Preparing a business for M&A is much like the preparations you make before listing your home on the market. After a long time talking about it with your family and planning the perfect destination for your next stage in life, you are ready to sell your home. But plenty of work lies ahead before you can officially list it on the market. The process might involve professional cleaning services, minor repairs, and potentially even larger renovation projects to get your home “sell-ready” and realize the highest price. A good real estate agent will help you properly “stage” your property so potential buyers can see themselves living there.
Like a home, your communications or managed service business must follow a similar preparation path to streamline the sales process and achieve maximum value. You have to “stage” your business and a good investment banker can provide advice much like a real estate agent can with your home.
In this blog post, we detail six steps to organize your financial and operational house to secure maximum value for your CSP business during this critical next step in your business’s evolution.
STEP 1 – LOCATE WHERE YOUR FILES LIVE
This step seems obvious, but you would be amazed at the extent of messy file organization that exists in some companies. Worse yet, critical files might not be easily found. Businesses very often find themselves reaching out to customers, vendors, lawyers or digging through old employee email inboxes to find those files while they are in the middle of the due diligence process. This can have the effect of slowing the process down and as the old saying goes – “time is money.” Many companies even have to hire a consultant to assist with tracking down and compiling important information.
Before you can move forward with thoughtfully organizing and filing, you will need to pinpoint where existing files currently live (either digitally or in hard copy form). The types of files you need to locate may include:
- Corporate formation documents
- Employee personnel files
- Customer contracts
- Vendor contracts
- Financial records and supporting documents
- Insurance records
- Legal agreements and settlements
- Contractor agreements
During this process, you may notice that some files are missing. To address this issue, go back to the original source and obtain copies of the documentation. In some cases, you may have to create or re-sign agreements. Agreements that the business is not using, that may still be in effect, should be canceled. Moving forward, you should create and enforce a record retention process and ensure cloud storage of customer information to avoid permanently losing key files and reports.
STEP 2 – ORGANIZE YOUR DOCUMENTATION
Once you’ve identified where existing files currently live, it’s time to organize your company’s documents. Choose an organizing approach that suits your business’s specific needs and how you wish to store and access files in the future. Keep these files together in one easily accessible place. Better yet, have your files stored in such a concise manner that you could drop them into a cloud-based data room in just two days’ time if needed.
Ultimately, you shouldn’t have to search long and hard for critical files that are relevant to your core business operations.
STEP 3 – ADDRESS TAX COMPLIANCE ISSUES
Tax compliance is another critical area where you need to make sure you are completely organized. From sales taxes on invoices to regulatory taxes, compliance in the advanced communications space can get very complicated.
The topic of tax compliance will inevitably come up during the due diligence phase of the M&A process, with any highlighted issues in this area negatively affecting your business’s overall valuation. At a minimum, the buyer may escrow a portion of the purchase price to ensure that any past tax issues are corrected, post sale. Past taxes that are paid plus interest, penalties and tax advisors fees will come out of your proceeds.
Since the 2018 South Dakota v. Wayfair Supreme Court decision which overturned the physical presence rule, more and more states and local entities have been instituting SaaS software sales taxes for remote sellers. The effect is that you have to actively work to stay in compliance, which is no simple task when you are trying to grow your business at the same time.
For this reason, larger tech businesses – generating over 100 million in annual revenue – would be wise to invest in building out their own tax departments internally and reduce expenses compared to solely relying on outside tax advisors. As for smaller businesses in the advanced communications space, forming partnerships with respected tax advisors you trust is well worth the investment.
STEP 4 – OWN YOUR IP TITLE
Does your business have a clear title for the IP (intellectual property) you own? It’s an easy area to overlook, but IP title rights are critical in protecting your business value. Very often business owners think they own the IP rights and during the sale process realize that they do not which very often will derail things. In a technology business, the main value that the buyer is acquiring is the IP of the company.
Commit to shoring up the necessary licensing and documentation in this area. Ensure the proper language is reflected in your employee covenant agreements, along with contracts with customers, vendors and outside developers. It is important to find a well versed intellectual property attorney to assist with this effort and not rely on something downloaded from the internet. This is among the most important money to spend to have it done right and be legally binding.
If you do not have IP language in your employee covenant agreements, start now to get existing employees to sign a revised agreement. It is much easier to have them sign it now as opposed to when you are in the middle of the sales process. Even a loyal and faithful employee can change when the sales process starts and they are asked to sign a new legal document. In fact, those are the ones you need to really worry about because sometimes they can feel entitled. Your business should have complete ownership of the materials that each of your employees and vendors creates on company time or with company resources. Don’t say: “I will get those agreements created next year.”
STEP 5 – CONDUCT AN EXTERNAL AUDIT
To get your business’s house in order, you have located all relevant company files, organized these files into one place, have strong IP language in place and addressed any lingering tax compliance issues. So now what?
It’s time to put your business’s sales prep to the test with an external audit. This audit will help pinpoint flaws in your organization’s finances and accounting processes, along with any glaring documentation issues you still need to address. Also having an external audit in place provides credibility that a future buyer will want to see. Typically a buyer will want three years of external audits, so you have to start well before you might sell your company. While it might be enticing from a fee perspective to go with a review or compilation as opposed to a full audit, these do not provide the full assurance that the audit will and certainly will not carry as much weight with a prospective buyer. As they say, the juice isn’t worth the squeeze.
When selecting an audit firm, stick at least with a regional firm with a solid reputation in your area that has the resources to support your company as you grow. Explaining why you changed auditors every year is not something that you want to spend time on with a potential buyer.
Buyers will have audit firms of their own performing the accounting due diligence. By having several years of audits, you can feel confident that your business will pass due diligence with flying colors.
STEP 6 – MODERNIZE YOUR TECHNOLOGY & HOSTING PLATFORM
Companies interested in pursuing prospective M&A opportunities with your business will first want to assess the current status of the infrastructure your technology is hosted on.
Does your infrastructure and technology currently meet the industry standard? The age of your infrastructure, whether you use the latest technology, and your current security standards will all factor into this evaluation. Before your business can feel prepared to entertain mergers and acquisitions, you will need to devote resources for modernization in these areas. Even if this process requires moving from an on-premises platform to a cloud platform, the investment and effort is worthy of internal consideration. I have seen all too often where deals fell apart because the buyers felt a big technology upgrade was needed post purchase. Don’t let this happen to you.
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These six steps will help you get organized in pursuit of a strong valuation that helps optimize the value of your company.
To discuss these business strategies and leadership insights in greater detail, contact our team today.