Decisions and preparation that will help you achieve maximum value for your company

When the time comes to sell your business, the choices you make and the preparation you undertake can help insure you the best possible return. We reached out to business succession expert John Murphy of Atlantic Management (www.atlantic-mgmt.com) for some of the most important points to consider as you begin contemplating a sale.

Q. How much is my company worth?

There are a number of valuation methods that can be used, but in general, value is derived by determining an appropriate multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). The multiple used depends on a number of risks, including industry, economic, and companyspecific. The higher the risk, the lower the multiple, and vice versa. While you may not have control over the risks related to the industry and economy, you do have control over the company-specific risks. Having a strong and dedicated management team, audited financial statements, higher-thanindustry profit margins, and a solid balance sheet, including low debt and strong working capital, will help to lower your company specific risk, which will increase value. Also, keep in mind that a buyer will “normalize” the company’s EBITDA by excluding any one-time, non-recurring or non-companyrelated income and expenses.

Q. Who would be a typical buyer for my company?

Assuming there is no family to buy your company, in general, there are three typical buyers: third-party sales (such as a strategic buyer, competitor or a private equity firm), company management through a management buy-out (MBO), or an employee stock ownership plan (ESOP). Generally speaking, a third-party sale will drive a higher price than an MBO or an ESOP due to the strategic premium a third party may be willing to pay.

Q. What steps should I take to prepare my company for sale?

Properly preparing your company for sale can be time consuming, depending on the availability of corporate and financial information. It is not uncommon to take one to three years to properly prepare a company for sale. The list of due diligence items requested by a seller can oftentimes be multiple pages.

You can start the process by gathering all corporate documentation, including articles of incorporation and any related amendments, by-laws, stock certificates, minutes of meetings, and formal company agreements and contracts. Buyers will generally require five years of historical financial information, including tax returns and financial statements. Audited financial statements are always preferred and companies with audited financial statements are generally perceived as lower risk and may benefit from a higher multiple of EBITDA.

Q. Should I sell my company as a stock sale or asset sale, and what are the differences?

Buyers normally prefer an asset sale, as they can pick and choose which assets they want to purchase and are only assuming the risks related to those assets. In addition, they can choose to assume some or no liabilities. Furthermore, buyers are entitled to “step up” the basis to fair value for any assets purchased and can take advantage of the depreciation deduction. Asset sales can also be complex depending on the need to rewrite contracts or retitle as sets.

From a seller perspective, asset sales can be tax disadvantaged, especially for a C corporation, as the company would be taxed when it sells the assets and then the company owner would be taxed when they receive the proceeds from the sale out of the company.

On the other hand, sellers normally prefer a stock sale as this transfers all liabilities, warranties and risk to the buyer. Stock sales are much simpler than an asset sale as the company stays fully intact. However, the buyer loses many of the tax advantages available in an asset sale.

Q. What advisors do I need to sell my company?

Your advisory team will generally consist of an attorney to assist with preparation and review of documents, an accountant to assist with taxation or accounting-related issues and questions, and potentially an investment banker or financial advisor to assist with marketing the company for sale and advising the company owner on transaction structure and pricing, as well as negotiating the terms of the deal. For an ESOP transaction, you would also need to engage a trustee.