I’m often asked by business owners when the best time is to consider merging or selling their company. Is it when earnings or revenues are at all-time highs? Or is it when the opportunity for future growth seems greatest, regardless of earnings or revenue?
My answer is partially both. While these are good considerations, the best question to ask is, “When will my business reach its maximum value to an outsider?” And it’s a great question to answer well before considering a sale, a joint venture/partnership and even when taking in investors.
In order to recognize maximum value, business owners need to establish the value of their business on a regular basis, ideally annually. It allows a business owner to plan for the future and develop benchmarks against which progress can be measured. Imagine what an acquirer or an investor might find appealing and a road map for future planning is suddenly much clearer.
In future posts, we will explore a variety of areas that will create maximum valuation, but we'll start with the basics: every investor or acquirer wants to know that the company they are interested in is well run and organized. From the legal structure and supporting documentation to financial books, records and statements, true value is in being organized and having details available when requested.
Yes, there is business value in organization. A business worthy of being acquired or worthy of investment capital should have at the ready:
- financial statements
- tax returns
- shareholders list
- capital structure
- roster of continuing personnel
- employment contracts and agreements
- list pending litigation
- customer contracts
The next step is to look at a business to determine the key metrics, including both financial statements as well as non-GAAP areas, in determining value. A business owner needs to identify these tangible and intangible metrics and figure out how to best monitor these areas.
Tangible metrics (which can be segmented) include:
- revenues and gross profits
- cash flows
- physical assets, including inventory
Intangible metrics may include:
- the value of intellectual property
- the likelihood of retaining key employees
- industry trends
- changing customer requirements
As mundane as all this sounds, it’s this organization, attention to detail and the determination of key elements that will provide the framework for maximizing any business’ true value.
Corey L. Massella, CPA, is a partner with the accounting and business consulting firm Citrin Cooperman, and is the CEO of the firm’s SEC Solutions Group. He brings more than 20 years experience in counseling entrepreneurs in financial and business strategies, including structuring, negotiating and executing mergers and acquisitions, completing due diligence and preparing companies for public offerings. He is also a board member and sponsor for the Financial Executives Institute (FEI), Keiretsu Forum and the Long Island Capital Alliance. He can be reached at 212/697-1000 or email@example.com