Is your business ready for sale?
Planning for Sale
So, you’ve run your business for a number of years, got through the initial phase of “what am I doing?” and, eventually – after no doubt many years of uncertainty and second-guessing your decisions and many sleepless nights – done well enough to support your family over the journey.
Hopefully you have earned a good income, and managed to have a better work/life balance – after all, isn’t that why you started working for yourself? You may have now reached a stage where you want to step away from it all and try something new, or retire and eventually take the family on that long overdue overseas holiday.
So, you put your business up for sale! Surely someone out there has the vision and drive to jump into what you’ve created and pay you enough to comfortably retire? But the question arises; is your business ready to be sold, and are you sale ready?
Are you sale ready?
Ensuring that your business is sale ready before putting your business up for sale is critical. Having your business sale-ready will increase your chances of achieving an outcome that meets your objectives and ensures that you achieve a good return on your investment. After all, if you’ve worked so hard for so long, you don’t want to have to accept a sale price lower than what you need because your business wasn’t sale ready. With more and more businesses coming into the market, being sale-ready is more important than ever.
Our experience is that many business owners initially place a value on their business that is far too high considering how the business is operating. Sure, having a profitable business is important for achieving a good sale price, but there are many other non-financial factors prospective buyers need to cover off before signing the sale agreement.
What can you do to make sure your business is sale ready?
Businesses that are well managed, have clearly documented and managed systems and processes and are profitable, will always be sought after, and buyers are likely to pay a higher price for businesses like this.
To ensure that your business is “sale ready”, check that the following is in order:
- Business documentation – have you got your legislative requirements up to date (income tax, BAS, Workcover, payroll tax, industry reporting etc.), and readily available
- Processes are clearly documented – do you have a set of easy to follow processes across the different aspects of your business. Use the “hit by a bus” principle – if you were to walk out and get hit by a bus at lunchtime, could someone pick up your process manuals and follow them well enough to ensure your business continues to operate without you. This reduces the reliance on the principal owner’s knowledge.
- Systems are capable of providing quality information – have you ensured you’re using up to date and relevant systems that someone can easily takeover without having to significant investment time and resources in to get information out of?
- Technology and software current and in good working order – again, are you using the most recent software, or are you using something that’s 20 years old that will need immediate updating under a new owner?
- Staff employment agreements are current – have employment contracts been prepared and executed adequately, or do they need updating to reflect changes in salary or position descriptions for example?
- WIP & debtor recovery is strong – if applicable, prospective buyers don’t want to invest in something that has inadequate WIP and debtor turnarounds. Do you have a documented policy for ensuring WIP and debtor days are managed as tightly as possible to ensure cash flows back to you as quickly as possible after the work is commenced?
- Financial performance is strong and has an improving trend – are you able to show a period of sustained growth, and are you meeting key benchmarks against others in your industry?
- Budget to actual performance is documented and actively managed – have you set and actively managed budgets periodically throughout the years? Would a prospective buyer be able to look at your performance today and determine how well you’ve tracked against your budgets
- Arrangements with business partners – have you got documented service agreements or contractual arrangements in place? Do you have key contact information available, and have you maintained an up to date Customer Relationship Management (CRM) system?
- Service providers etc. are documented and up to date – are your current arrangements with 3rd party providers (e.g. IT, payroll, consulting, legal, bookkeeping etc.) current and able to be produced if required?
- Your business plan and is well documented and being implemented – are you able to pull out your business plan and walk through it with a prospective buyer? Is it up to date, has it been updated to reflect any changes in the direction your business may have taken over time?
One of the key considerations when assessing the readiness of your business for sale is the business’s level of principal reliance. If your business is principal reliant, i.e. it is heavily reliant on you as the business owner, it may be difficult to find someone willing to take over your business. The ability to transfer intellectual knowledge from you to a prospective buyer in a small amount of time is not attractive.
You will need to reduce the dependence of your business on the principal and any other key staff who will be leaving the business at the time of sale.
In order to rectify this situation, it is important to start planning for the sale of your business years in advance. You may decide that an internal transition of ownership is your best exit option. Do you have a future successor in your business? A key staff member is often the best person to consider as a possible successor as you can start transitioning client management and other responsibilities a lot earlier than if you were selling to an external successor. If this is not going to be the case, transferring as much knowledge from yourself onto paper through adequate documentation is vitally important.
Another key consideration is ensuring you have strong relationships with your clients, suppliers and business partners. This will lower the risks in your business and make it more attractive to a future purchaser. It is far more attractive for a prospective buyer to know that the clients, suppliers, and business partners are long-term supporters of the business that are likely to continue dealing with the business under new ownership.
Key Value Drivers
There are numerous key value drivers you should focus on to optimise the value of your business and ensure that you get the most money for your business when it comes time to sell. In addition to the value drivers already discussed, some of the other key value drivers are:
- Loyal customers – a long-standing, loyal customer base is extremely valuable
- Innovative and different – a business that stands apart from its competitors rather than blending in with everyone else is more appetizing to a prospective buyer
- Benchmarking performance – a business that outperforms its competitors is far more valuable
- Good systems
- Loyal & committed staff – a solid staff base with low turnover shows the business is a good place to work and the staff are good at what they do
- Growth and succession planning – if you have a plan for growth, a prospective buyer will be able to see an upside to their initial investment
Steps in planning for sale
The following is a guide as to what you need to do before putting your business on the market or approaching potential successors.
- Prepare a Selling Memorandum – includes unique selling points
- Prepare a Register for Sale – documentation to be given to potential buyers.
- Obtain a business valuation – find out whether the value you have indicated is more than, equal to, or less than a professional valuation.
- Discuss your proposed sale with your professional advisers – engaging professionals early in the process is much better than trying to rush something through and potentially missing something, or getting something wrong.
- Obtain tax advice prior to sale – depending on your business structure will determine the tax outcome for you personally. Are there any potential small business tax concessions available to you, which you may be able to take advantage of?
- Determine the sale price – consider all other businesses similar to yours currently for sale and how your business compared with theirs, consider what is the lowest price you are willing to sell for, and set your price around all the advice you have been provided with.
A helpful tool for checking that your documentation is in order is to complete a “Planning for Sale Checklist”. This is a step by step guide in preparing the information you will need to show prospective purchasers and is a good way of double-checking that your house is in order.
Thnk Advisory can assist you in the process of getting your business ready for sale. Please contact us if you would like to discuss the process of getting your business ready for sale, and where we might be able to assist you in this process.