There is a famous quote by Benjamin Franklin that says, “The best investment is in the tools of one’s trade.”
While an apt statement, there is sometimes an exception to the rule when there is an opportunity to leverage that entails selling your operating company.
The general perception of a company selling out is bad financials; however, that may not always be true. On many occasions selling a company may present the best choice on multiple accounts.
There are numerous reasons for an entrepreneur to sell their company, such as a lucrative buyout deal, migration to another country, growth stagnance and lack of succession plan, to name a few. Some instances include the recent acquisition of Indian entities by MNC conglomerates at lucrative valuations.
If you are also considering selling out your company, here are three critical preparatory steps that are a must to clinch the best deal and maximize your value.
What are the three preparatory steps?
Financially-sound companies have an easy ride, but the ride may be a tad rough for companies with muddled finances or facing financial challenges. However, the steps discussed here can help you prepare for success.
Get the proper valuation for your company.
Plan well in advance. Often in haste to close the deal, you miss getting the correct valuation for your company. Financial due diligence is the first step to arriving at the valuation number for your company. It involves being sensitive and realistic about your company’s past, present, and future performance and industry positioning. It is the most critical number for the investor or the buyer to make an offer.
Once you have the valuation number, care needs to be taken while submitting it to the buyer/ investor. Valuation is of 2 types: Equity Value & Enterprise value.
Equity value solely represents the ownership (equity) in the company. Enterprise value adds both equity and debt to the company.
For example, a company can have a valuation of Rs. 4 cr, which includes debt of Rs. 1 cr. The number reduces by Rs. 1 cr for equity value.
Thus, while submitting the valuation, you must be mindful of which valuation you prefer to share with the prospective buyer.
An expert’s advice here may be handy to make the right decision for your company, as occasionally, confusion in equity & enterprise value can negatively impact the deal.
Consider the contingent liabilities.
Contingent liabilities, are liabilities that can arise in the future in response to specific events or outcomes. These liabilities can bring uncertainty to the deal, and that may make the buyer lose interest. At the same time, some buyers may still proceed with the deal and accept the contingent liabilities on the condition of compromising the valuation, a move which will hurt the entrepreneur’s interest. For best results, as far as possible, adjust and resolve these liabilities before presenting the same to a prospective buyer.
In parallel to resolving contingent liabilities, have your business documents, such as statutory certificates and renewed business licenses, ready. It reduces the buyer’s hassle and sets the path for a good deal.
Hire an expert for the best deal
As a physician is essential to diagnose and treat a disease, so is an expert for a profitable company sale.
Instead of opting for the traditional valuation-only firm, hire an agency expert in valuations and one that can act as a matchmaker to find you the best investor/buyer, help you negotiate the best deal and look after the covenants if any.
Business owners often fail to plan for a sell-out; sometimes, succession plans or partner conflicts present challenges. In such cases, getting an expert on board helps streamline things and gain alignment.
Agencies in the M & A domain are the best experts to consult for selling your company.
Conclusion
There are numerous reasons and benefits for selling a company, such as a lucrative buyout offer, succession issues, migration planning to another country, or another business interest. However, remember one thing whether you are kickstarting the deal or it is in progression, never stop fueling your company’s growth. The investments you make will always come back to you via the buyout offer. The bottom line is to plan well and execute even better.
(The author is Mr.Shrikant Goyal, Co-Founder & Managing Partner, GetFive and the views expressed in this article are his own)
