Getting ready to sell your business is a big decision with many considerations. It can be difficult to know whether you are truly ready for a transaction. The following checklist is designed to give you an idea of how prepared you are to go to market. If you check all five boxes, your business is likely well-prepared for a transaction.
Of course, the most important element of timing is your personal time horizon. When does it make sense for you to seek a change of this magnitude? That is a very personal decision that will significantly impact your daily life. No checklist in the world can fully gauge all the considerations that will influence that decision, but knowing that your business is ready for a transaction when you are can bring peace of mind.
Here are five indicators that your business is ready for the greenlight:
1. Is Your Business Growing and Financially Healthy?
Naturally, one of the first things potential buyers look at is the financial status of your business. Businesses that are steadily growing their profit and revenue are usually the most attractive. That said, Tech and SaaS companies can often get away with lower current profits in exchange for higher growth and future scalability. In general, though, it’s difficult to sell a business that is not growing or has significant cash burn.
Want to quickly assess whether you’ll get a good reception in the market? There's a helpful rule of thumb known as “The Rule of 40.” When you add together the growth rate of your business with your profit margins, the sum should equal 40 or higher. For example, a business with a 20% annual growth rate with 20% profit margins would likely be attractive to buyers, as would a business growing 30% with 10% profit margins.
2. Are Your Financials Reported Consistently and Correctly?
Even if you are growing rapidly, correct and consistent financial reporting is a must for a successful transaction. Audited financials are ideal, although smaller companies with no outside stakeholders may struggle to justify such a costly investment. At a minimum, we would recommend having 3 consecutive years of reviewed financials.
It is also important that your financial reporting tracks the KPIs that are most important to buyers. Trying to compile these KPIs in retrospect can be very difficult, so it is best to track them from the outset.
Some of the important KPIs and metrics for buyers include:
3. Is Your Customer Base Diversified?
A diversified customer base is ideal. Customer concentration, typically defined as a single customer accounting for over 20% of revenue, will increase risk in a buyer’s eyes. While having a cornerstone customer is not a deal-breaker, excessive customer concentration can be a red flag for buyers. Buyers will also look to see if your customers are heavily concentrated in a particular industry, especially one that is sensitive to the economic cycle.
There are other kinds of concentration to consider as well. For example, one salesperson or employee “owning” a big chunk of the revenue can be seen as a risk. Similarly, a single-channel partner representing a meaningful share of revenue can also be a concentration concern.
Finally, be mindful of any special designations for your business: woman-owned, minority-owned, veteran-owned, etc. For most buyers, these designations will be viewed as a customer relationship risk, as a buyer is unlikely to qualify for these designations after an ownership transfer. There is nothing wrong with getting these designations, but as you approach the time when you would like to consider a transaction, it is best to eliminate them three years in advance. This way you have proof that you have retained your customer base without the designation.
4. Do You Have Your Legal Infrastructure In Order?
There are a few important things buyers look for when it comes to legal infrastructure. Wherever possible, limit contracts that require consent to assign the contract to a buyer. Change of control provisions can cause delays when it comes time to sell a majority stake in your business.
When it comes to customer contracts, keeping good records is essential. With long-standing customers, pricing, services, and other terms often change over the years. As such, it is important to organize customer records with both the original agreement and any subsequent changes to the statement of work. Otherwise, going back to match revenue, invoices, and contracts at transaction time can create a huge mess, not to mention extra costs.
Lastly, it is wise to have confidentiality agreements in place for employees with access to important information. It may also make sense to consider non-compete agreements for key employees. Having these contracts in place at the outset can help prevent intellectual property disputes and other headaches down the road.
5. Do You Have a Succession Plan in Place?
Finally, it is essential to develop a succession plan. It takes time to identify and develop the next generation of talent. If your objective is to create the flexibility to retire shortly after a transaction, it is important to begin to transition key responsibilities well in advance. By doing so, you will be able to demonstrate that the next generation is capable of executing at a high level in their new roles. This will alleviate buyer anxieties about your importance to the business.
Also, you will want to take the time to contemplate your own objective as the business owner. What do you want to do after selling the company? Stay involved, retire immediately? Consulting with a wealth advisor and tax advisor early can provide clarity about how much you will need from the sale of your business to maintain your lifestyle. It is important to have a clear understanding of what enterprise value will yield the amount you will need after taxes are paid and any debts have been satisfied.
Harbor View Advisors - Personalized Guidance for Business Owners
Harbor View Advisors provides M&A advisory, turnkey corporate development and strategic consulting to software and technology-enabled business services companies. Our unique approach combines the strategic thinking of a consulting firm with the execution experience of an investment bank to provide clients with the full spectrum of guidance they need to achieve their goals. If you are considering a potential strategic alternative for your company – connect with us at Harbor View. Our investment banking services help companies get the results they deserve, guiding them step-by-step through all stages of a transaction.
DISCLAIMER This presentation is intended for information and discussion purposes only and does not constitute legal or professional investment advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Harbor View Advisors, LLC (“HVA”). The information in this presentation was compiled from sources believed to be reliable for informational purposes only. HVA does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.
