ANSWERS TO KEY QUESTIONS
How do you know if your business is ready for sale?
Selling a business requires a lot of preparation, and it will never be possible to maximize the exit value of your business unless you have taken steps to prepare your business for sale well in advance.
Planning for the sale of your company may seem daunting. Perhaps you’re not sure where to begin or how to get started. But to make the process as easy and profitable as possible, you’ll want to start planning early. Ideally, preparations for selling a business should get underway at least two to three years before going to market. This is because many of the initiatives involved will take time to implement. So, what are the critical success factors that should be addressed in the years leading up to the sale? Here is a primer on pre-sale considerations.
You want your business to stand out, so unique sale arguments should be developed during preparation. Most buyers are more interested in a company’s competitive advantage and intangible value than its physical assets or balance sheet, especially if it is in the service sector. Buyers are typically interested in the unique attributes of your product or service offerings, your customer base and the strength of your management team. You should therefore focus on the following points to make your business more attractive before putting it on the market:
- Promote the business name and its brands. In many cases, awareness of your business can be raised by advertising in trade magazines, newspapers and other public information channels.
- Foster customer loyalty and diversification. Demonstrating a loyal and diversified customer base increases the chance of a high-value sale.
- Make sure a strong and committed management team is in place.
- It is also important to demonstrate that the business is not dependent on a handful of key employees, and that a strong successor has been identified for each key management position.
You want to make a good first impression on potential buyers. So, to prepare your business for sale, you need to think about what gives it an edge and strengthen this drawcard. Buyers want more than just a good growth story; they also want to know what is special about your particular business and what makes it unique.
Building a well-oiled machine
Part of attracting buyers is also about showing you have built an efficient and well-run operation. As an owner you should ideally strive to hand over a well-oiled machine that enables a buyer to readily integrate the business into their existing operations. Some initiatives that may be worth undertaking are the following:
- Providing transparent annual financial statements and financial information.
- Separation of the business into parts which are for sale and those which are not.
- Reviewing product/service offerings. If there are certain product lines that are unprofitable, it may be best to eliminate them.
- Ensuring that facilities are clean and presentable.
- Installing state-of-the-art IT systems based on industry-specific standard solutions.
- Revising inventories. Removing those which are slow-moving or obsolete.
- Ensuring that ongoing research and development initiatives are well-documented, including costs and benefits associated with planned developments.
- Disclosure of and solutions for possible skeletons in the closet, such as current or imminent court proceedings, or outstanding taxes.
- Ensuring that the website provides an attractive (but realistic) image of the business. The website is one of the first things a potential buyer will look at, and it will influence their initial perceived value of the business and overall level of interest.
It’s equally important to make sure that the administrative matters of your business are in order prior to soliciting buyers. This includes up-to-date books and corporate records, lease contracts, policy manuals, customer and supplier agreements, employment contracts, government filings, banking agreements and similar types of documentation.
Dotting all yours i’s and crossing your t’s, to show that all administrative documents are complete and available, will speed up the sales process and testify that you have a well-organized business to hand over.
Making your financial statements look good
Buyers like to see revenue and profit growth in the years leading up to the sale, so it’s a good idea to consider what you can do to increase revenue. Revenue growth might be accomplished by accelerating the sale of products and services to customers, and putting short-term sale initiatives into place. However, accounting standards governing revenue recognition must also be considered.
If expenses in the years leading up to the sale are carefully controlled, this can impact positively on profitability. But it’s important to be aware that most buyers will be on the lookout for reductions in operating expenditures that are required to support the long-term viability and growth of the business. For example, in the years leading up to the sale, business owners sometimes reduce costs that may not offer an immediate payback, such as advertising, R&D and equipment maintenance. When a buyer discovers that expenses such as these have been artificially reduced, they usually lower the purchase price accordingly.
This impairs your negotiation position, especially in cases where a high correlation with long-term operational performance can be shown. Therefore, you don’t want to make any cuts that could jeopardize the long-term viability of the business.
A clean sheet
Buyers also like to see a clean balance sheet, so consider removing any redundant assets. Redundant assets are those not required in the ongoing operations of the business, such as marketable securities or vacant land. Potential buyers are not usually willing to acquire non-operational activities and assets or to pay a reasonable price for them.
And finally, make sure you are aware of the under-accrued liabilities in your business, such as employee vacation pay, pension obligations and post-retirement benefits. Buyers will closely scrutinize all liabilities that will be assumed at the closing date, meaning any unidentified liabilities can have a negative impact on the purchase price.
This is just an overview of some of the main steps that are involved with preparing a business for sale. To get a better understanding of what the process entails, it’s a good idea to seek advice from an M&A expert. Having a clear idea of what buyers are looking for will help ensure your business is in the best position possible, which will ultimately strengthen the value of your company.
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Articles in this this six-part series on ‘Answering key questions when selling a business’
4. How do you know if your business is ready for sale?