Should You Window-dress Your Business For A Sale?
Or, a pig with lipstick is still a pig
I have worked with a number of CEOs who gone through the sale of their business. And one of the questions I get asked by people going through this process is about whether they should be doing any advance work inside the business to prepare it for a sale. In other words, they want to know whether they should window-dress the business-meaning should they make it prettier or more desirable-before they sell it. It’s actually a bit of a tricky question.
Let me explain what I mean.
When I talk about window-dressing a business, I am specifically talking about sprucing up the company’s financials in a way that will help increase the selling price for the business. The idea might be to find a way to crank up the revenue in a non-sustainable way, or even deferring costs inside the business to make it look more profitable or capitalizing development expenses, all with an eye on getting a better price from a buyer. While that might seem fine in theory, there’s actually a bunch of problems with this approach.
First of all, there are things you should be doing if you’re preparing for a sale-especially when it comes to being completely transparent with your financials. The basic clean up to reduce complexity and eliminate spending that makes no sense if appropriate. If you have a child or relative working inside the business that is paid well to do nominal work, you need to stop. You also need to be wary of other pre-tax expenses you might be running through the business, like cars, condos, or even planes. These are all things that are not fully business justifiable, and you need to clean them up immediately. Any buyer who sees things like these on your balance sheet will consider them risks and will wonder what other items you might be hiding from them. These are immediate red flags.
But you should also continue to run your business like you’re not even thinking about selling it. If you try and avoid taking on necessary costs, like investing in expensive maintenance on your computer system, or hiring people you need to grow the business, or even deferring payments into the future, these can come back to bite you. Any reasonably bright buyer will see right through these antics when they conduct their due diligence. They will then add these costs back into the profitability and thereby reduce the price.
The bigger problem by doing this, however, is that you will make the buyer even more suspicious of your numbers and financial statements-they will know that you are playing games. You don’t want this lack of trust, especially if you need to work for the seller in a transition period or for longer.
You also should avoid the practice of what I call chasing “empty calories” when it comes to adding revenue. The temptation might be to go find sources of low-margin, non-strategic revenue as a way to pad your top line. But the buyer will see right through this and you will only distract yourself from investing in projects that will generate longer term strategic returns for the business.
That’s why my recommendation is to continue to run your business like you’re never going to sell it. While it might be OK to postpone making a gigantic investment in a new ERP system that can reasonably be delayed, you should continue to make the necessary investments to keep the business growing. Think of it like you’re trying to sell a house: you can’t really hide the condition of a house if you stop cleaning it or taking care of the lawn. If you defer on doing the basics of maintenance inside your business like replacing an ancient roof, the seller will discount the price anyway because they know they need to make those investments after they buy the business.
So, if you want to sell your business for the highest price possible, the best approach is to continue building the best possible business you can and not window dress it.