Institutionalize Your Business Before You Sell It

The more you institutionalize your company, the more value it will have in a transaction. 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 prior to a deal, 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.

Gears

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 my previous post Knowing Your Financial Metrics Can Increase Your Company’s Value for more guidance in this area.

Michael Schwerdtfeger’s eBook “The Inner Workings of a Deal: Tips for a Successful Transaction” is now available for download on his website. Get your free copy here: http://mbsmergers.com/downloads/

This article originally appeared on LinkedIn’s Entrepreneurship & Small Business channel.

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