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1. Have financial statements audited.
2. Try to reach the magic number of $1mm in EBITDA and thereafter earn as much money as possible. For companies over $10 million in sales, try to exceed $1mm in EBITDA.
3. Justify the add-backs and/or adjusted earnings.
4. Clean-up the balance sheet, i.e., stockholders, pay-off loans, write-off obsolete inventory and uncollectable A/R’s, sell off non-producing assets such as slow-moving or dead inventory as the buyer’s due diligence team will identify them anyway.
Dividend-out extra cash not necessary for working capital and liquidate stocks, bonds, etc. that are not associated with the company being sold.
5. Prepare financial projections 1-2 years out.
6. Receive fair market value appraisal of real estate (if owned) and M&E.
7. Have key employees sign non-compete and maybe have “stay-agreement” in place. Maybe promote key officers as full management team in place. Whatever relationships such as sales representatives agreements, key employees, landlords, vendors’ orders, customers’ purchase, etc. that should be formalized, do so for purposes of institutionalizing the business. Examine long-term contracts either to renegotiate the terms or extend these contracts if it is favorable.
8. Organize company records, i.e., minutes, BOD meetings, etc.
9. Settle any and all legal threats by customers, vendors, or employees that have not yet materialized.
10. Set up a War Room whereby various documents pertaining to the business will be accumulated in one specific place.
11. Consult with your attorney and/or other advisors for tax planning, generation planning, wealth management planning, etc.
12. Select an investment banker well in advance so that you will have their opinion of a range of valuation to expect from the potential buyers.
13. “Begin with the end in mind” is an expression that means one should estimate the selling price and then factor in all the deductions including capital gains tax, transaction costs and in some cases severance costs to determine the net proceeds, then divided by the respected ownership to determine if the net amount will be acceptable.
14. Clean-up the office and facilities.
Source: Selling Middle-Market Businesses: A Guidebook for Intermediaries -Business Brokerage Press
The Benefits of Financial Recasting
Most privately held businesses keep track of their financial performances by means of balance sheets, P/Ls, and Tax Returns. This type of reporting is essential in a businesses' operation but it is not beneficial in defining the real fair market value of a business and its true financial performance. Buyer's buy cash flow! Prospective buyers need to know the health of a business, how the money is being spent and the operation's capacity to generate positive cash flow. Traditional, financial reporting seeks to minimize a business' tax liability which in turn, inaccurately reveals the company's true earnings and profitability.
The process of recasting financial statements is integral in identifying fair market value of a business when the owner's intentions are to sell. Recasting requires extensive investigation to ensure all relevant and appropriate adjustments are correctly reported. The objective is to examine a company's balance sheet and financial statements to convey the real value of the company, which in most cases greatly enhances the fair market value of the business.
A business owner's salary, commissions, perks, incentives, personal loans and discretionary expenses are all key areas that are examined when recasting financial statements. Such owner benefits are to be "added back" into the value of the company so that a future buyer can adequately assess the business, its cash flow, and future earning capacity. Additional areas of interest, such as included/excluded assets & liabilities as well as fair market value of tangible assets will be examined with the business owner, in an effort to correctly determine the fair market value of the business.
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