Advivo’s Managing Partner, Leon Stephan, outlines what you need to do to prepare your business for sale
A report by the global financial services firm, UBS, revealed that a staggering 41 per cent of business owners expect to leave their business in the next five years. Though a majority of exiting business owners plan to sell, many are unprepared. Fifty-eight per cent have never had their business formally appraised, and 48 per cent have no formal exit strategy in place.
Selling a business successfully requires a great deal of planning, which owners often underestimate. Many business owners get so wrapped up in the day-to-day details of running the business they never make time to adequately plan their eventual exit. Consequently, they receive a lesser value on the sale.
There are four key phases when selling your business: preparation; marketing; negotiating; and closing. In this blog, we will delve into how to prepare your business for sale and the various steps you can take to maximise the return to you – the ultimate beneficiary.
It can take years to prepare and sell a business. A business sale is certainly not something that happens overnight; many factors come into play and numerous, proactive decisions need to be made after a decision to sell has been made.
Before the sale, it’s important to prepare clearly documented plans, systems and processes which make your business ‘investor ready’, or more attractive to a prospective buyer, and which allow you to maximise your profit on the sale of the business.
So, what do you need to do to prepare your business for sale?
Get a plan
Obtaining the best results begins with a timely decision to commence the planning and preparation process.
Every good general has a retreat plan. To formulate the very best plan you should know what your business is worth and that the timing of the sale is right.
You must identify the attributes of an ideal successor, the one who will recognise the full opportunity you have created, pay the optimum value and move the business up to the next level of profitability.
Get a valuation
One of the first things you should do is obtain an idea of what your business is worth from an objective, outside source. A professional valuation will provide you with a basis for gauging buyer offers and will give you an idea of what you can expect to get from the sale.
It will also tell you your business’s market position, financial situation, strengths and weaknesses (which you can hopefully correct before putting it on the market).
At Advivo, we use a systematic process to value businesses, companies or a particular division as of a specific date and provide you with a valuation report that fits your requirements. If you would like to obtain a quote or order your valuation, please download and complete this Valuation Order Form.
Get your books in order
Buyers evaluating your business generally require at least three years of financial information. The more formal and consistent your statements (accountant-reviewed or prepared versus internally generated statements), the better impression you will make – and the easier the due diligence will be for a buyer. Provide detailed comments on trends and extraneous transactions.
The biggest “turn off” for prospective purchasers is a lot of adjustments for personal expenditure. Personal expenditure should not be in the company’s accounts, so make sure you separate personal from business and have a nice clean set of accounts to present.
Understanding profitability
Most privately-held businesses claim a variety of non-operational expenses. Make sure you have supporting documentation for these expenses. For example, your business may be paying for your personal vehicle lease.
In addition, there may be infrequent expenses that should be excluded from a buyer’s analysis of recurring cash flow.
Clean up your business
In the months or, ideally, years before the sales process (marketing) begins, it is essential to take a long, hard look at all aspects of the business.
In the interests of boosting profitability, consider whether margins can be enhanced. Can non-business expenses be reduced at the expense of long-term relationships? Can expenditure with a longer-term payback, such as an advertising campaign, be deferred?
Non-business surplus assets should be disposed of. Purchasers will not want these, so realise some cash and consider paying a pre-sale dividend.
In addition to the above housekeeping, also ensure that your premises and first impressions stick in their minds.
Organise legal
Review your incorporation papers, permits, patents, intellectual property, licensing agreements, leases, customer and vendor contracts, etcetera. Make sure you have them readily available, current and in order.
Consider management
If you are absolutely critical to your business, who will a buyer be able to turn to for help running the business after you leave? You should have a succession plan in place prior to going to market. The better a business is presented as being self-sufficient and having little to no reliance on you as the exiting owner the better. If a purchaser perceives a business is dependent on the owner for sales or supplies, they will reduce the price. This is what’s called personal goodwill and needs to be removed.
Timing is king
The time to sell your business is when the future of your business looks brightest, not when you have reached a peak or entered a down cycle.
Purchasers place more value on future potential than on past performance. Buyers want a return on their investment; they are buying future income, not historical profits.
Also, consider sales seasonality. Many businesses are affected by cycles (for example, retailers and Christmas) so ensure that you time your business sale when turnover is trending upwards.
Identify potential purchasers
If you want cash from the deal, this may rule out buyers below a certain size. If you are looking for a friendly purchaser who will safeguard future employment of staff and management, there is little point in talking to asset-strippers (those who buy a business, break it up into smaller pieces and then sell off the pieces).
You should put together a list of possible buyers – you may hold information about prospective trade-buyers, but do not rule out prospective new entrants to the sector. Consideration should be given to key employees or even competitors.
Non-executive directors or professional advisors should have the ability to identify non-trade buyers who may be prepared to pay a premium to enter your market.
Keep your target list to manageable proportions – if you have to advertise, time drags on and you end up sending the wrong signals to the industry as well as dealing with time wasters.
Prepare a sale memorandum
A sale memorandum is often the only piece of information available to the purchaser and it is the deciding one. It is intended to be a selling document and should, therefore show the full potential of the business, its strengths, weaknesses and the risks associated with it. Don’t try to hide or avoid risks discuss them and how they are mitigated.
Its purpose is to bring a purchaser to the negotiating table. It should be truthful and its contents capable of verification. Stress good points, but don’t overlook the bad. Put disclaimers on the document, but bear in mind that the due diligence process will determine if you are trying to conceal something.
You will be aware of the skeletons in your closet and should decide at the outset how and when these will be disclosed. It is easy to lose a potential purchaser – do not lose their trust by hiding things that the due diligence process will flesh out.
Buyers don’t want your business – they want a business they can make their own. That is why, as one of your first steps in preparation for the sale, you attempt to identify your ideal successor.
Buyers are chasing the opportunity to make your business better and, in the process, make it their business to provide them with a financial return. Capitalising on opportunities is a buyer’s primary motivation, therefore, the sales memorandum must clearly highlight future opportunities.
Presentation is extremely important. Product literature, charts and tables are much more relevant than pages and pages of management accounts.
Most importantly, keep your eye on the ball – don’t let your business performance decline because you are too focused on the sale of your business. Engage trusted professional advisors, like Advivo, who will assist with the entire process.
