In the business world, it is often hard to know the right time to consider a sale. If the business has strong management, dedicated ownership, sufficient capital, and a business model or strategy that will generate future growth and profits, there should be no reason to sell.
On the other hand, the absence of any one or more of these requirements may prompt consideration of a sale, especially if capital or a management team is missing. When considering a sale, the best-prepared businesses focus on the following items in order to maximize value:
- Financial Performance. The financial performance of a firm is often the prime factor in determining the ultimate value of the business. Certainly, potential buyers will want to see how the business has fared, especially during the recent economic downturn. Perhaps, just as important, are the future financial prospects of the business. If company owners are able to provide evidence of strong financial projections, it certainly may prove to be more attractive to a buyer.
- Management. A well-established management team that shares in the long-term vision established for the firm is a vital part of any business. Any interested buyer will want assurances that the management team will be able to execute the firm’s existing business plan as well as the strategies developed by the buyer. However, in the event that the buyer plans to insert its own management team following the acquisition, it will be just as important that current management agrees with and participates in the transition process.
- Customers and Suppliers. One of the key aspects in developing strong financial projections will be the firm’s relationship with its customers and suppliers. Potential buyers will want to determine that the firm has established long-term, profitable relationships with its customers while effectively managing its costs through favorably priced supply contracts. Moreover, to the extent the firm is able to demonstrate the strength of these relationships, the more likely it is that the buyer will remain confident that the partnerships will continue following the closing of the sale.
- Due Diligence. Planning for the transaction in advance of approaching potential buyers is extremely important. Not only will this help to facilitate the buyer’s due diligence process, but it will also enable both parties to save on transaction costs. In addition, the firm may be able uncover and perhaps correct any unexpected negative information, which otherwise could impact the success of a sale.
If a business tends to these issues, it will enhance its ability to complete a purchase or a favorably termed sale.
James Waggoner is an associate in the Business Practice Group of Clark Hill’s Detroit office and concentrates his practice in corporate law.