Sell Side Due Diligence and Planning: 11 Ways to Maximize Your Enterprise Value

Your company has successfully made custom widgets for over 15 years.  Your kids are flourishing in their own careers, and retirement is on the horizon.  The market is good, and your balance sheet is strong.  What’s more, a competitor in Ohio just sold for $25 million, and your business has better margins and more customers.  You have finally decided to sell, but one question looms large:  “Now what?”

Middle-market businesses in virtually every industry face this dilemma all the time.  More likely than not, sell-side due diligence and planning contributed to your competitor’s upside.  How can you achieve similar success?  What follows are 11 steps you should take in the pre-sale due diligence process to maximize your enterprise value.

Control the Process

Nothing can lower the perceived value of your business faster than the appearance of a fire sale.  Not everyone is capable of or interested in buying your business, so you shouldn’t market yourself too broadly.  A well-planned, targeted approach will get better results than a shotgun sales strategy.

Protect Your Intellectual Property

Trademarks, service marks, trade secrets and confidential information all have value in the marketplace.  Taking the necessary steps to protect your intellectual property — from the company name to the tagline you have used for the past decade — gives tangible value to an otherwise intangible asset.

Don’t Be Emotional/Be Ready to Sell

Are you ready to sell?  Really ready?  Nothing is worse than going through the sale process and discovering you aren’t truly prepared to give up the reins.  Pulling the sale yourself or being a difficult negotiator in hopes of forcing the buyer to overpay or withdraw leaves a bad taste in everyone’s mouth.  Having a reputation of “just testing the waters,” being an unrealistic negotiator or having multiple “busted auctions” makes the sale that much harder the second, third or fourth time around.  The community of buyers and sellers is too small to be perceived by the marketplace as disingenuous or otherwise difficult.  Most importantly, “busted auctions” and bad reputations can lead to lower offer prices.

Investigate Yourself before Someone Else Does

There is nothing like the sale process to make you finally sign the stacks of board meeting minutes you’ve neglected over the years.  Such housekeeping items, while an annoyance to you in the grand scheme of widget-making, are important in the sale process and for liability protection.  Clean and well-organized corporate, accounting, sales and operational records convey a seriousness about your business that can positively impact prior to your offer price.  Think of your business like a house for sale.  The one with fresh paint, clean carpet and neutral décor will generally command a higher price than a comparable property with an interior in disrepair.

Disclose Everything

Honesty definitely counts in the due diligence process.  If the fourth quarter of the previous year was not one of the company’s best in terms of sales, don’t bury the numbers.  Instead, offer sold answers as to why the event was non-recurring.  Or, if it is recurring, state the potential future impact of the event.  When prospective buyers are left to make up their own story or your explanation is not grounded in quantitative fact, your final purchase price will invariably suffer.  Remember, you only have one chance to make a good first impression, which can help you obtain the maximum value possible for your business.

Consider Consulting Fees, Earnouts and Other Back-end Compensation

If you have realistically assessed your company’s value in the marketplace, you should feel comfortable taking an earnout, consulting fee or some other back-end compensation.  Sellers who defer a small portion of the total compensation could reap big rewards when future financial targets are achieved by the new owners.  However, do not acquiesce to a buyer’s demand to take a majority of the purchase price on the back end.  Instead, find a happy medium that protects your interests while letting the buyer know you are willing to stand behind the business with your wallet and your services.

Set a Deadline for Due Diligence

Buyers that look hard enough for long enough will eventually find the proverbial skeleton in the closet.  By setting a reasonable cutoff date for the due diligence, process you force both parties to be organized and efficient.  More importantly, you encourage the buyer to focus on what is most important, rather than wasting everyone’s time with an unnecessary fishing expedition.

Have a Price Range, Not a Price

If you’ve been involved in the business from the outset, you are essentially selling your life’s work.  However, sellers rarely get the “emotional value” of their business, which often accounts for your years of sacrifice, long hours and other factors that are irrelevant to the buyer.  Rather than focusing on an exact number, your best strategy is to set a realistic range that accounts for industry norms and market conditions, as well as the premium price that you believe represents the true value of your business.  Then strengthen your position by offering an objective rationale for the premium asking price.

Don’t Scrutinize a Good Offer to Death

A little more here or there in the negotiation process may win the battle but lose the war.  Having a firm grip on the objective value of your business and its potential will help you decide what constitutes a good offer.  Keep in mind that buyers rarely present their best price first, so don’t take a lowball offer as an insult.  Instead, use the due diligence process to your advantage to increase the offer.  After careful consideration, however, you may find that the buyer’s offer is appropriate for the industry, timing and potential of your business.

Get Your Financial House in Order

Reconcile outstanding checks, maintain a cash reserve for doubtful accounts and write off everything that should have been written off long ago.  Try to ask questions about your business from the buyer’s perspective.  Who are your top 10 customers and what percentage of revenue do they comprise?  How many accounts are more than 60 days old and why?  How many accounts are in collections?  What percentage of sales is attributed to related parties?  Be prepared to answer standard questions regarding your financial operations quickly and accurately.  If you give potential buyers the sense that your company runs a tight financial ship (or at least has a basic understanding of relevant performance metrics), they are less likely to worry about overpaying for your business.

Assemble a Team of Knowledgeable Advisors

Selling a business is a complex endeavor, and you can’t be expected to know everything.  Business brokers, accountants, lawyers and appraisers offer an array of skills and knowledge that will help you substantiate the value of your business.  Although these professionals can assist with damage control at audit or in litigation, they offer many more valuable services.  Their involvement early in the process may minimize or even eliminate the need for damage control.  Good counsel can shepherd a deal to a successful closing, so be sure to choose advisors who have knowledge of an experience in your particular business or industry.

In today’s business climate, where quality acquisition targets are plentiful, set yourself apart by making your enterprise worth buying.  Careful planning and comprehensive sell-side due diligence could be the difference between a mediocre sales price and a comfortable early retirement.