Prepare to Sell a Business

Want the Best price?  Do this.   

To get the best price for your business, you’ve got to prepare your business for sale.   And to help you do that, I have put together this together. It captures some of what I’ve learned from successfully selling businesses right across New Zealand.

Good preparation leads to a significantly improved outcome, a higher price, shorter time on the market, and fewer post-transaction requirements.   The best time to sell your business is just before its peak. Your business will look far more attractive to a buyer while it’s still showing signs of growth.

There are some things you can do to make your business more attractive, to stand out from the rest and give you a better chance of getting top dollar at sale time.

Growth and Profitability

Generally, buyers will ask for 3 to 5 years of financial statements as part of their due diligence. Buyers like to see year-on-year growth, with consistent or growing margins.   The reality is that most buyers will require some form of finance to purchase your business.  They will look to use bank or other lending as this makes the process of purchasing more efficient for them. 

Accounts showing little profit are great from a tax point of view but not good when it comes to determining the value of the business you’ve built. The valuation a buyer places on your business will be based on your financial statements.  Therefore, it makes sense leading up to a sale to focus on growth and profitability.   

Make it Easy for a Buyer

Any steps you can take to simplify your business and better position your company for a buyer will improve its valuation. This might mean changing the structure of the business, solving capacity issues or putting better systems and processes in place.   Think about how to position your business to be as simple as possible for a new owner to take over.

Make Yourself Redundant

A purchaser will want to be assured that the business wont collapse when you walk out the door.   The less dependent your business is on you, the more valuable it will be to a buyer, and the more likely you’ll be able to exit without a lengthy transition. If you currently play a critical role in day-to-day operations, look for ways to hand off some (or all) of your duties prior to selling. This might mean transitioning customer relationships to others or giving more responsibility to your management team. If you build a structure that allows the business to run independently, it will be a significantly more attractive acquisition.  

Predictable Revenue and Profits

Perhaps the most important determinant of value is the extent to which a buyer can predict revenue (and profit) post-transaction. In other words, future maintainable earnings.  Businesses with lumpy sales, whether project-based, seasonal or otherwise, tend to be discounted.  Businesses with highly predictable revenue will command a higher valuation multiple. 

Track your sales in detail by product, service and sale method (repeat sales, advertisements, promotions etc).  Know your market-place; take copies of published articles about your industry, products and competitors.  Understand your outgoings and be ready to explain changes in sales, GP or one-off expenses. 

Keep Straightforward, Accurate Financials

One of the first steps a buyer will take is to review 3-5 years of profit and loss, cash flow, and balance sheet statements. It is important that you have these statements available, and that they provide a true picture of your business’ financial state. In the period leading up to a sale, businesses should make sure they are keeping up with the basics, including regular stock takes, reconciling bank statements, and properly accruing expenses.

While audited financials are not necessary (and are rare for small businesses), buyers look favourably upon those prepared by an external accountant.   While most business owners look to expense everything possible to keep profit and taxes at a minimum, a lower profit on your books will translate to a lower business value at sale time.

Be prepared to recast your financial statements to reflect adjustments for what you take out of the business in terms of salary, health, car (Boat?) expenses, travel etc.  Accounts showing little profit are great from a tax point of view but not good when it comes to determining the value of the business you’ve built.  You will want to show purchasers your business in the most favourable, and profitable light possible. 

Address Risk Areas

Some risk areas for a buyer include customer or supplier concentration, pending legal issues, old equipment, insufficient IP protection, or a lease without an option to renew.  Address any stumbling blocks with the documentation including non-assignable leases, contracts, licences, supplier agreements or key staff issues, and plan a strategy to explain the effect on the business. 

Systems and Procedures: 

A buyer is unlikely to buy your business if they think that you, as the owner, are smarter than they are.  They will want the business to be smart.  This smart business is usually seen in the form of systems, procedures, manuals etc.  Ensure that your operations manual details the current daily operation of the business and be able to demonstrate that your staff handle the day to day tasks because of their training and the information contained in those operations manual.  Make sure all  your systems are documented and linked to procedures etc. 

Assets or Stock

Too many non-performing assets can make a business difficult to sell.  Businesses with excess stock or assets should sell off the excess now.  This will make the business more attractive and remove the inevitable arguments about deferred maintenance and outdated or aged stock. 

Compile a full list of current assets and inventory that the business needs to function. This includes a depreciation schedule to determine the age and value of current assets, aged stock report and lists of stock on order.

Business Potential

Business owners are optimistic.  Were they not they probably wouldnt have gone into business in the first place.  Optimism leads to inflated expectations.  This is obvious when a seller expects a buyer to pay for potential earnings.   If an owner wants to be paid for the potential in their business, they need to trade the business to realise that potential and show the results in the financial statements.  In most cases both buyer and seller will benefit from the increased earnings.  The seller gets a higher value for their business while the buyer has greater financial strength to attract financing and further grow the business.

Business Plan. 

Dig out your business plan and refine it into a professionally presented document.  Properly research areas that have proven problematic in the past so you can present buyers with ready-made plans for addressing them. If you haven’t got a business plan, don’t shy away from the task of making one. It helps buyers to answer questions and to identify potential opportunities for a new owner. 

Legal Documentation

Are all leases, employment agreements, supplier agreements current, secure, transferable up to date and available?   Check expiry dates and ensure all documentation is current, and not nearing expiry.  Check that the supplier agreements and software agreements are able to be transferred and document the process for the transfer.  Check that all legal documents are signed, completed and any addendums, renewals or updates are included with the originals.

To ensure you are well prepared for sale, put yourself in the shoes of a buyer.  Understand what they will be looking for in any due diligence investigation and make sure your business stacks up.