A Seller’s Roadmap to Smarter Divestitures by Jake Hyland

For a business seller, there are multiple ways to maximize transaction value and help ensure a successful close. Maximizing value requires careful planning, operational discipline, and a commitment to transparency with advisors and potential buyers. The steps below outline ways that leaders can help ensure the best possible outcome for all stakeholders.

Laying the foundation of a successful transaction begins with ensuring accurate financial statements and diligence documentation are readily accessible. Financial statements that are current, accurate, and professionally prepared establish the company’s credibility. Management can demonstrate their responsiveness to potential buyers by establishing a folder with potential diligence documentation. If real estate is involved in the transaction, it might be helpful to conduct an initial environmental assessment, identifying potential issues and disclosures.

Open Communication and Timely Action

It’s critical for the seller to proactively communicate relevant information with the transaction advisors. When buyers request data, the seller should be prepared to respond quickly and accurately. Speed and transparency in addressing questions inspires confidence for the buyer and can lead to a quicker close.

Identifying and Supporting Add-Backs

Sellers will improve the process by attempting to identify potential add-backs (one-time or nonrecurring expenses or revenues), impacting EBITDA positively or negatively. The concept is the buyer wants to understand their expected cash flow from the business after the closing. The added benefit to the seller with add-backs that increase EBITDA is that they will increase the purchase price if it is a multiple of EBITDA. Buyers may push back on certain add-backs, so the seller must be prepared to justify these adjustments with supporting documentation. The seller’s investment banker should have the sophistication to know the appropriateness of certain add-backs and suggest additional ones not considered by management.

Hiring Experienced Professionals

An experienced investment banker provides strategic advice and implementation of the sales process. Legal counsel will navigate complexities throughout the process to protect the seller’s interests. While not always necessary, engaging a professional to provide a Quality of Earnings analysis can provide comfort to potential buyers on historical results that set the framework for future forecasted results. Trusting and leveraging the expertise of these advisors is crucial to navigating the transaction efficiently and maximizing value.

Performing During the Marketing Period

Once the business is being marketed to potential buyers, it is vital to maintain strong financial performance and management engagement. Buyers will closely monitor the seller’s financial results and management’s involvement, so delivering on forecasted results can make a significant impact on perceived value and deal momentum.

Reducing Single-Person Dependency

If the business relies heavily on one or two individuals, buyers could perceive post-closing risk if those critical people become less involved in the business. This is the classic problem of a strong entrepreneur who founded the business and maintains tight control over all aspects, including customer relationships. To mitigate this perceived risk for buyers, the seller could transfer certain responsibilities from key individuals to other trusted employees before initiating the marketing period. Empowering other team members demonstrates a robust business and can be a decisive factor in closing the deal at a premium valuation.

Conclusion

Maximizing a company’s enterprise value in a sale transaction requires strategic preparation, open communication, rapid responsiveness, and expert guidance. By prioritizing documentation, engaging the right advisors, and fostering a culture of knowledge sharing, sellers position their companies for the greatest success in the transaction process.