparisons favorable by being strategic about categorizing expenses and revenue.

4. Adding Up Add-Backs
It’s likely that certain expenses under your ownership are unnecessary going forward; country club memberships, Aunt Susan’s payroll, CEO expense accounts…track these expenses under a single category so your buyer can make one easy adjustment.

5. Simplify Your Financials
Your financials may have evolved into a confusing format that only you understand. Take the time to revamp your books in an intuitive fashion – buyers want a simple story.

6. Spinning Assets
You may have assets that are of lower value to a buyer, i.e. real estate – you might be happy with a 6 percent return, alternately, you may be selling a prosaic service business with a terrific software product you developed. Spin out the software in advance of the sale and lease the technology back to the company.

7. You Are Not Essential
Making yourself non-essential accords more options with buyers, especially if you don’t intend to stay with the company. By implementing a leave-behind manager you can keep buyers who might otherwise have backed away, invested.

8. Talking Tax
As you get closer to closing, your tax options narrow – now is the time to move assets, change accounting treatment and alter your structure.

9. Register Your Property
If you have valuable intellectual property – copyrights, trademarks, service marks, patents – consider creating additional value for a buyer by registering them in advance, registrations take time.

10. Buy Back/Clean Up
Buying back Cousin Greta’s shares at US$1.25 a share and selling them three months later for US$3.85 a share = a lawsuit. Create value in advance of a sale by buying up minority shareholdings and if there are minor shareholders party to your subsequent agreement, cash them out and clean up the table.

11. Accelerate Don’t Litigate
Litigation gets in the way of a clean transaction and can cause problems with lenders. While one should hardly settle under unfavorable terms, it makes sense to move your cases aggressively forward in advance of a sale.

12. Third Rail Activities
Rethink any operations a buyer or lender may shy away from or consider spinning them out, i.e. self-insurance, work susceptible to litigation (especially consumer litigation), activities with high health risk worker, etc.

13. Give It Up
Your company may have some small activities with things that are intriguing, but not adding short-term earnings. Take time to evaluate these hobbies and ask whether they add enough value to cover the expense.

14. Over Insure
Consider increasing umbrella limits so that if you have a large claim in the 24 months up to a sale, you can argue that it not affect value since it’s fully insured.

15. Build Your Buyers
Remember, you want to catch the “outlier” and you never know who that might be (it’s seldom who you think). To build your list, become active in outside activities and trade associations, and build bridges with competitors where appropriate. Keep a running list of names so when the time comes, you minimize the risk of forgetting any possibilities.

12-24 Months Before the Sale

16. Pull Out the Cash
In many cases, companies are purchased based on P&L and the balance sheet is only reviewed for “reasonableness.” Think about A/R, A/P, inventory, pre-paids and amounts owed to you –pull them out and keep them out.

17. Take the Longview
Don’t get greedy with P&L, but don’t be foolhardy: If you sell for a multiple of earnings, every US$1 you save in R&D could come back to you as US$6 or more.

18. Step on the Gas
Create as much profit as possible: Every dollar you drop to the bottom line could come back to you as US$6-$10 or more in purchase price.

19. Consider Communication
While confidentiality has advantages, so does letting your team in on the event – properly motivated, they can help you in ways you can’t imagine, and generally they find out anyway.

20. Create Incentives
Often sellers make the mistake of putting in a bonus that occurs at the time of sale. There are two problems with this; you, the seller, generally pay the tab and this structure does nothing to help the buyer. Arrange bonuses that pay out at the six and 12-month marks – this way you reassure the seller his team won’t leave right away and offer him plenty of time to implement a structure for retaining management.

21. Succession Planning
Hopefully you’ve laid the groundwork, now it’s time to polish up the succession planning for presentation to a buyer.

22. Customers on Contract
Re-signing contracts can have a big impact on the purchase price – if you have relied on a handshake for years, you might want to gravitate toward something more binding.

23. Give Yourself a Raise
Whether you stay or go, the higher the salary the better: If you leave, you can justify a severance package or consulting agreement as a multiple of your salary, if you stay, you’ll want a continuation of your compensation at the highest possible level. The trade-off is a loss of earnings multiple (USD$1 of salary costs you USD$8 of purchase price) but CEO salary as an add-back is one of the easiest to get a buyer comfortable with.

24. Blocks of Time
To do a sale correctly, you’ll need to allocate 25-50 percent of your day-to-day to managing the process. If it takes less, great, but don’t count on it.

25. Spruce the Place Up
Paint is cheap and “curb appeal” matters; paint the walls, tidy up the offices and put in some landscaping.

In summation, buyers like simple stories – integrity, transparency and a nice coat of paint go a long way toward mitigating a happy, healthy and (mostly) drama-free sale.

Now feel free to buy that plane ticket to Fiji and forget about it all…

(The author of this article is Deborah Stoll from Young Presidents’ Organization)

YPO (Young Presidents’ Organization) is a not-for-profit, global network of young chief executives connected through the shared mission of becoming Better Leaders Through Education and Idea Exchange™. For more information, visit www.ypo.org.

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