Top 10 tips when preparing for a transaction
In our experience as diligence providers and financial advisors seated on each side of the deal, there are too many times we see owners leaving money on the table because they haven’t spent the time and effort necessary to put policies, procedures, and proper reporting in place to maximize the value of their transaction. With so many outside factors impacting the consumer M&A and investment environment right now, it pays to have all of your ducks in a row before raising capital or putting your company on the block.
For consumer businesses, there are a myriad of factors impacting profitability and operations including inflation, supply chain challenges, and labor constraints, just to name a few. How a company responds to these changes operationally will drive a buyer’s view of the future potential of the business. On the buyside – apart from being more cautious in understanding the impacts of inflation, supply chain, and labor on the business – investors need to consider interest rates and the cost of capital. All of this means potential downward pressure on valuations, particularly if you’re not prepared.
Here are the top 10 tips to help make your company more attractive to investors and buyers, and potentially increase your valuation:
- Convert all non-GAAP financials to GAAP. Investors will want to see financial statements prepared in accordance with generally accepted accounting principles (GAAP). For example, consumer businesses will sometimes maintain their books and records on a cash basis, whereby revenue is recorded when the cash is received, and expenses recorded when amounts are disbursed. Investors and buyers are unlikely to rely on financial statements prepared on the cash basis of accounting to evaluate a potential acquisition or investment target.
- Evaluate the company’s corporate structure. Determine whether there is a better corporate structure available (e.g., one that offers more tax advantages) and, if there is, then make the change now. Don’t wait until you’re in the middle of the transaction to make this move.
- Improve and strengthen controls, technology, and processes. If you’re still using accounting software and spreadsheets, consider a full-blown enterprise resource planning (ERP) system or other platform that offers robust controls, data management, and reporting functionalities.
- Finish implementing any cost-cutting strategies. We often come across situations where a company will pro forma its results to reflect an idea that has not yet been fully implemented. A buyer isn’t going to give full credit to the “potential savings” that will come out of that idea, so now is the time to finish implementing those cost-reduction strategies. If you haven’t started implementing, then start; you’ll get more credit for partially realized savings than an idea.
- Identify opportunities to improve EBITDA and working capital. Make changes that will translate into higher EBITDA and working capital. Some options include strategies to maintain or increase selling prices while also reducing costs, improving inventory management, changing compensation plans, and reducing the amount of time it takes to get paid for your products or services.
- Plan for succession. If members of the company’s leadership team are planning to exit following the transaction, start planning the succession process, and communicate these actions to the team, customers, and suppliers. Use the same approach to fill in any gaps in your management team.
- Keep the lines of communication open. You don’t want your current team jumping ship because a potential sale is looming, so fill them in as soon it makes sense and make sure they understand the plan. Consider the use of a retention bonus but be selective who you bring “under the tent” and when. Use the same approach with customers and business partners, both of whom you want to stay in place after the transaction closes.
- Set clear expectations for market value. Make sure the company’s owners understand exactly how much the organization is worth and what they’ll be getting from the proceeds of the sale. You don't want them assuming that the company is worth $500 million only to learn through an independent valuation that it’s actually worth significantly less than that.
- Know your data. Data is key in M&A and buyers will want all they can get. Make sure you are able to track all your key operating metrics. For example, are you selling primarily through brick-and-mortar, online B2C/B2B, social media, or a combination of all three? Investors will want to know the answers to – and see proof of – these questions when they’re assessing your company’s potential. Ensure you are able to break down your sales and margins by the different channels.
- Engage professional firms to conduct an audit and/or sell-side due diligence. Sell side diligence should be performed when you are close to contemplating a transaction. Sell-side due diligence often pays for itself because it identifies favorable adjustments to EBITDA that might otherwise go uncovered and increases the likelihood of getting interest from multiple buyers which can drive up your sale price. It also allows you to get ahead, and out in front, of any issues and decreases the chance of any unnecessary transaction delays. An audit is not essential but can give a buyer comfort in the accounting processes underpinning your financials. The auditor process will need to be started well before (at least two years) contemplating a transaction.
For consumer companies embarking on a sales process, knowing you have these 10 areas covered is crucial to helping your company find and attract the best potential investor or buyer.
Sharon Bromberg, CPA, CIRA, CFF, Partner, Transaction Advisory and Dispute Resolution Services
Daniel Teoh, Managing Director, Transaction Advisory Services
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