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Allen Liebnick
Allen Liebnick
Preparing a Company for Sale

Begin with the end in mind.

July 9, 2009
by Allen Liebnick, CPA

In a recent discussion with Janae Chamblee, CPA, BCB and CBI, we discussed how to ensure an effective exit strategy for Private Company Owners. Chamblee is director of the Texas State Society of CPAs and a Trustee of the TSCPA Insurance Trust. As the owner of First Business Resources, Inc., a merger and acquisition services company and business broker firm (not a CPA firm), Chamblee has had years of experience in providing hands on guidance to her clients in helping them buy or sell a business.

Chamblee explained that selling a company is three parts art, seven parts science with a little sprinkle of luck but is definitely 100 percent process oriented. It is critical to begin with strategic planning to posture the company in its best operational and financial light. Sellers commonly fail to consider exit strategies when things are going well for their company and tend not to focus on an exit strategy or transfer process until an unforeseen external event triggers an awakening or they decide to retire, or reach burn-out. Knowledgeable sellers understand that to exert control over internal forces (employees, accounting and operational processes) and external forces (economic turbulence, industry downturn, changing competition, illness, etc.) they must clearly examine all aspects of their business, define their personal goals and objectives and begin exit preparation yesterday.

A transaction has three characters; a seller, a buyer and a financing source. Sellers should take a critical look at their company from the prospective buyer’s or lender’s viewpoint. If sellers manage their company with an “End in Mind” decision-making outlook, then they will always be in a continuous process of preparing their company for sale.

Seller’s Goals and Objectives

How do sellers begin to define their goals and objectives? Chamblee explained that sellers must delineate specific objectives for financial goals (liquidity, sale price, taxation/estate planning) and nonfinancial goals (succession, legacy and reputation, employee, stakeholder concerns and other special interests). Decision-making questions include: To whom do I want to sell/transfer the business (family, financial investors or competitors)? How long, post closing, do I want to be involved? Do I want to maintain some upside/risk? Are there employees or others whom I want to protect/reward? What is my after sale tax position? What are my financial alternatives post closings?

Assemble and Communicate With Trusted Advisor Professionals

Chamblee pointed out that sellers should not try planning their exit strategy alone. Running a company is a full-time job. Sellers shouldn’t take their eye of the ball. Sellers should assemble their advisory team early in the exit-strategy planning process and clearly communicate their exit goals and objectives. Sellers must listen to their advisors’ advice, understand their options and implement the agreed upon suggestions. Advisors who must be in position early in the planning process include: certified public accountant, transactional attorney, financial advisor, merger and acquisition advisor (business broker).

Market Value and Transaction Structuring Alternatives

According to Chamblee, a prerequisite of a comprehensive exit plan is to understand the current market value range of the company. A comparison of market value to the seller’s financial objectives will indicate if the right time to exit is now. If market value is too low a seller needs to contemplate how they will increase value. Deal structuring, tax structuring and financial engineering can significantly impact the seller’s transactional proceeds. Sellers that understand the implications of transaction structuring alternatives will be prepared when they elect to take their company to market.

Influence Value — Develop Credible Financial and Operational Projections

“Buyers analyze the past but buy the future” says Chamblee. A persuasive growth strategy is a key element of exit planning. In a sale, to maximize the transactional value of a company, sellers must provide potential buyers with a compelling story of future growth opportunities and profitability. Sellers should develop a credible set of detailed financial projections and key operational drivers for the next three to five years which will, in part, define the buyer's perception of the company's future and management's ability to deliver.

A Company’s Financial Profile Via a Buyer’s/Lender’s Perspective

 Let the seller’s CPA perform the heavy lifting but have a thorough knowledge of the results was Chamblee’s advice. Buyers will want a transparent understanding of the target company’s historical performance. It is best to have three years of audited financial statements plus interim year-to-date financials. Very clean compiled/reviewed statements with their accompanying tax returns will suffice in some cases. The validation of the “the numbers” via audited financials will engender confidence with the buyer. Accurate historical financial information will allow the buyer to focus on the future with a better understanding of the risks and rewards associated with their potential acquisition. Sellers and their CPAs should focus on:

  • Evaluating the company’s current corporate structure.
  • Eliminating personal expenses and over generous benefits to friends and family.
  • Cleaning up the balance sheet by:
    • Selling excess or non-producing assets;
    • Recognizing all on- and off-balance sheet liabilities such as customer prepayments, work in process billings, warranty obligations etc. openly; and
    • Taking any necessary “write downs” for uncollectable accounts receivable (A/R) or unusable inventory.
  • Eliminating any unrelated “side” activities intermixed with the company.
  • Maintaining an accurate inventory and current inventory value.
  • Understanding the company’s key performance indicators and how they compare in the industry.
  • Improving the quality of earnings.

A Company’s Operational Profile Via a Buyer’s/Lender’s Perspective

On what areas of the company’s current day-to-day operations should a seller focus? Chamblee explained that buyers will spotlight the key operational drivers of the target company. A seller should review and be prepared to give accurate details regarding the prior, current and future status of the:

  □ Size of the Company
□ Location of the Company
□ History of the Company
□ Management of the Company
□ Employee Resources
□ Barriers to Entry
□ Manufacturing Processes
□ Market Share
□ Client Base
□ Business Growth
□ Pricing Policy
□ Inventory Levels
□ Competition

Conclusion

“Owners who have prepared their exit strategy will begin the marketing of their company in a position of strength,” pointed out Chamblee. “Clear goals and objectives will place the seller in the optimal position to negotiate favorable price and terms, or, if necessary, to walk away.”

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Allen M. Liebnick, CPA, is president of Overpaid Payables Recovery, Inc. A former associate professor, Liebnick has been providing accounts payable, sales tax and telecommunications post audit recovery services for over 15 years. He serves clients in the U.S., Canada and Mexico. He is a member of the New York State Society of CPAs as well as Texas Society of Certified Public Accountants. Liebnick thanks Janae Chamblee for her contribution to this article. If you want to contact her directly to ask any questions, feel free to contact her and tell her Allen sent you.