By Fabio De Filippo, Managing Director, CPA

The Federal Reserve Bank reduced interest rates by 0.50 percentage points in September 2024 and by a quarter point in November 2024—its first cuts since the start of the pandemic. These announcements may signal a new cycle of lower borrowing costs and a heightened appetite for mergers and acquisition (M&A) activity that had slowed considerably in 2023 following record transaction volume in 2022. In this environment, with corporations and private equity sitting on trillions of dollars in cash and capital reserves, business owners who wish to exit their business must get their companies in order, both financially and operationally, so that they may respond to evolving market conditions and execute a timely sale or merger that meets their specific needs and goals.

Exiting a business is, perhaps, one of the most significant events in an entrepreneur’s life. Not only does the company represent the owners’ largest asset, but it also embodies their life work and the legacies they leave behind. Getting everything right requires considerable time, strategic planning and attention to detail. The earlier one starts preparing and putting a plan in place for an eventual exit, the better for a smooth transition later, regardless of whether you intend to pass the reigns of the business to a family member, sell the entity to its management or respond to an acquisition inquiry from prospective buyers. Even owners who plan to continue working until their last breath must contemplate what they want for their companies in the event of a partner dispute, a personal disability or worse, death.

Financial Preparation

One of the first steps to take when considering a business sale and assessing the overall health of your company is to get your financials in order. It can take several months to organize and review critical financial records, such as bank statements, employee and payroll records, benefits cost information, inventory counts and proof of business insurance. Moreover, you will need this time to clean up financial statements and assemble the information buyers need to close the sale.

You should also take this time to understand all the factors that affect the business’s ability to generate income and how much money it makes. This includes reviewing current customer contracts and vendor agreements, analyzing profit and loss (P&L) statements to ensure they accurately reflect the company’s profits and working with tax advisors to determine the best strategies for minimizing your tax liabilities. It is also important you engage a professional to conduct a formal business valuation that assesses the company’s fair market value or the realistic price a buyer is willing to pay. 

The ultimate goal of all this financial preparation is to convey legitimacy and project an accurate picture of the company’s overall financial health to attract and inform buyers.

Operational Planning

Improving operational efficiency is another critical step business owners must take to achieve M&A readiness. After all, companies that are well organized and have appropriate systems, policies and procedures already in place are more attractive acquisition candidates that may command higher valuations. Take the time to create a data center where you copy and store all the relevant information and supporting documentation you will need to produce when you are ready to sell or receive an unsolicited purchase offer.

Business owners have additional opportunities to maximize operational performance when they plan early on, far before a potential sale. For example, businesses may employ various tools to track relevant business metrics, which, in turn, can help them identify opportunities to improve key performance indicators (KPIs) and management structure while removing inefficient, obsolete and underperforming products, systems and services. Equally important is the need for the business entity to comply with all applicable industry-specific regulations, including those intended to protect customer/patient data, minimize risks of cyberattacks, prevent fraud and ensure transparency in financial operations.

Legal Preparation

Selling a business involves many legal implications that can impact the negotiation process and the ultimate sales price. Ensure you have well-organized documentation to support the business activity, including tax returns, customer and vendor invoices, real estate and equipment lease agreements, employment agreements and employee benefit plans. Evidence of intellectual property, including patents and trademarks, is also essential for legal and valuation purposes.

By planning in advance with legal counsel experienced in M&A transactions, business owners are afforded the time to clear up any ownership issues and obtain written contracts supporting material relationships with vendors and customers when possible. This, in turn, helps to improve the impression they present to prospective buyers and enables them to move faster and more smoothly through the transaction process.

Team Planning

The complexity of a business sale and the process of preparing a company and its owners for these transactions require a high level of professional expertise in law, finance, tax and wealth management. Unfortunately, owners often overlook the planning needed to ensure the business structure and the use of the sale proceeds are optimized for tax efficiency and future wealth preservation and protection from creditors. Working with experienced CPAs and financial advisors and setting up the right processes and structures in advance can help to achieve these aims.  

Business owners should also take the time to develop an internal team of employees from finance, operations, sales, marketing and human resources to help throughout the sale preparation and transition processes. This will help effectuate a smooth and timely transaction with minimal impact to business operations, which can further impact valuations and sales prices.

For more information about positioning your business for a successful sale, please contact:

Fabio De Filippo, CPA
Managing Director
Tel: 646.213.7596
Email: fdefilippo@bpbcpa.com