Achieving the Maximum Valuation When Selling a Business
Most mergers and acquisitions are complex and take a great deal of time and energy to complete. There are details and nuances to every deal that can swing valuation one way or the other. At Turning Point, we work with our clients to ensure that pivotal guidelines that often get overlooked in the hustle and bustle of a growing enterprise are turned into strengths, not weaknesses, as the company goes to market. Here are some guidelines that can be extremely valuable during any M&A transaction and can help your company valuate for what you know it’s worth, or more.
KEEP PROPER CORPORATE GOVERNANCE
Verbal agreements and handshake deals have a funny way of changing once a company gets into discussions to be acquired. Keeping proper corporate governance means adhering to clear, concise, and current agreements among the equity holders of the business. These must be written and signed by all the interested parties.
MANAGE YOUR CONTRACTUAL OBLIGATIONS
Most successful ventures have contracts upon contracts with their customers, clients, vendors, suppliers, and other key parties involved in day-to-day operations. Yes, most of these contracts are full of boilerplate language that is both cumbersome and boring. But, if you are an entrepreneur, it’s crucial for you to have read these agreements so you know whether or not you are required to get any form of consent or permission from these parties in a change in control transaction—i.e. 51 percent or more of the voting equity in the company is changing hands. Most customer agreements have a provision stating that if a company is contemplating a change in control deal, the customer needs to either be informed ahead of time or needs to consent to the transaction before it becomes official.
A company being acquired with 100 percent of its customer relationships intact is a much different animal than a company that is going to lose 25 percent of its customer base (or have a significant number of its customers want to renegotiate terms) in the transaction. The impact on valuation can be significant.
UNDERSTAND YOUR FINANCIAL STATEMENTS
Before you ask anyone else to, it’s imperative that you know your own company’s basic financial statements: the income statement, the balance sheet, and the statement of cash flows. These documents should be accurate, timely, and have supporting schedules to validate how the reports were created. If a company isn’t able to produce accurate and timely financials, its strategies and growth plans with always be reactive instead of proactive. Any potential acquirer will use this to their advantage when it comes time to valuate, citing poor financial reporting.
HAVE A DETAILED FORECAST
At Turning Point, we advise clients to create and utilize a 36-month forecast on a month-over-month basis, which helps project the future trajectory of the company. In an M&A context, such a forecast can be invaluable, particularly if it has been used for a period of time and updated regularly to be more reliable and accurate. A good forecast that shows growth on a trended basis can shine a light on future cash flow and make a company more desirable to a potential acquirer.
Elevate your business with Turning Point Strategic Advisors in Seattle, WA. For more information, contact us and discover your path to success.
