Preparing your business for sale
Whether you are seeking an exit from your business in the short, medium or long term, it is always beneficial to bare in mind how any potential acquirers will perceive your business. In order to attain the highest value it is important to get the company in the best possible shape. In doing so, business owners should endeavor to eliminate any potential issues which may arise come the due diligence process.
A decision must be made regarding the most appropriate deal structure for the owners, with both current and future objectives in mind. This consideration should begin with any tax implications.
These can vary depending on a variety of different factors relating to length of ownership, business type and the structure of the deal. Thorough planning with a tax advisor will possibly enable substantially reduced tax costs following completion of sale. Be sure to consider personal and family tax positions along with that of your business.
After this you will need to begin gathering the following documents:
- HMRC Tax returns for the business
- Three years’ profit and loss statements
- The lease and lease related documents
- Comprehensive list of fixtures and equipment
- A list of loans against the business (amounts and payment schedule)
- A copy of any franchise agreement, if applicable
- Copies of equipment leases
- An approximate amount of the inventory on hand, if applicable
- The names of any external advisors
When preparing for the sale of your business, one of the most important things to do is place yourself in the position of the acquirer. If you were acquiring the business what information would you want to see in order to make the appropriate decisions?
First of all, gather all of the necessary financial statements. It is hugely important that these statements are as up-to-date and accurate as possible. If you are currently halfway through a financial year be sure to gather last year’s full statements in addition to the business’ year-to-date figures.
When it comes to presenting your business’ finances it will generally pay to employ a professional to ensure they are as attractive as possible. Ensuring your business is well presented on paper is the first step towards attracting the right type of acquirer. Having a budget for the coming year will also aid the acquirer’s decision.
Some of the most important factors to consider in order to get your business in the best possible position to ensure a successful sale are detailed below:
- Resolve shareholder issues – before you take your business to market it is imperative that any issues relating to the ownership are resolved. In order to attain a successful sale it is imperative that all shareholders have a common goal in place. If this is not the case, the negotiation process will likely become cloudy and lack focus.
- Make sure there are no skeletons in the closet – when it comes to selling a business, one thing is certain: every aspect of your business will come under intense scrutiny. For this reason, it is impossible to hide anything relating to your business that you may not want a prospective acquirer to discover. With this in mind it is best course of action is to identify any potential issues and endeavor to resolve them.
- Maximise up-front cash and generate a competitive atmosphere to create leverage – it goes without saying that, in general, the best deals will usually involve a high percentage of up-front cash. This type of deal shows a greater degree of confidence from the acquirer. In order to achieve the best deals, a high level of competitiveness surrounding the opportunity is absolutely necessary.
- Ensure all processes and records are in good shape – prospective acquirers will always seek out opportunities which require the least amount of reconditioning.
- Appoint specialists to manage the sale of the business – many owners believe that they are best positioned to manage the sale of their business, however, they will more often than not lack the essential skills, experiences and capabilities to market the opportunity to the same caliber of prospective acquirer.
What do acquirers want to know?
As mentioned previously, it can help to place yourself in the position of the acquirer. If you were serious about acquiring your business what specific information would you want to know to help with your decision making process? Set out below are some questions that you may be faced with when you come face to face with any prospective acquirer:
- What is the annual increase in turnover?
- How much would the business cost now and going forwards with staged payments?
- Will the exiting owner remain within the business for a consultancy period?
- What does the profit look like in bad times as well as good?
- What makes this business different from its competitors?
- Can you further define the product or service? Bid work? Repeat business?
- What can be done in order to take the business to the next level?
It is important to keep in mind that a primary influence in the majority of acquisitions will be cash flow. For this reason, business owners preparing to sell should first sit down with their accountant and get their financial statements in order, with cash flow being of particularly high importance. Cash flow is not the same thing as profit. The majority of acquirers will study profit and loss statements and tax returns in addition to owner compensation. Acquirers will consider excess compensation to shareholders and employees.
Acquirers will also pay due consideration to sizable, one-off expenses such as investments in systems. They will look closely at non-cash items such as amortisation and depreciation in addition to expenses or owner prerequisites.
Identify and profile your best customers and endeavor to increase the presence of this kind of customer on your order book. Throughout the sale process it may be necessary to re-adjust the business’ sales database with a different profile of custom, particularly if you develop any new products or services.
When you are preparing for the sale you should consider your entire product line in relation to the marketplace. Acquirers will be more attracted to businesses with a strong product or service offering, correctly positioned within the market. Produce a marketing plan which identifies the demands and tastes of your potential consumer base and make sure your product or service offering is aligned appropriately.
It is vitally important to review every facet of your business and be proactive in eliminating the possibility of any negative surprises cropping up. Acquirers like businesses which offer high levels of predictability, so ensure you address any potential problems in advance as it may save a potential deal falling at the final hurdle.
It is important to remember that in order to do justice to the many hours you have put into nurturing and developing your business, it is very much worthwhile devoting a few more to ensure you are in the best position possible to achieve a successful sale.