Positioning Your Company for Sale
The first in a series of three articles
By Owen Johnson, CPA/ABV, ASA, CBA
Introduction
At Mercer Capital Advisors we are often asked by potential clients, “Is
my business ready for sale?” and, if not, “What things should we be
focused on to position the company to attain the highest possible sales
price?” Z. Christopher Mercer, CEO of Mercer Capital, has developed over
the years a framework for thinking about the financial considerations of
your business that he calls BIG TIPS from MOSESTM, which
will appear in a new book in 2006. He does not pretend to have the Ten
Commandments of business; however, we at Mercer Capital Advisors use
this acronym to guide our discussions with clients of the financial
concepts that are significant to their businesses.
In this series of three articles, we will focus on the important
aspects of a business that is “ready for sale” —not necessarily “up for
sale”— so that you can use them as a guide in evaluating whether or not
your business is operating at optimum performance; and provide you with
a better understanding of the nature of value in your business.
Remember, “ready for sale” does not mean on the market or up for sale.
It simply means that if a favorable opportunity arises or if
circumstances necessitate a sale, the company is ready and has the
characteristics for which rational buyers of capacity will pay a
reasonable — or better — price.
Keep in mind that in this series of articles we discuss what
rational buyers seeking reasonable market returns might pay for your
business. What you really want to find at the time you decide to sell is
an irrational buyer who will overpay for your business; or a
strategic buyer with unique reasons for paying that may be quite
rational in light of that buyer's unique strategy. Unfortunately,
irrational buyers are hard to find, especially when you need one the
most. Therefore, we will continue to focus on the requirements of
rational purchasers of businesses.
Let us first define BIG TIPS from MOSESTM, or the financial
considerations of your business:
- B Balance Sheet
- I Income Statement
- G Growth
- T Technology and CapEx
- I Information and the Internet
- P Products and Services
- S Sales and Marketing
- M Management in Place
- O Oversight
- S Strategic Direction
- E Employees in Place
- S Stock Considerations
Focusing on BIG
This first article in the series deals with “BIG,” known as the Balance
Sheet, Income Statement and Growth.
Balance Sheet. A company’s balance sheet is an important part
of the overall valuation equation and should be relevant to the
business. The nature, composition and quality of a company’s assets are
extremely important to valuation. On the liability side, financing
should be secure, and equity should provide an appropriate degree of
funding to maximize value at acceptable risk levels.
We have reviewed the balance sheets of many companies positioned for
sale and have discovered that certain information was not relevant. For
example, we recently reviewed a medical products distributing company
where the owner made all of his personal investments inside the company.
To further compound the issue the company is a C corporation. The
company had certain operations of non-related businesses inside the
company. It also had millions of dollars of hunting and other land
investments in the company that, at fair market value, was approaching
the underlying value of the operating entity.
Needless to say, to position this business for sale, we have to
separate these non-operating assets from the core operating business.
This takes time to complete and the delay can be potentially damaging to
the selling price. Why? Because now is an excellent time for
quality companies to be on the market if their balance sheet is
positioned well.
| The balance sheet is the foundation upon which most
companies stand. To maximize value, a company’s balance
sheet should be built on solid rock, and not on the shifting
sand of excessive leverage. |
Income Statement. The positioning of the income statement is a
very important part of any analysis made in the consideration of selling
a business. Questions to ask include:
- What are the revenue and profitability trends of the business?
Are they up or down? Are they flat?
- How are the margins holding up? Are they trending up or trending
down?
- Key ratio analyses are very important in looking at a company.
How does the company compare with prior periods? How do the
company’s ratios compare currently against industry metrics and
industry peer groups? How do they compare over time?
- What type of returns does the company generate? Are the returns
on equity higher than, the same or lower than those of its peers?
We are currently selling a company that has been highly profitable
over the last five years and has been able to maintain a very good
profit margin over this time period. However, at the same time, the
company has experienced a drop in its overall revenue for the last three
years. While the business revenue mix has changed over this time period,
we are still getting resistance from the market as to the real reason
that revenues have declined. In fact, the current potential buyer just
backed out of the deal because they were unsure that they could grow the
company’s revenue line as fast as expected. Because the top line has
been declining, this has made the sale of the company somewhat
difficult, even though profit margins remain quite strong. This has been
very frustrating to us and to the owner of the company who has been
somewhat “hands off” in running the company since it has still been so
profitable.
| The income statement provides evidence of a company’s
ongoing flow of business, and needs to be managed carefully
and consistently if a company is to be ready for sale. |
Growth. In looking at the growth of a company, the real
question is “Has there been any growth?” Obviously, a company “on the
grow” is always more attractive than similar businesses that are
stagnating, declining, or losing money.
Many business owners run their companies in maintenance mode. They
are happy with the status quo. This part of the equation is really what
gets the attention of the marketplace. Some buyers —either strategic or
financial — like high growth situations, while some buyers like good
relatively stable growth of revenue and earnings. The subject company
and its prospects for growth will determine the type of buyer that we
will seek in the marketplace.
Some questions to ask are:
- Where does growth come from?
- Is the company expanding its market share of products and/or
services?
- What is the competitive landscape of the company?
- Are there new innovations of products and/or services that can
get to the market before the competition?
When selling, every business owner desires to sell the unlimited
prospects for future growth available to purchasers. Those prospects are
inevitably more believable if there is a clear, historical record of
consistent growth in sales and earnings. Absent such a record, potential
buyers may never bridge the gap between a company’s lackluster record or
declining trends and the selling owner’s vision of a grand and glorious
future. Value, and inevitably, sales price suffers as a result.
| From the standpoint of potential purchasers, one of
the best indicators of management quality is a history of
improving performance, or sustained performance at or above
industry norms. |
About the Author
Owen Johnson, CPA/ABV, ASA, CBA, is senior vice president
with Mercer Capital Advisors, an investment banking division of Mercer
Capital Management, Inc., located in Memphis, Tennessee, where he
specializes in providing merger and acquisition services to buyers or
sellers of public or private companies. Owen can be reached at
johnsono@mercercapital.com. |
