Prepare Before You Sell

Now that the economy is on an upswing, many business owners who were ready to sell out in the late ’90s are ready to try again. The pent up demand to convert business assets and ownership into liquid assets is very high. That doesn’t mean sellers will get the prices people were getting in the late ’90s, but it’s better than it was two years ago.

Some business entities are going to be easier to sell than others. And you all know that contracting firms are probably close to the bottom of the list. They are typically hard to sell because of the importance the existing owner has in terms of generating revenue and customer relationships. Add to that all the war stories you hear about the industry and it’s enough to scare off the highest risk-takers out there. Put a bank’s perspective into the equation and you have a real tough deal on your hands.

Are contracting companies impossible to sell? No. You can do it and probably even successfully if you do your homework and plan out the timing and process. You remember the old saying: “Plan the work and work the plan”. When it comes to selling your business, this is exactly what you have to do.

Clean up the books

Here are some preliminary chores to add to your “to-do” list.

The accounting records must be clean. The support documents have to be on file and be traceable through the accounting records. It makes no difference what kind of business you run, this is a must.

Financial statements have to be prepared according to industry standards. Find out what those standards are and have your internal and external accountants convert to those standards. You can’t expect to have accountants, lawyers and bankers working on a transaction if they can’t compare your company against industry stats.

Speaking of industry statistics, how does your company compare? If you don’t know, find out. Put these figures right on your financial statements. If you don’t know how they work, ask somebody. Most industry associations have these figures available for you.

Normalize your financial statements. Prepare a file supporting any adjustments you would make to your financial statements to reflect how they would look if a buyer took over the business. These adjustments would include excess compensation, personal expenses, personal assets on the books and any other out of the ordinary revenues or expenses. When you are ready to restate your financials, you will have everything needed to do so in this file.

Needless to say, don’t expect to “sell” cash transactions. Nobody believes the numbers nor wishes to inherit IRS problems.

After you get the books cleaned up, covering at least a three-year period, you can start to see what your business looks like to a potential buyer. If you covered all the points discussed above, it’s either going to look good compared to the industry norms or it isn’t. If there are problems, it’s time to see what changes you can make to produce better, provable future results. Selling a company takes time and effort, and sometimes you have to make changes to make it work. For example, you may be providing some form of service that doesn’t produce any profit. If you get rid of it maybe the financial results look better. If they do, and it makes sense, then maybe it’s time to cease the operation.

Know your “soft” side

After you have a feel for the financial side of the business it’s time to focus on the soft issues. When you stop to think about it, what is a buyer purchasing when he buys a contracting business? Sure, it’s the billing and expenses, but more importantly they are buying:

  • the name or brand recognition;
  • the people;
  • the customers and contacts;
  • and any territory covered.

Let’s face it, without at least three of these components you have nothing to sell. Without these components, it becomes almost impossible to generate future cash flow. That’s why it is extremely important to be able to convince a potential buyer that these components are in place, and will continue to be for a reasonable time period after a change in ownership.

Part of the process again relates to accounting and sales records. Do you follow proper bidding and estimating policies? Do you have job accounting records that reflect revenues and costs? Do you have marketing and sales activities documented for future reference? Do you hire and retain the best people available? Can you demonstrate that customers call the company and not an individual?

The more your company reflects these concepts and policies, the easier it is to put a value on the company. For smaller sellers, it will be tough to comply with these points, but that is no excuse for not having a set of books and records prepared according to industry standards.

By now, you probably noticed there has been zero discussion about pricing methods. We can get into that at some future time. All you have to keep in mind regarding pricing is that a buyer is purchasing future cash flow — cash flow to pay you out and to earn a reasonable return after taking an industry standard salary. How you help him/her make that happen will determine how soon you can get out of the business, and how much you will get for it.

Garry Bartecki is director of dealer/distributor services at BDO Seidman, LLP of Chicago, as well as a consultant to the AED. He has also worked as an independent CPA and consultant to equipment dealers. He can be reached at (312) 616-4677 or gbartecki@bdo.com.

Loading