The time to start getting your financial and legal house in order in anticipation of a transaction isn’t once someone has approached you or you have an offer on the table. Ideally, you want to have all of your ducks in a row well before embarking on a sales process, and in some cases, this can take up to a year to address. The last thing you want to do is be scrambling to clean things up during due diligence which can kill a deal very quickly. Here are a few things you should consider doing before you are ready to sell.
Clean up your Balance Sheet
- Improve your current ratio (i.e. the ratio of current assets vs. current liabilities), collect your receivables on time and eliminate dead receivables. Also, ensure that your inventory is current and saleable and write off dead inventory
Reduce long-term debt
- Buyers will generally not want to assume long-term debt or will simply deduct it from the sale price. Try to reduce long-term debt before the sale process and potentially renegotiate terms of long-term debt with your lender to get more favorable terms
Improve Operational Efficiencies and Margins
- Look at cutting unnecessary staff or expenses to improve margins and reduce total overhead which will drive your bottom line
- Reduce discretionary expenses for long-term growth initiatives that won’t pay dividends in the short term (i.e. business development, marketing, product development, etc.). Also, use technology where possible to replace labor and improve margins
- This goes without saying but higher revenues translate into higher profits which directly affects valuation
- Look at alternative sales channels or strategic partnerships to drive sales well in advance of a sale and continue to build up your sales pipeline
Address Any Legal Issues
- Settle any outstanding lawsuits or disputes well before the sale process begins
- DO NOT ignore even potential lawsuits as you will be giving reps and warranties in this regard
- Talk to your lawyers about your current corporate structure and have a tax expert look at it as well. It’s too late to change share structure, income split, or set up trusts once you are on the cusp of a transaction as these things need to be in place years prior to a transaction to get the tax benefit.
- Simplify your corporate structure if possible by eliminating unnecessary subsidiaries and complexities. The more complicated your corporate structure is the longer the due diligence and the harder it will be to complete a deal.
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