Welcome to the third in a series concerning the challenges of selling a family-owned or closely held business. If you have not read the previous articles, part 1 is available here and you can find part 2 here.
If what you see here looks familiar, the time to act is now. Many of these issues take time to resolve and should be addressed if you are considering an outside investment, sale, merger, or other exit for your business. The examples we discuss are based on situations from actual client work we have done at SiVal. If your business faces any of these challenges, please contact us at SiVal to learn how we can help.
Challenge 7 – Compliance Issues
Today’s business environment is loaded with potholes coming from every direction. Employment regulations, different levels of tax rules and requirements, and environmental concerns can lurk hidden from view. Add a layer of a constantly moving regulatory environments spanning localities, states, and countries and it’s amazing that anyone can keep up with the complexity. Paying attention to and addressing the compliance issues that can directly and immediately affect your business is important. Don’t let a potential time bomb delay your M&A efforts or impact its sale value. Buyers will most certainly uncover these in due diligence, so better to fix these well in advance.
Challenge 8 – Balance Sheet
One of the first items a potential acquirer will ask for are several years of prior and forecasted financials. This includes balance sheets, cash flows and profit / loss statements. The corporate balance sheet can reveal good things and not-so-positive things about your business. An undercapitalized business may stem from a past reluctance or inability to raise capital. That lack of capital may have hampered growth and innovation thus negatively impacting value. Obsolete or consignment inventory that is overvalued can add to valuation challenges. Owners that have deferred salary and entered that deferral on the books as a loan can distort balance sheet liabilities. If you run a software business or similar company where subscription, maintenance, or partial payments are a factor, understanding and being able to explain deferred revenue, license liability, and their impact on revenue will be important, especially if a potential acquirer is from outside your industry.
Challenge 9 – Intellectual Property Issues
Does your company have clear rights to its intellectual property? Are patents owned or licensed? Do they actually matter to the business? Does IP from a prior business have the potential to cause problems? IP can be a tricky matter. Your M&A advisor can help you find a good IP lawyer to look at and resolve any potential issues.
Challenge 10 – Unrealistic Valuation Expectations
Every business owner and manager would like to think their business is unique and worth more than any business in its sector. Unfortunately, in the vast majority of businesses, it simply isn’t so. The perceptions of company value can be influenced unrealistically by the success and valuations of larger and more profitable competitors. In some cases, a business may be trying to move into new markets or transition to new business models that are higher growth, yet a track record of proving those markets and models simply doesn’t exist. At this point it’s hard to demonstrate the probability of success. Deal valuations and even probability of completion can be impacted. The gap in valuation expectations between seller and buyer(s) can sometimes be closed with earn-outs or other creative structures; however, there are risks for both sides in these types of deals. Best to have sound professional advice on valuation in advance of going to the market.
Bonus Challenge – What About You?
Are you ready personally and professionally for a deal to happen? What’s the next stage of your life? What about that great team you have built? How do you make the transition? Now is the time to start thinking about these things. A good M&A advisor can help you address these issues and all these challenges.
Contact SiVal Advisors to learn more. One of our experienced team members is ready to hear from you. Let’s talk.