In this first installment of our series on navigating business mergers and acquisitions, Deanna Salo, Managing Principal at Cray Kaiser Ltd., shares valuable insights on preparing your business for a successful transition. Whether you’re planning to pass your company to the next generation, sell to a third party, or position your business for future growth, preparation is crucial. Join us as we delve into the foundational practices that set the stage for a smooth and strategic process.

Transcript:

My name is Deanna Salo, and I’m the Managing Principal here at Cray Kaiser Limited CPAs and Advisors. In the Cray Kaiser family of clients, we’ve had a lot of activity in the mergers and acquisitions front, mostly where clients are looking to succeed their companies to what might be the next generation of their family business or privately held space, or they sell to a third party and look to a buyer, e company, and somebody to succeed their company and exit the company accordingly. The readiness of being acquired is a process and it’s best practice to start early and get the right procedures and get the right people in place to move your strategic plan to an acquisition, meaning whether you’re acquiring another company or you’re being acquired. In most cases, as I mentioned before, our clients are looking to be acquired to exit their company and to fulfill their strategic plan of retirement.

How to get ready for an acquisition

Some of the shared experiences and one most recent client experience that we’ve had is in six to seven points, which I think are the most important things about getting ready for an acquisition or being acquired.

Make sure your financial warehouse is in check

Making sure that your financial warehouse is in check. Your financial department, the procedures, the accounting department really needs to be updated and looked at in a very granular sense, meaning you might be getting monthly financial reporting from your internal accounting department, but really what else is there? And that’s documenting the procedures around your financial reporting system. Even documentation of your general operating procedures is an important part of getting your financial warehouse in check. There’s three different levels of financial assurance that your CPA can provide to you. One is a compilation, which is really no assurance. It’s the lowest level of assurance. The next is a financial review, and the highest level of financial assurance is an audit. We see clients actually moving through a compilation to a review to a financial audit to really get integrity to their financial statements, get those auditors in their offices to check and balance the financial operations of the company. And when you’re looking to be sold, being able to provide a buyer or a third party a financial audit provides integrity to the financial statements, reliability to the financial statements really shows the audience that you are ready for a financial acquisition. So getting your financials in place and on check is the first step in that direction.

Understand your organizational structure

The next point is understanding your organizational structure. And many owners look to me and say, I know my organizational structure. I know where the hierarchy lies in my company. And then I look at them and I go, but have you mapped it out? Being able to put your organizational chart in a framework to show a buyer that here’s our C-suite of leadership. These are the folks below them and not necessarily listing out the people’s names, but just their titles, their roles and responsibilities. Being able to document your organizational structure is really important to provide the footprint, the mapping of your company to a third party, so they know that you know how your operations actually work and who are the most important people or the most important jobs and roles within the organization. Your people, your process are two very important parts of the value of your company. So being able to document that organizational chart with the roles of the folks that you have in your company is one of the other next steps in getting ready to be acquired.

Assemble your team of advisors

Getting your team of advisors together and people, you know, clients of ours look to us and say, “Well, you’re my advisor, Deanna, so you’re part of the team.” And I said, “Yes.” And we need to make sure we have the proper legal counsel. Your corporate attorney might be a great person to help you with this deal, but perhaps you may want to have somebody else who maybe specializes in mergers and acquisitions from a corporate legal counsel assist. Your wealth management advisor who should be ready to receive potentially your after-tax cash flow from the sale of your business should also be part of your advisory group. And the current operations of the company may already have a banker involved where you might have loans and obligations to that bank, and they too need to be part of that team of advisors. Getting ready to sell your company, you need all of these people to provide you counsel through the journey of selling your business. And most importantly, the banker, if you do have obligations with the bank, you know, any change of ownership, any look to sell your company, they need to be definitely included in that conversation early rather than later.

Understand the value of your company

Understanding the value of your company. Here we see lots of our clients look and say, okay, I think my company is worth X dollars. If we go to the marketplace, this is how much I should get for my company. This is the multiple of EBITDA that I might need. Earnings before interest, taxes, depreciation, and amortization. A key role in determining value in the marketplace sometimes is a multiple of your EBITDA. Well, that might be true. However, we have clients that come to us and say, oh, I need Cray Kaiser to do a business valuation so you guys can tell me how much I’m worth so that I can go pedal my company out in the public market. And I would say, I’m not sure we really need a business valuation. The business valuation may be a great educational tool for owners so that they can decide how much a third party might look to their company and value them at, but it’s an expensive cost to have where markets, fair market value is probably mostly looked at in terms of what will the market provide. There’s lots of different factors that a buyer might look to you. You may have a certain product or service that they don’t have in their company. So there’s synergetic reasons for that other company to look at you and provide you a higher value than might be what you’re looking for. There’s other reasons that somebody may want to come and buy you from a demographic perspective. They don’t have a business in Chicago and they want to have a footprint in Chicago. Therefore it gives you even a higher value than what you might even compute in a business valuation. So I guess, you know, out of the value, I would say, you know, understanding what and how somebody might look at you as an important part of your process. What I can tell you, your value is not. It’s not what the owners need to retire. We often hear from clients, “Well, I need X million dollars so that I can retire and have my life after my business.” And I would say, “Okay, that might be a number, but it probably isn’t the number.” What the fair market value will bring to you, you really do need to start that process of going out into the market and getting a couple of different buyers potentially interested parties in your business. You know, only selling to one business is probably where you’ll end, but as you work through the process, it’s probably in your best favor to have multiple companies looking at you to create a competitive environment to drive up that value perhaps, or just to become a little bit more popular in that space to really determine for yourself what is the value that you might need for your company.

Get a non-disclosure agreement

One of the next points that I think is really important, as business owners get excited to the idea of selling their company, they’ve kind of come to their crescendo, if you will. It’s time for me to exit my company. It’s time to sell, they get really excited, and when people are interested in them, they get even more excited. And when you get excited, oftentimes I see clients letting the horse out of the barn way too early. So don’t let the horse out of the barn. And what I mean here is, don’t give away so much financial information before you have a non-disclosure agreement. A non-disclosure agreement is also known as an NDA. It is fine to have great conversations over drinks, over dinner. It’s important for the buyer to get that information from you, all the tribal knowledge, all the history of the company, and that can be done in lots of different conversations. But as soon as you start providing them financial information, historical financial statements, historical tax returns, that’s where you really need to get that NDA out there in front of any of that financial reporting. I would also say that if a buyer wants to start getting copies of customer lists and vendors’ lists and sales by customer and wages by employee, all of that information will be shared with them, but during due diligence. And that’s long after you’ve already signed a letter of intent and I’ll talk about that in just a minute. But in terms of not letting the horse out of the barn, that’s really keep your information guarded. Certainly give them all the intelligence about your company, the story, the history, the products, the people, the energy around the company. You can give them the financial information and the tax return information, however only start giving them some tangible information after you have a non-disclosure agreement signed.