Preparing for the M&A Process: Laying the Foundation to Sell Your Business
Key Takeaways:
Preparation is Key: The successful sale of your business starts long before you approach potential buyers.
Three Crucial Steps: Reviewing your internal KPIs, processes, and controls and correcting potential red flags supports a favorable business valuation.
Work With Experienced M&A Advisors: The right M&A Advisory team can guide you through the M&A process, helping you prepare to approach potential buyers and secure favorable terms.
Preparing for the M&A Process: Three Key Steps to Take Before Selling Your Business
Selling your business is a significant decision that requires careful preparation, strategic planning, and the right expertise. The mergers and acquisitions (M&A) process involves multiple stages–from assessing key performance indicators (KPIs) to strengthening key relationships and preemptively mitigating risks that may arise during due diligence. By proactively preparing for a sale, business owners can improve their company’s valuation and streamline the M&A process.
Below, we outline the essential steps to take before selling your business, ensuring you maximize its value and attract the right buyers.
Step 1: Conduct an Internal Business Review
Evaluating your company's financial performance, operational efficiency, and overall readiness for sale is crucial before entering the M&A process. Potential buyers will scrutinize every aspect of your business, so conducting an internal review helps identify strengths, weaknesses, and potential red flags before due diligence begins.
Most businesses routinely review processes and performance as part of ongoing routines, but this review should be much more in-depth and cover the following:
Financial Performance: Review revenue trends, profitability, and growth potential.
Corporate and Legal Structure: Ensure you have optimized business entities, and tax structures for the impending sale.
Material Agreements: Examine employment contracts, supplier agreements, leases, and other critical contracts.
Operational Improvements: Identify inefficiencies and streamline processes to make your business more attractive to buyers.
In a tighter M&A market, like the one we’ve seen in recent years, where higher interest rates and a less stable international business environment, it’s imperative to show strong current and future performance.
Step 2: Calculate Adjusted EBITDA
One of the most critical financial metrics in the M&A process is EBITDA, which provides insight into a company’s core profitability. However, buyers typically focus on Adjusted EBITDA, which removes non-recurring expenses and incorporates pro forma adjustments to the business to reflect the company’s true earnings potential.
What is Adjusted EBITDA?
Adjusted EBITDA is similar to EBITDA, except it removes one-time, irregular, or non-recurring items. Common adjusted EBITDA add-backs include:
One-time legal or consulting fees
Non-operational expenses
Owner salaries or personal expenses
Write-offs or non-recurring investments
Unusual or extraordinary costs
Accurately calculating adjusted EBITDA can significantly impact M&A valuation, as potential buyers will use this metric to determine how much they are willing to pay for the business.
What is the Difference Between EBITDA and Adjusted EBITDA?
While both EBITDA and adjusted EBITDA are important financial performance indicators, they serve different purposes:
EBITDA: A measure of a company’s operating performance before accounting for financial and tax-related expenses.
Adjusted EBITDA: EBITDA that has been modified to exclude non-recurring, extraordinary, or discretionary expenses, making it a more accurate reflection of sustainable profitability.
For an in-depth explanation, check out this article on Maximizing Business Value in a Sale: How EBITDA Addbacks Boost Your Valuation.
Step 3: Strengthen Your Company’s Valuation Drivers
Company value may seem straightforward, but M&A valuation is not fixed and, to the surprise of many business owners, is negotiable. Several factors determine your company’s fair market value (FMV), many of which are outside of your control. Some of those include current economic climate and overall industry performance. So what can you control? Look to improve and strengthen Key Performance Indicators (KPIs) and crucial business relationships.
Improving KPIs and Presenting a Strong Case for Long-Term ROI
Business valuation KPIs include financial, metrics such as revenue growth, gross profit margin, customer lifetime value and net profit margin. A few of the most important metrics for potential buyers are:
Revenue Growth: Consistent and sustainable revenue increases make your company more attractive.
Profit Margins: Enhance profitability by optimizing costs and pricing strategies.
Customer Retention: High customer retention rates indicate a strong business model and predictable revenue streams.
Strengthening Key Relationships
Companies often acquire other businesses to enter new markets or access valuable intellectual property. If you're positioning your company as an attractive acquisition target, it's essential to have key relationships and operational processes in order. Buyers look for companies that can integrate smoothly–minimizing risk and maximizing value. Strengthening these areas not only increases a business’ appeal but can also drive a higher valuation in the acquisition process.
Reflect on the external vendors, customers and other companies you work with regularly. Some of these may include:
Top Customers: Secure long-term agreements with your most valuable clients to enhance revenue stability.
Vendors & Suppliers: Negotiate favorable terms and solidify partnerships to ensure operational efficiency.
Banking & Financial Institutions: Maintain a strong relationship with your bank to ensure access to credit and financial stability.
Proactively Address Potential Red Flags
Buyers will conduct M&A due diligence to uncover any issues that could impact valuation or derail the deal. Common red flags include:
Inconsistent financial reporting
Ongoing or pending litigation or compliance issues
High customer concentration (too much revenue from a single client)
Operational inefficiencies
Outdated technology
Mitigating these risks ahead of time will improve buyer confidence and streamline the transaction.
Work With an M&A Advisor For a Smoother M&A Process
Hiring the right M&A advisor can make the difference between success and failure in a sale process. Advisors specialize in selling businesses, negotiating deals, and optimizing valuation. They can help you ensure you are properly prepared and guide you through the entire process.
The benefits of working with an M&A advisor include:
Sale Preparation: Assist in your business review, including evaluation of business and valuation drivers, EBITDA adjustments, supplier and customer relationships, and potential red flags.
Market Positioning: Helps position your business in the best possible light.
Buyer Network: Access to a network of strategic and financial buyers.
Due Diligence Management: Ensures all documentation is in order and addresses buyer concerns.
Negotiation Expertise: Maximizes sale price and favorable deal terms.
Final Thoughts: Preparing to Sell Your Business
Selling a business is complex and time-consuming, but preparation is key to a successful outcome. Business owners should focus on:
Conducting an internal review to identify strengths and weaknesses.
Calculating adjusted EBITDA to maximize valuation.
Strengthening key performance indicators to enhance buyer interest.
Addressing potential red flags before entering due diligence.
Choosing the right M&A advisor to navigate the sale process.
Starting the process early and assembling the right advisory team can significantly reduce delays and increase your chances of a successful sale.
At Keene Advisors, we specialize in guiding business owners throughout the entire sale process. Whether you're a founder planning an exit or an owner looking to maximize your company's value, our team is here to help you achieve a successful transaction.
We’ve advised clients in connection with over $40 billion in corporate finance and M&A deals. We work directly with business owners to identify potential buyers and align long-term goals with a deal with favorable terms.
Ready to start preparing for your business sale? Contact us today to discuss your options.
Disclaimer: This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.