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The Inner Workings of a Deal: What to Expect When You’re Expecting

Last month, we started our look at the inner workings of a deal by examining the different sorts of transactions that you might be considering, along with starting to think about the goals you might have for your company (first article).

This month, we’ll talk about a variety of ways to prepare for a successful deal; things you can do now even if your planned transaction is several years in the future.  With some advance planning, you will be able to significantly increase the post-tax value of a transaction to your ownership group.

 Business Preparation

 Overall, the more you institutionalize your company, the more value it will have.

Middle market companies often suffer from the effects of transitioning from an entrepreneurial activity to a more formalized business operation.  The more you can accelerate this transition, the more value you will drive to your business in a transaction.

This transition generally occurs as a company hits revenues of $10 million or so, but can often last well up into the $100 million revenue range.  Below these levels the company is most often driven by the personality and needs of an entrepreneur founder/owner.  To maximize the company’s value, the company needs to become less an extension of the owner and more of an independent company.

There are a handful of common needs that run through companies making this transition:  management infrastructure, financial reporting and performance metrics.

Management Infrastructure:  Many middle market companies are owned and operated by a single entrepreneur/founder (or a small team of founders).  To buyers, this adds significant risk.  If the owner is the sole holder of company knowledge, then a buyer will be concerned about what happens to the company if something happens to that owner or if the owner loses interest downstream of a transaction.  Consequently, the optimal transition is for the owner to step away from the day to day operations and become a CEO rather than president, sales manager, accountant and chief bottle washer.  Hiring and delegating responsibility to senior managers can be difficult for some owners, but it is critical for increasing value.

Financial Reporting:  In the early days of most companies, the owner puts in place some sort of low level accounting program (e.g., QuickBooks), muddles his or her way through keeping track of financial performance and outsources tax preparation to a friendly neighborhood accountant.  The problem is that for many companies, other than hiring a bookkeeper, the company keeps these practices in place as revenues increase to $10 million, $20 million, or even $50 million.  I’ve worked with middle market companies with significant revenue that still operated like a mom and pop business.  Nothing will destroy value faster than not understanding the performance of your company from the perspective of a buyer.  While I’ve heard many sellers say “it’s good enough for me,” it won’t be good enough to get top dollar out of a transaction.  Most middle market companies will want to hire a controller, move toward GAAP (Generally Accepted Accounting Principles) compliant financials, and have their financials audited (or at least reviewed).

Performance Metrics:  Finally, many businesses reach very significant levels of revenue and profitability without understanding what exactly drives that profit.  A business that can’t provide specific answers to questions about the profitability of each customer, project, and line of business will ultimately leave dollars on the table when it comes time to sell.  See this article for more guidance in this area.

Tax/Estate Preparation 

In addition to ensuring that your business is as institutionalized as possible, it is also important to prepare for an eventual liquidity event from a tax and estate planning perspective.

Company Tax Planning:  Analyzing and implementing appropriate organizational and structural changes can radically affect the ultimate value of a sale if they are put into place many years before a transaction takes place.  For example, most middle market sellers will greatly benefit from converting their C corporations to S corporations, but only if the conversion is done many years in advance of a potential transaction.  Since many companies retain outside accountants only for tax preparation, many middle market owners have never worked with anyone on transaction planning and opportunities available for longer term value creation.  Like any other field, all accountants are not created equal.  Consulting with an accountant that has significant M&A experience well in advance of a transaction will likely yield significant increases in post-tax value.

Personal Tax Planning:  Concurrently with evaluating the company’s tax status, business owners considering a sale should consult with an experienced deal accountant to evaluate their personal options for maximizing post-tax value.  There are a variety of tools that can be used to defer or eliminate tax liability, but they need to be planned for well in advance.

Estate Planning:  Since mortality is a subject that many hard driving entrepreneur owners often don’t want to discuss, I regularly talk to business owners that have highly valuable businesses, but have neither taken steps to ensure that their families are protected in the event of catastrophe, nor taken advantage of estate planning tools available to increase the value realized in a transaction.  Business owners thinking of a sale should consult with a financial planner and/or estate planning professional well ahead of a potential transaction.


There are a variety of ways to increase the pre- and post-tax values of your business, but they need to be analyzed well in advance of a potential sale.  Institutionalizing your business and consulting tax and other financial professionals well ahead of a transaction will pay dividends when you are ready to sell.

Next month:  Part III – Hiring an Intermediary

Michael Jan 2014 crop 1 [1]Michael Schwerdtfeger is a managing director at Chapman Associates. Michael and his team are focused on providing exceptional results through sell-side mergers and acquisitions advisement to entrepreneurs and business owners exclusively. Michael leverages his 20 years of diverse experience handling complex business transactions to help guide his middle-market clients to the best possible deal outcomes.

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