Cleaning House: 5 Mistakes to Avoid When Selling Your Business
After working hard over the years to build a successful print/promo distributorship or trade manufacturing company, perhaps you’re now ready to sell. Whether you decide to do this on your own or with the help of an intermediary or broker, there are common mistakes that you’ll want to avoid to make the process smooth for you and your other shareholders. Here are five of the biggest mistakes that can potentially make or break a future transaction.
1. Poor Financial Controls
The biggest single mistake our boutique intermediary firm sees on a regular basis is shoddy financial statements — and they start with the level of reporting your firm is receiving (or not receiving).
Internals: If you have no bank borrowings, you may have elected to simply prepare your income statements and balance sheets in-house using one of the many print and promo industry-specific software programs, like DemandBridge (including e-Quantum and Kramer-Smilko), Foundry Commerce, Xetex Xebra, Antera or even QuickBooks.
Compilations: If you have decided to hire an outside CPA firm to prepare your company financials from your internals, that is a step up, but frankly not worth much more to anyone looking at them than an internal statement. Because your CPA firm will be preparing your financial statements directly from the records you provide, it will not verify the accuracy or completeness of the information and is not required to issue a formal report.
Reviews: This is what we recommend for companies in the range of $7.5 million to $10 million in sales. A review is one in which the CPA firm performs analytical procedures, inquiries and other procedures to obtain limited assurance on the financial statements and is intended to provide a user with a level of comfort on their accuracy. A review is typically appropriate as your business grows and seeks larger and more complex levels of financing and credit lines.
Audits: This is what we recommend for companies with sales exceeding $10 million. An audit is the highest level of assurance that a CPA performs and is intended to provide a user comfort about the accuracy of the financial statements. The CPA firm will issue a formal report that expresses an opinion on whether the financial statements are presented fairly and in accordance with GAAP (Generally Accepted Accounting Procedures). An audit is typically required when you are seeking complex or high levels of financing, or are seeking outside investors or preparing to sell or merge with another business.
2. Unrealistic Valuation Expectation
This is the No. 2 problem our firm encounters. Business owners need to have a realistic idea as to what their company is worth. Unlike real estate (residential or commercial), companies don’t enjoy the same comparables, such as price per square foot or the last 10 sales in your neighborhood or section of town. What they do have are comps, such as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), percentage of selling price to sales and/or gross margin, or a multiple of book value. Your CPA or attorney can help you with some of this, but it might be best to talk to someone who appraises businesses for a living. Don’t be surprised if you’re given a valuation range that is less than what you think your company is worth.
3. Outside Sales Reps (applies to print and promo distributors only)
As a former sales rep yourself, you are obviously sympathetic to making sure your reps are happy financially. If your comp plan is based on a split of gross margin dollar (most are), hopefully it is in the 60% (house)/40% (rep) range. If it is higher, say 50/50, or worse, 60% to the rep, you are going to have problems with most buyers. The most common split we see is 60/40 in favor of the house. Also, if you have your own or a public warehouse, those expenses should be added into cost of goods sold (COGS) before computing gross margin dollar. And, perhaps more importantly, you should have all your sales reps signed to non-compete/non-solicitation agreements or, at minimum, confidentiality agreements. The new owner of your distributorship will most likely want to sign your outside sales reps up to theirs in any event. While you may not think non-competes are enforceable, they certainly make a sales rep think twice about changing employment or branching out on their own.
4. Customer (or Sales Rep) Concentration
Your company — whether a distributorship or trade plant — probably began with taking a large account away from your previous employer (most likely one of the majors). As you grew, you added several other large accounts, along with sales reps. If 50% or more of your company’s sales are coming from just a few large accounts, this will be a concern for any buyer. Conversely, if you or one of your sales reps control 50% or more of the total sales of your company, that will be an issue as well. As you approach the time you would like to exit, it is best to transfer most (or all) of your personal accounts to your outside sales reps. Try to make yourself as invisible to the daily operations of the business as possible.
5. Physical Facility
Prospective buyers will want to conduct a site visit, so now is the time to tidy up your office and warehouse. Also, leave any pets at home that day. If you have a manufacturing plant, make sure you control the time and day of the tour so that the plant employees are at their machines and they are running.
This all sounds pretty basic, right? Well, it is harder than you think. While you might be a great salesperson yourself, how many businesses have you sold lately — or ever? The sale of your business will be the most important sale of your life and you don’t want to blow it. What do you think when you see a house or commercial building for sale by owner? The mere involvement of a realtor in the marketing and sale of a house or commercial building will more than cover the commission.
So, talk to your CPA or attorney and seek the advice of some local business brokers or investment bankers they might know. Or, ask your trade associations if they are aware of any companies familiar with your industry that can handle this for you. This is not something that you should try to do alone.
Good luck and good selling!
Jim Anderson is the founder and president of Corporate Development Associates (CDA), a private intermediary firm serving the North American and United Kingdom graphic arts industry since 1987. CDA is based in Scottsdale, Arizona, and has branch offices in St. Louis; Rochester, New York; and Pittsburgh. Visit his website at www.printmergers.com.
Jim Anderson is the founder and president of Corporate Development Associates.