Preparing your business for sale: There’s no time like the present!
It has been widely publicised that a significant number of businesses may swamp the market in the coming years as baby-boomers look to sell their businesses. This increased supply is likely to make selling your business more difficult than it may have been in the past.
Perhaps more than ever before it will be important that businesses are well presented for sale.
The following are four practical suggestions to enable you to start preparing your business for sale in today’s environment. Prepare a formal succession plan - before you can determine what sort of preparation or ‘grooming’ your business requires it is important to clearly establish your succession plan and exit strategy. If your succession plan involves a progressive sell-down to key employees then an important consideration might be to establish a strong shareholders agreement. By contrast, if
your exit plan involves a complete sale then a shareholders agreement may be unnecessary.
A formal succession planning document should include:
- your goals and objectives
- intended exit strategy (include a ‘Plan B’)
- indicative timeframes – this will enable you to tailor and plan your sale preparation initiatives accordingly
- Obtain a valuation - a valuation of your business at this stage might seem premature, however, a formal business valuation prepared by a crediblevaluer will likely form a key part of your succession plan. Amongst other things, a business valuation will:
- enable you to assess whether your lifestyle goals and objectives will be met by the sale of your business, and:
- identify the key drivers of value in your
- business which will provide an important
- focus for your business grooming initiatives and identify areas where you can improve value.
Business valuation is a specialist area. It is important to ensure that the valuer you choose has the appropriate expertise and experience. Document key business processes - any potential purchaser will consider the ongoing assistance they are likely to require from you as vendor to operate the business going forward.
Well documented business processes will minimise the required ‘handover period’ and will
also maximise the conversion of ‘personal goodwill’ to ‘business goodwill’. As a bonus, well
documented business processes will also aid the induction and training of new employees.Clean up the financials - one of the most important sets of documents upon which a potential purchaser will base their decision is your business’s financial statements. Not only might these determine whether or not a sale
takes place at all, but they will also have a significant bearing on the value you are likely to realise. It is essential therefore to ensure that your business’s financial statements are as
‘clean’ as possible, which will include:
- ensuring any personal expenditure is not included within the Company’s accounts
- paying ‘fair market’ salaries to shareholders and family members, and
- paying ‘fair market’ rents for premises owned by associated persons.
The process of preparing a business for sale is unfortunately something most business owners do not consider until it is far too late. By the time your business is placed for sale there are a limited number options for improving its value. By contrast, good planning and preparation now will ensure you extract maximum value when you decide it is time to exit.
Author - C 2009 University of Waikato