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Focus on Mergers & Acquisitions: Top Ten Actions to Take Before Going to Market

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Presuming that you've made the decision to sell your company and are fully committed to seeing it through, the below items represent what we feel are the Top 10 actions to take before putting your company up for sale. Many of these actions are best undertaken years ahead of a potential sale, yet we often find business owners scrambling to complete these action items during a buyer's due diligence process.
August 7, 2013

Presuming that you've made the decision to sell your company and are fully committed to seeing it through, the below items represent what we feel are the Top 10 actions to take before putting your company up for sale. Many of these actions are best undertaken years ahead of a potential sale, yet we often find business owners scrambling to complete these action items during a buyer's due diligence process. And, while not explicitly mentioned below, we've seen time and time again that a knowledgeable team of financial, tax, and legal advisors as well as a reputable business broker or investment banker can improve the outcome of your sales process.

1. Consider your exit options

Before selecting your buyer, have you considered the potential buyer universe? We've placed a list of questions below that only scratches the surface, but hopefully will provide you a starting point:

  • Are all of your co-owners/investors on-board with the sale, if applicable?
  • Do you want to sell 100% of your business?
  • Are you willing to retain a fraction of your existing ownership interest? If so, are you comfortable with someone else having a controlling interest?
  • Are you willing to bridge a valuation gap with an earn-out?
  • Are you prepared to finance some portion of the sales price?
  • Are you prepared to stick around for a few years, and what terms would you require in your post-closing employment agreement?
  • Are you prepared to retain ownership of your company's real estate and facilities, if applicable? (Buyers most often prefer not to acquire these assets and liabilities.) If not, do you have a plan to divest these assets (and related liabilities) pre-transaction?
  • Is this a business that you'd like to keep in the family, or – for whatever reason – is non-family the best option going forward?
  • Would you prefer to sell the company to your employees (i.e., ESOP) or management (i.e., management buy-out), or find an independent third party buyer?
  • If a third party buyer, would you consider a competitor, an existing customer or supplier, or someone entirely new to your business or industry?
  • What type of process would you prefer to sell your company with: a broad auction process (i.e., a shotgun approach in which dozens, if not hundreds, of companies that may have a remote interest are contacted), a narrow auction process (i.e., a limited and more targeted shotgun approach with a more refined timeline), or a negotiated sale process (i.e., with a targeted list of potential buyers)?
  • Are you looking for the highest offer, the best fit, or some combination of the two that you'll only know when you see it?

2. Get your financial house in order

Sure, you'd expect an accounting firm to say this, but let's face it – who wants to buy a company that can't produce accurate financial statements, or the support to back them up? How would a buyer know what they're buying? Having audited financial statements is a big plus, and can provide a buyer with greater comfort on your reported figures and provide you with greater proceeds (read: a higher sales price). Believe it! Investment bankers often indicate that having audited financials allows a company to get an additional half to full point on the valuation multiple. But, what if you haven't had a third party place some level of assurance on your financials? There are many professionals, such as RubinBrown's Mergers & Acquisitions Services Team, that can perform varying procedures to prepare your financials for the intense scrutiny of a sale. Nothing can erode a buyer's confidence in a company and its management team like inconsistent or unsupportable financials. Poorly prepared financials can be a major source of value erosion and can create deal fatigue, which can also erode value.

3. Be prepared to explain your business' performance

This seems obvious, but do you truly understand why your business has trended the way it has? For instance, if your sales are up but your margins are down – your easy answer is "Well, higher supplier prices (or labor costs) are eating into my profits" or "The economy has been rough," but neither of those tells the whole story. Ask yourself, "Why am I unable to push through price increases?", "Am I selling more volume to make up for depressed margins?", and "Have I discounted my products/services so much that I am unable to get back to higher, normalized pricing?" A sophisticated buyer will ask these types of questions to get to the heart of the matter – it's best that you are prepared to answer these questions and more; otherwise, you risk losing your buyer's trust and, ultimately, your buyer. Said differently, the better you can articulate your company's performance to a buyer, the smoother the process will be.

On a related note, make sure you understand your reasons for selling. Put yourself in a buyer's shoes – if this is such a great business, why do you want out? There are countless legitimate reasons to sell, so don't despair, but know that a buyer will be thinking this throughout the sales process. Self-awareness about your reasons for selling will also help you identify which negotiation items to push back on, and which items to let go. Understand what matters to you in the beginning, because there will inevitably be negotiating points which will make you uncomfortable.

4. Have plans in place to remedy any difficult situations / negative trends encountered or currently faced

Along the lines of the preceding action item, have you considered how you plan to remedy any difficult situations / negative trends? If there is no way to mitigate these situations, why would you expect a buyer to come in and do so? A buyer will want to see a well thought-out approach to tackling your business' biggest issues. In many cases, the fact that you are prepared to tackle these issues can be just as strong of a selling point as the results you expect to achieve.

