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Three Things to Check

When you are preparing for a possible transition and sale, lots of things come to mind. What you will do with all that free time. Champagne after the closing. Winter days in the warm sun.

Before you get too far along the path to dreams, consider these three things when preparing for the transaction that makes this possible.

  • Sales by customer report
  • Inventory status
  • Normalized expenses

Sales by customer. Our process includes a detailed review of sales back at least three years. This provides insights into the ebb and flow of revenues. We put a lot of time into it. Guess what? So will a buyer.

This report paints a picture of revenue, how much is recurring and how much is newly generated each year. It shows major customers, including percentage of annual revenues.

This is heavily influence by the type of business, to be sure. Some by nature require one-time sales. Examples include retail or web-based stores.

Others should have established customer relationships that show up in a report. Examples include distribution and manufacturing. A review can reveal trends, whether the customer relationship is strong or on shaky ground. Another key point is to rank customers to show any concentration issues.

Inventory status. This is an area that should be accurate and up to date. Are you doing a physical inventory periodically, relying on technology-based reporting or some other method? There is nothing like a physical check to see that things are accurate.

Most owners know whether inventory is current or not. Buyers have a similar impression, but also tend to be suspicious. Often, there are issues lurking that may not show up until well down the road in diligence or a quality of earnings review. These include things like obsolete items kept in inventory, but unlikely to sell in the future. Knowing this information and being able to address it upfront will add to your credibility and help avoid problems.

Better to take a hard look now than be surprised in the eleventh hour of a transfer.

Normalized expenses. Owners of private companies enjoy a lot of discretion. Let’s leave it there. When it comes to a sale, we need to normalize these things to show the true economic performance.

These include things like one-time expenses, such as a legal dispute over a contract. Others involve discretionary expenses that won’t go forward, like driving a high-end BMW when your business requires a pickup or delivery van.

We spend a lot of time on financials in part to be able to explain them to a buyer. Anything that is normalized gets footnoted and disclosed. While most businesses have some of these items, it can be a red flag if there is a laundry list of footnotes. While it may be expected by a buyer, excessive adjustments impact credibility.

This is not a complete list, but a handful of items we have found significant in most transactions. It is a good practice to get familiar with these before a transfer. If appropriate, consider adjusting. But most of all, try to make the picture as clear as possible. Be proactive and look at these things as a buyer would.



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