Business Development Solutions

The Merger & Acquisition Resource for Growing Companies

How to Maximize the Price of a Business through a Confidential Business Review

In the vast majority of the small and mid-sized businesses that buyers review when looking to acquire a business, the level of analysis and documentation of the value drivers is below what it should be to maximize the price. Even most business brokers when preparing the information to market a business for sale fall short of providing the type of information that buyers need. Here are the components of a Confidential Business Review:

·        Executive Summary.  Concisely describes the key elements of the business and why the buyer should buy it. This section may be the only section that is sent to a number of potential buyers and may be the only thing they read.

It should describe the essence of the proposed transaction.  It should convince a potential buyer to look more closely at your business.

·        The Company.  Provides background information on the company, owners, and management.

If a business is not solely dependent on the owner and has good management under the owner, it will be more valuable and attractive to buyers.  To add value to a business, an organization chart and description of the functions of each position should be included.  The experience, education, and accomplishments of each key manager should be summarized.

·        The Offer.  Specifies what is for sale (assets, stock, or real estate), the price, and terms. This includes the factors that increase the value of the business.  Because the business review is prepared before buyers look at a business, some of the negative factors affecting the value can be fixed.

·        Products/Services.  Describes competitors' products/services and how your company competes effectively with them.   It should demonstrate knowledge of the competitive strengths and weaknesses to reduce the buyer's risk of the unknown.

The profitability of each of the major products is shown.  If the profits come from a number of products, the business will be worth more than if most of the profits come from just one product.

·        Industry.  Outlines the industry status, trends, and financial standards.  A business will have a higher value if an industry is growing and a company's market share is expanding.  Industry growth trends should be based on third party estimates.

·        Customers.  A buyer will want to know if most of the company sales come from just a few customers or are from a wide number of customers.  The profitability levels for key customers should be shown.

·        Competitors.  Describes market share information for a company and competitors.  Describes how competitors interact with each other.  Rate their intensity of competition as fierce, moderate, or passive.

Use competitor credit reports or any other available information to show competitor financial information or other relevant information.

·        Marketing Plan.  Describes marketing activities including overall strategy, pricing policy, methods of selling, advertising and promotions.

·        Weaknesses, Strengths, Opportunities, and Threats.  Describes important risks, assumptions, and problems.  Explains the potential actions or strategies that could use to overcome these problems.

Buyers are aware there are risks to buying a business. However, the business review needs to reduce their risk of the unknown by identifying the risks and problems. By explaining potential solutions, it is shown that those risks can be managed.

·        Geography.  Describes the city and state as a place to live.  This information may be needed for out-of-state buyers.

·        Production/Operating Plan. Explains your production method or delivery of service.

Potential buyers want a well run company.  By providing a copy of the internal company reports, buyers become more comfortable that decisions are made with timely, accurate information.

·        Financials.  Prior to selling a business, most Sellers report as little profits as possible to keep taxes low.  The financial statements should be recasted to show the maximum earning power of the business.  Normally, the higher the earnings and cash flow, the more the buyer will pay.

The accounting methods used to capitalize or expense inventory, marketing, capital expenses, and R&D costs should be disclosed because the buyer will want to know the quality of your earnings.

If the Company has a large backlog of orders, is it profitable?  If it can show it is, a potential risk is eliminated to the buyer.

Because buyers are interested in the future, a financial forecast should be provided.  The financial forecast should be tied to the business strategy.  The more reliable and predictable a company's financial history and forecast, the more the buyer will understand your company and offer a fair price.

The value of a business to a buyer is based on the future financial benefits they will receive.  By including in a business review a business valuation using several valuation methods, the potential buyer can see that a fair price has been set.

To help the buyer understand a company's financials, detailed documents and assumptions to back up key historical financial information, adjustments made to recast your financials, and financial forecasts should be shown.

Present a business's financial ratios and compare them to industry and competitor averages.  If they are better than the averages, they will help attract prospective buyers.  If they are worse than the averages, it should be explained why or they should be fixed before the company is offered for sale.

·         Exhibits.  Includes all documents required for due diligence by a buyer.  Includes inventory counts, appraisals, and assets lists.  If a company has new equipment that will not have be replaced soon, the value of a business will be higher than if the equipment is old and needs to be replaced.  Marketing material, photographs, and maps can be effective in attracting prospective buyers.

"The will to win (Selling your business for the price you want) is not nearly as important as the will to prepare to win. Everyone wants to win, but not everyone wants to prepare to win.


Call if you have any questions on the above article or to find out more about buying or selling a business.

Business Development Solutions

Jay Whitney, President