5. Assemble a list of strong growth opportunities, know what investment may be required, and be prepared to act on them

Presuming that you can satisfy a buyer's concerns about any difficult situations / negative trends in your business, what do you see as your business' growth opportunities? Many owners have a wealth of ideas but lack either the time or resources to act upon them. A buyer will be interested in learning how the business can grow – in fact, their investment thesis is predicated on it – so your list should be specific and contain steps, a timeline, and a budget (as necessary) that you deem necessary to realize your growth ideas. Keep in mind, however, that a buyer may question extremely rosy growth opportunities, and may wonder why you didn't pursue them if they are so great. These questions can be answered, but be prepared to address the concern.

6. Prepare a defensible budget/forecast/projection for the next year or two

Not all business owners prepare forward-looking financial documents; however, a buyer will require you to do so. It would be advantageous for you to put in a budgeting and forecasting process now, well in advance of a sale, so you can demonstrate the accuracy of your process. In doing so, consider what areas of the business you think you can grow, how much will it cost to do so, and whether you expect short- or long-term changes to your business' operations (such as a change in staffing levels, a one-time capital investment, or changes in pricing/procurement costs). Be realistic, but not overly conservative. A good budget should be somewhere between a stretch goal and a conservative goal.

7. Consider removing your personal expenses from the business

This certainly does not apply to all business owners, but we encounter a number of sellers who have utilized their business as a personal piggy bank (to varying degrees). Now, there are ways to make adjustments for this in the sales process (these adjustments may be part of a larger group of adjustments frequently referred to as "add-backs"). Inevitably, however, it may be difficult to substantiate (or prove the non-business nature of) certain non-business expenses, which will make your business appear less profitable. Missing credit for non-business expenses may have a significant impact on your proceeds: for instance, $10,000 of personal expenses that are not added-back at a 5.0x multiple may result in $50,000 of sales price being left on the table.

And, yes, this step also includes an honest assessment of whether any family on the payroll should really be there, and whether or not their wages are reflective of their efforts, responsibilities, etc.

8. Have your key customer and/or vendor relationships documented (and have signed agreements, if possible)

A buyer will be interested in knowing what on-going commitments you've agreed to since they will be your buyer's commitments going forward, assuming that such agreements are transferable post-transaction. Therefore, it's imperative that you document all third party agreements and arrangements so that your buyer is clear on the terms under which it is bound with suppliers and customers going forward. This also includes loan agreements, promissory notes, operating leases, facility rental agreements, insurance policies, and other monthly/quarterly/annual commitments. Of course, it's desirable that all such arrangements are already written out and signed by both parties. (Plus, you'll appreciate already having these agreements ready-to-go when the multiple rounds of document requests start coming in.)

9. Understand what it will take to retain your key employees post-sale

Transactions create uncertainty, and uncertainty is usually perceived negatively by employees. While it may make sense to keep some or most all of your employees in the dark until a sale is consummated, it is important to the buyer that your key employees understand what is occurring and what it means for them. A buyer will often want key employees to sign employment agreements as a condition to the transaction, and may be willing to offer employment terms post-transaction that are more favorable than what they're currently getting from you. It is helpful to a buyer and the buying process if you understand what it will take to get your employees to buy-in post-transaction so that key employee retention is not an issue.

10. Know your value (and be realistic)

Fortunately, it appears that many business owners have already thought about how much they'd like to receive from the sale of their business. Unfortunately, we see a number of situations where a business owner has heard about a competitor/friend/friend-of-a-friend who has sold their business for some multiple that is unrealistic for their situation. It is important to note that there are a number of factors in every transaction which can impact the sales price, and that comparable transactions – while relevant – should be used only as a guide and not a direct indication of what can be achieved in your situation. It's also worth mentioning that having a realistic value in mind will allow you to better respond to the offers you receive, and help you quickly decide whether to move forward with a buyer. This also gets back to our third bullet - understand why you want to sell and what is important to you.

11. BONUS – Understand your tax position (and tax obligations post-sale) under different transaction structures

A $5 million sales price to an LLC is not the same as a $5 million sales price to a C-Corporation. Similarly, a sale of assets may be treated differently from a sale of equity. Thus, it's imperative to know that – even if you are selling to the highest bidder – the transaction price should not be considered in a vacuum, and should be considered in conjunction with the proposed transaction (read: tax) structure. In fact, there are a number of situations in which a lower sales price can yield greater after-tax cash proceeds. Simply put, the tax implications of any transaction are of significant consideration and, often, more easily negotiated than the actual price – don't be ignorant to the value that can be gained and lost here.

If you are considering selling your business, RubinBrown's experienced team of Mergers & Acquisitions professionals would be pleased to discuss your situation, options, and strategy. We can even provide you with a "buy-side" diagnostic, approaching you as a potential buyer might to provide an assessment of your strengths, areas for improvement, and any potential red flags or deal killers. The sooner you have an understanding of your potential weaknesses in the eyes of a buyer, the more time you will have to deal with those issues.

RubinBrown has a dedicated team of M&A professionals that can assist you at any point in your business' lifecycle, whether you are considering making an acquisition, divesting a business line or product, or readying your business for sale. RubinBrown has the experience to help your organization from the initial thought of buying or selling to the critical post-closing and integration activities that must occur. Our comprehensive approach maximizes the value of the transaction for our clients.


Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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