Thinking of selling your business? Preparation is the key to success.
Having built a successful business you may seek to realize your investment with an exit route. It might be via an outright sale, a management buyout or merger. It could involve your retirement or allow for new investment to take it to the next level.
Whatever reason, a key driver to obtain the best price is to start thinking well in advance. As with most things in life - the quality of preparations will determine the quality of results. Typical lead times are between 3 to 5 years prior to sale completion.
Preparation involves many factors - not just financial - that are often overlooked but these will be obvious to prospective buyers.
It is not just about window-dressing the financial statements and having a quick tidy up around the premises. Attempts to present such a façade stick out like sore thumb. A sale will be lost if your integrity is in doubt.
It is about making sure your business is underpinned by good basic business fundamentals. This is very attractive to prospective buyers and encourages them to pay best price.
To prepare your business for sale there are four key areas:
- Your business must demonstrate solid financial performance
- The business should not be reliant on your personal day-to-day involvement
- Physical assets should be in good order and intellectual property protected
- Uncertainties and risks faced by the business should reduced
How can Vale & West help?
Preparing a business for sale involves a range of issues - financial, tax, legal, property etc. – and without specialist help the task is daunting. To get the best price for your business it is essential you select a good team of advisers well in advance of your planned exit. Retaining competent, professional advisers is a critical step in the process. Vale & West can assist you with the financial and taxation aspects and also work closely with other professional advisers – for a free consultation please contact Jason Pyke.
Financial performance
Historic financial data is usually the first information to be disclosed and whilst this alone will not determine full underlying opportunity to a prospective buyer it is essential that your business looks like a financially attractive proposition.
Your business must have financial records that are in good order. Good financial records indicate your business has control of accounting and financial matters. The frequency of management accounts should be at least quarterly. The management accounts should comprise not just a profit and loss account and balance sheet but include cash flow information and key performance indicators. The preparation of budgets and forecast will also help increase prospective buyers confidence.
The basis by which some owner managers draw from profit their businesses can mask the business value. In such cases it may be necessary to prepare financial statements that set out with clarity the underlying profitability to substantiate business value.
Stock management can be a key factor for improving the financial performance of a business. A high stock holding and retention of slow moving stocks will lock up working capital that could be better employed elsewhere in the business. Prospective purchasers will look for an optimal level of stock and seek to reduce the valuation for stock if considered to be unsellable.
A broad review should be carried out to identify areas in which to improve the balance sheet asset position and profits. For example, tighter credit control policies, re-negotiation of supplier contracts, outsourcing certain operations, review of discretionary expenditure etc. However, care should be taken to ensure that any changes are for the long-term benefit and will not compromise the operational effectiveness of the business.
The financial records will be subject to intense scrutiny and it is important to have them based on realistic bases. Unrealistic provisions and valuations, unusual accounting policies, optimistic forecasts, under or over market rate transactions etc. may be picked up during the sale process and will erode credibility with the prospective purchaser.
Business management and systems
A key concern for a prospective purchaser of an owner-managed business is whether the business can operate on a day-to-day basis in the absence of the owner.
It is essential that business operations be streamlined so they will continue to run smoothly without your involvement on a day-to-day basis. This means developing and recording operational procedures and systems and training employees to allow for a high degree of delegation. The systems and procedures do not need to be sophisticated but must be effective and communicated to your key employees. As your business operations are streamlined delegation will become less of a problem, as each employee will have clearly defined role, there will be a clear line management and the procedures will lead to desired outcomes. A prospective buyer will see how they may fit in to the business operation.
In addition to the day-to-day operations the business should document its strategy in business plan and incorporate with this organizational charts, forecasts etc. Again, this will inspire confidence in the prospective purchaser and indicate where they may fit in to business.
Intellectual property and other fixed assets
You should identify and value the intangible assets or intellectual property rights of the business. These assets can be proprietary products or services, business name, distribution network, technical knowhow etc. These items can account for a lot of goodwill with customers and market share and you should take steps to protect the ownership, as they will improve value to a prospective buyer.
The most important intangible assets are proprietary products and services. These may be protected with patents, trademarks and copyright. A prospect buyer will gain confidence in a business that has protected its intangibles as it demonstrates good management and supports valuation.
As with selling anything the first impression a prospective buyer has of a business will count. There are a number of practical steps you can take to help create a good first impression - some are simple and inexpensive but perhaps overlooked because of years of familiarity. The starting point is to stand back and look at the business through the eyes of a prospect.
Housekeeping is a good place to start. If the general appearance is worn, untidy and shabby then tidy them up and redecorate.
Many business owners bleed assets to maximize return but to a prospect buyer worn out plant and machinery indicates a lack of reinvestment and may reduce the valuation. The adoption of a rolling asset replacement plan will ensure that plant and machinery is kept up-to-date and minimizes the impact on cash flow.
Reduce business risk
A prospective buyer will identify and focus on any inherent risks associated with your business. The prospective buyer will not only consider the immediate commercial risks faced on day-to-day basis but will look at other risks that may occur in the future that could be costly and cause trouble. The due diligence process may answer the buyers concerns but could reduce their confidence and the valuation of your business. You should seek to put in place safeguards to reduce the general business risk.
Informal arrangements with customers, suppliers, landlords etc. should be turned into formal agreements. Handshake agreements will be uncertain to a prospective buyer and they will be concerned that they will not endure a change of ownership.
A prospective buyer will consider a business risky if it relies on a few large customers or a limited number of suppliers. You should seek reduce dependency on too few customers or suppliers.
The most valuable asset of any organization is its people. You should secure the management team with service contracts to ensure business continuity and that key people are willing to stay on after the sale.
All problem areas of the business should be reviewed and cleaned up. Problem areas may include ongoing legal disputes, final salary pension scheme liabilities etc. If problem areas cannot be resolved you should adopt clear management policies for these issues to help a prospective buyer assess the implications to the business.
To find out more, please contact Jason Pyke.
