Properly structuring the purchase or sale of a business is a critical step in the process of buying or selling a business. Whether your company is the buyer or the seller, an early, systematic approach is the key to a successful transaction.

Here are some questions, ideas, and approaches we believe will prove helpful in preparing your company for sale:

Business Plan: Is there a logical connection between your long-term business plan and your historical financial results? If the business plan indicates growth in contract revenues, margins, and market share but your financials tell a different story, the buyer’s assessment of risk will increase.

Litigation: If you have a file drawer full of unresolved lawsuits and cannot offer reasonable and reliable explanations of the outcomes and estimates of the company’s financial exposure, the buyer’s risk analysis will be negatively affected.

Technology: If you haven’t done so already, you should ensure that your information technology systems are up to date. These should include not only the accounting/job cost systems, but also project management software, scheduling technology, and related internal processes and workflow documentation.
Financial Statements: Make sure you have the staff and money necessary to produce current monthly financial statements and meaningful work in progress (WIP) schedules. This should be undertaken long before posturing for a sale (or a year-end closing).

Depreciation: Many companies delay booking depreciation until the end of the fiscal year, which often results in an unexpected “hit”. Since a large part of depreciation expenses are charged to contract costs, you should consider determining (at the beginning of the project) a reasonable method to allocate depreciation and consider setting up recurring journal entries to periodically charge these expenses. This will minimize the unexpected end of year impact.

Costs to Complete: Set up a procedure that accommodates timely and accurate cost-to-complete estimates on work in progress. Insist on thorough analysis by project managers and hold them accountable for timely and meaningful reports. “Sandbagging” must be identified early and perpetrators admonished for misleading management.

Gross Profit Estimates: Review several years of your work-in-progress schedules. Gross profit fade should be attributed to identifiable events for any given job. However, frequent gross profit fade usually indicates more systematic problems such as poor estimating or work force productivity. It could also be an indicator of ineffective project management. Stand ready to defend fading gross profits.

The buyer’s risk assessment of your company will determine, to a large degree, his or her attitude when analyzing and projecting your future cash flows and it will have a direct affect on the capitalization rate used to estimate value. Higher cap rates equal lower earnings multiples, and therefore can result in a lower offering price for your company.

Turn to the GALLINA professionals for help navigating the opportunities and pitfalls of buying or selling a business.