Are you a small business CFO? If so, the odds are high that you will play a critical role in selling your company to new owners at some point.
After a career at a Fortune 500 consumer goods company, I became CFO of a privately held group, including several businesses focused on sustainable packaging and a global recycler of PET plastic.
The recycling company was in financial distress, requiring immediate stabilization. I led efforts to restore financial discipline, address liquidity and covenant challenges, and ultimately partnered with a court-appointed receiver to execute a successful sale, achieving full creditor repayment.
I then helped prepare the remaining businesses for sale, improving financial reporting, strengthening controls and rationalizing the balance sheet and structure, culminating in a successful transaction with a strategic buyer.
These experiences shaped my perspective on what it truly takes to prepare a private company for sale.
A 10-point checklist to prepare your business for sale
Based on these experiences, here are ten actions every small business leadership team should take before entering discussions with a potential buyer.
1. Prioritize quality financial reporting. Soon after becoming CFO, I was reviewing the current month’s financial statements. It caught my eye that the month-to-date reporting for several prior months had changed in the current report. When I questioned my new team, they noted they had received vendor billings for activity earlier in the year, so they posted these charges to prior months accordingly. In other words, prior months were never fully “closed.”
To produce reliable monthly financial statements, upgrade your accounting team’s competency, stress the importance of quality, leverage a closing and reporting checklist and perform comprehensive managerial reviews. In addition, ensure you are “telling the story” behind the numbers.
2. Clean up the balance sheet. Early in my CFO tenure, we hired a new corporate controller. Like me, she was a CPA who started her career as an auditor. Over the next several months, we reconciled all balance sheet accounts, some for the first time in years. We identified and addressed old, unsupported accruals. We began reporting on aging receivables and then collecting those that were past due. We negotiated more favorable payment terms with our suppliers. Over time, we conducted wall-to-wall physical inventories. And we performed a physical review of all fixed assets, enhancing asset descriptions, selling unused assets and removing fully depreciated assets from the books where appropriate. In short, we cleaned up our balance sheet.
3. Accelerate the financial close. Buyers will want evidence you understand your business in near real time, not months later. But many small business accounting teams fall short, whether due to priority or competence. To accelerate your financial close, standardize and formalize the team’s closing schedule and checklist, identify pre-closing prep work opportunities, eliminate manual workarounds and leverage estimates where appropriate. And as the leader, help your team focus exclusively on the closing by removing distractions.
4. Strengthen internal controls. Although a potential buyer may not expect you to have sophisticated controls like a public company, weak controls will raise red flags. Start by defining your organization’s core values, operating philosophy and standards of conduct, expressing these expectations in value statements, ethical codes and communications. Then leadership must “walk the walk” to set an appropriate tone at the top. In addition, establish appropriate delegations of authority, implement segregation of duties where feasible and clarify policies and procedures.
5. Organize key contracts & legal documents. As a new CFO, you should gain an understanding of major customer contracts, key supplier agreements, lease agreements, intellectual property, insurance coverage and employee benefit plans, as well as corporate bylaws, board minutes and other governing documents. And consider assembling these documents in a virtual data room, as a potential buyer will want access to them too.
6. Address potential issues. We engaged a new employee benefits partner who then evaluated our plan designs, audited our recordkeeping, and facilitated our compliance. We had a few gaps which, once identified, were easy to correct.
By collecting and analyzing your key contracts and legal documents, you can identify and address gaps and compliance issues upfront. Otherwise, a potential buyer is likely to find the issue, complicating the due diligence process, potentially impacting the offer or even outright jeopardizing the deal.
7. Rationalize legal entity structure. Creating a new LLC in Ohio, as I learned, is easy. To rationalize our legal entity structure, we sold several non-core businesses and we filed multiple certificates of dissolution to officially close inactive entities, including several created but never used. For the entities that remained, we ensured bylaws and ownership records were current, and that board meeting requirements were met and minutes documented.
8. Document revenue drivers and margins. Upon my arrival, our company was enjoying increased sales but deteriorating profitability. After carefully analyzing production costs, we discovered the key product for a major customer was underpriced. We were losing money on every pound of product sold.
Buyers are purchasing future earnings power. Analyze margins by product, customer and channel, addressing any issues. Identify your top customers and concentration risks. And be able to explain your pricing strategy and cost structure.
9. Identify operational improvement opportunities. Buyers appreciate self-awareness. To that end, adopt a continuous improvement mindset, identifying operational improvement opportunities, creating a roadmap for improvement and highlighting initiatives already in progress.
10. Build a credible forecast/strategic plan. During my onboarding at the global recycler, I walked through the production process and then analyzed their cost structure, helping them understand the true cost differential in producing their food-grade vs. non-food-grade PET resin. I then leveraged this insight to create their first detailed budget and multi-year plan. Specifically, I created a multi-year forecast that highlighted growth drivers, capital requirements, key underlying assumptions, and related risks and opportunities. The strategic buyer of this business based their decision to acquire the company on this plan. Building a credible forecast and strategic plan can provide a potential buyer the confidence they need.
