8 Tips to Maximize Your Valuation When Preparing for Exit by Acquisition

In the current economic landscape, it’s common for startups and businesses to seek a buyout or acquisition — in fact, it’s frequently the goal from the start.  Preparing for acquisition as early as possible can help alleviate the stress of an unplanned opportunity as well as put your company in the best situation for the strongest offer when the decision is made to sell the enterprise. To ensure your company is on the right track for success, here are some helpful tips to stay ahead of the game and ready for the perfect opportunity.

1. Define your company’s purpose, key differentiators, and goals

Be able to clearly articulate what you sell, how you sell it and who you sell it to. Also, know your competitors and what factors set you apart. This is critical for businesses at any stage of development and even more so when you are preparing to sell your business. This messaging should be very concise and get progressively more fine-tuned as the company matures. Your message should be easily expressed and the business lines should fit into a few buckets that are easy to explain as well.

It is also important to make sure you align financial reporting and projections about the future of the business to your overall message, in a way that will be meaningful to potential acquirers. Aim to make your projections feasible and defensible. The buying team will be looking at the projections, which if reasonably supportable, will allow you to sell the company for more money and close faster.

2. Gather and organize your financial data

When it comes to planning for acquisition, time is your greatest asset. You should understand your accounting policies as well as understand how your accounting aligns with expectations in your industry. Watch out for complex areas such as accounting for revenue, inventory, contingencies, equity instruments and consolidation, among others. Additionally, it is very important to organize your accounting records consistently and in a method that is easy to understand. Documentation such as invoices, bank statements, payroll information and other records should be well organized and easy to obtain.

3. Build and align your advisory team

A core of solid advisors will be critical for your success. At the CPA firm, you will need help from your auditor as well as the tax team. Your attorney and bankers are critical and don’t forget about the board and the board advisors. You will want this group, among other advisors you may have to be aligned and have experience with transactions with companies like yours in industries like yours. You won’t have to do it alone and things that pop up along the due diligence cycle that may be insurmountable if you were trying to tackle it on your own may be routine for the right advisor.

4. Conduct an independent audit

A successful purchase is all about having your buyer’s trust and confidence. Having audited financial statements will provide your buyer with a trustworthy source of your financials and operations. In addition to setting a solid baseline for historical financial information, an audit engagement is a good test run to experience what the due diligence process may look like for management going through acquisition for the first time.

5. Understand tax positions and filing requirements

Whether your company is generating profits or operating at a loss, taxes are a significant risk area in any acquisition. Depending on where you operate and the type of business you are in, your company may have federal, state, foreign and sales tax filing requirements, all of which will be heavily scrutinized by the potential acquirer looking for possible liabilities. It is important to understand the tax positions that the company has taken, what elections were made on returns, what returns were filed, and the risk that may exist for not filing certain returns.

Taxes are a complex area and issues here can stall or derail any deal. This applies to income taxes, sales taxes, property taxes, and VAT among others. Taxes are an area that can be a real liability for an acquirer and as such, they often receive a lot of scrutiny in due diligence.

6. Establish a disclosure schedule to review contracts and obligations

Make sure to go over all your documents to uncover any liabilities, risks, and worst of all potential breaches of contracts that may have occurred by mistake. Leave no stone unturned and be sure to dig deep. Numerous deals fail, with the demise often being the result of uncovering skeletons in the closet. A disclosure schedule should be as thorough as possible to avoid any information that might make your potential buyer question your accountability. Your disclosure schedule should cover key contracts, equity holders and options, litigation, intellectual property, and warranties — to name a few.

7. Solidify employees and contractors

Many companies utilize contractors as a way of tapping into unique and specialized skills that are often hard to find. In many instances, consultants can be a lower-cost option as well as carry less risk. If the consultant fails to be a good fit for the company, you simply do not renew the contract — which can be less messy than terminating a permanent employee. However, the legal definition of an employee versus a contractor can get tricky. There are numerous state and federal laws to consider as they can provide a significant risk to the company. If this is a potentially convoluted area for your business, it’s a good idea to clean it up prior to entering due diligence.

8. Protect your intellectual property

Any intellectual property should be properly documented to avoid question of ownership. When using others (employees, contractors, third parties) to develop your technology, be sure that ownership of IP is assigned to the company. This is a complex area and one that generally merits consulting with proper intellectual property legal expertise. If questions arise as to the propriety of ownership of IP, your valuation could be negatively affected, or the deal scuttled altogether.

When thinking of an acquisition, it is always advisable to begin preparations as early as possible. Having the time to collect and organize all the necessary documents the buyers will review will make the process much easier for you and the purchasing party.

Prepare today to win big later

As you can see, there’s a lot to think about when it comes to selling your business. That’s why it’s important to have a team of experts in your corner who can help guide you through the process. If you’re interested in learning more about our acquisition services or want to get started on the process, don’t hesitate to contact us.