How to Stage Your Company for Sale

As featured in LBM Journal

Staging your company for sale and obtaining maximum value takes time and discipline because the process involves making real changes to your financial practices. However you approach the staging process, two key goals are clear: Improve your balance sheet and clean up A/R.

An acquirer of your business will look at all of your operations, but they will zero in on “trailing 12 months earnings” (historical earnings reaching back one year), because this is a solid indicator of the business’ health. Many acquirers will look deeper, requesting performance data that looks back four+ years to determine your year-on-year growth. That reveals the resilience of your business in good times and bad, indicating how you’re positioned to weather a range of economic conditions.

What kind of performance and growth is most attractive?

If a company has grown its earnings by $1 million over a four-year period, that’s especially notable, because consistent compoundedannual growth rates (CARG) are very impressive to an acquirer. But it would be even more impressive if you survived the Great Recession, held your market share position, and emerged well-positioned for the recovery. (That would require showing your financials going back seven+ years.) That demonstrates resilience, discipline, and focus, to say nothing of how it speaks to the quality of your customers and how you have structured your company to absorb anything the economy can dish out.

To illustrate how valuations change, let’s look at three companies that have varying performance and see which would be the most attractive to an acquirer. (Figure 1)

three graphs side by side comparing the performance of Company A, Company B and Company C

Company A shows consistent sales, but no growth. Company B has sales that rose and fell erratically. Company C shows predictable growth and steady year-over-year growth, rising
from $400,000 in earnings to $1 million. Ignore the starting point of revenues for now, and note that Company C has consistently built on its success, year-over-year. Any observer
would agree that this trend is likely to continue upwards, making Company C the most attractive to an acquirer, even though Company B had almost twice of Company C’s revenues in the previous year.

Customer Quality and A/R

Acquirers look closely at customer quality, which is reflected in large part by the quality of A/R. An acquirer will “take your temperature” by seeing if you have a clean balance sheet, with no significant debt, a balance of assets to liabilities, a strong “Net Working Capital” position, and “Working Capital Ratio” that’s in an acceptable range.

As for A/R benchmarks, it’s considered good performance if 80+% A/R is current and you have limited A/R beyond 60 DPD. It is not good if you have a significant percent of A/R that’s out greater than 60 DPD.

Figure 2 scatterplot where sales is X and Credit Risk is Y

Customer Concentration

Now let’s look at customer concentration. For starters, note that concentration of sales is never positive. Also, large customers are often low margin, and they are a threat to your business if they leave or leave your bills unpaid. On the other hand, smaller customers, though higher-margin, are often low-volume, and perhaps more susceptible to being a bad payer. As an exercise, put your customers on a grid with four quadrants that represent high and low risk for credit, and high and low volume of sales (Figure 2).

With this grid, you get a “dashboard view” of your customer quality. The company represented in the grid has an overly high concentration of low-sales-volume customers, and a  disproportionately high number of customers that are high credit risk, in addition to being low volume. You want customers in the top right quadrant. How does this affect your value to an acquirer? An acquirer won’t pay high values if you have at-risk customers in the wrong quadrant of the grid.

graphic of man walking up stairs or taking steps

Steps to Take to Improve Valuation

When you go through the process of staging your company for sale, strongly consider engaging an M&A advisory firm. Experience shows that adding an M&A advisor along with a third-party credit management service (working a year+ in advance) can have a dramatically positive effect on your value. An M&A advisor will look over your company with an “acquirer’s eye” and—along with preparing your financials—help you to A) ensure your A/R practices are top notch, and B) maintain discipline in avoiding speculative investments, unnecessary purchases, or non-essential new hires. (Remember: every dollar you add to EBITDA has a magnifier effect on your company’s value. Today, that positive magnifier is 6X to 7X for every dollar added to earnings.)

Further, the importance of cleaning up your A/R can’t be underestimated. An acquirer will want to see a healthy amount of cash on the balance sheet and an A/R where the business is promptly paid. If you have lots of delinquent customers, you should improve this situation prior to sale. First, avoid increasing customer credit lines to accommodate their delinquency (Note: if they wouldn’t need the extra line if they paid on time, don’t give it). Next, assess and collect late charges on chronically delinquent customers and also put high risk accounts on COD. All three of these actions will substantially increase the cash on the balance sheet, increase the % of A/R that is current, and decrease the amount you borrow from a line of credit.
Admittedly, these actions require you to confront customers to change their behavior and that’s not always something that is comfortable or even successful. Some even fear losing customers if they do this. Though this fear is very rarely the reality, this may not be your preferred way of cleaning up your A/R.

Instead, you may want to consider a credit management company like BlueTarp. A credit management company will fund you upfront for your transactions, increase your cash-on-hand, bring your A/R to 100% current, and reduce your use of a bank line of credit, all while taking the credit risk on accounts that might never pay. That last piece becomes an especially attractive feature of your business to an acquirer. Knowing they are not at risk of a large bad debt after they purchase your business helps increase the probability of a closed sale and increase the amount your business gets valued at as well.

Whichever direction you choose to go, make sure you do what you can with your A/R to make your balance sheet look as attractive as possible. You’ll thank yourself in the end for making it happen.


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