30 May 2019
accountants news

Preparing your business for sale

Important items to consider and act on

Business Sale Preparation

  • Boost profits in the year end sale by not investing in growth
  • Get a respectable accounting firm to audit your financial statements
  • Awards can help communicate value, especially of intangible assets like corporate culture
  • Know who your buyer is
  • Introduce competition to a sale
  • Be wary of earn-outs

Sellers

  • Sellers need to be realistic about price and have a strong valuation method
  • Sellers must be able to show legitimate financial statements
  • Be aware that the due diligence process will show up any issues of concern and it may be better to be upfront about them

Buyers

  • Buyers want a business that shows scope for growth and satisfied customers
  • Buyers are not necessarily concerned by the profitability, size and state of the business
  • Buyers will walk away if there is internal conflict or over reliance on a single founder or director

Busiess Valuation Basics

A simple valuation formula is:

Business Value = Annual Future Maintainable Earnings x Industry Multiple

Two main ways to increase the value of a business:

  • Increase Annual Profits
  • Increase Multiple (by reducing the “risk” in a business, risk that the future cashflows might not happen)

Decide on a value

This is one of the most difficult decisions a business owner can face, with many owners’ expectations being much higher then what a buyer is willing to pay.

Owners need to have a good understanding of the value of their business long before it goes on the market for sale and should have their business valued each year to avoid any disappointment when it comes to selling a business.

Increase the value of the business

The key job for any potential seller in the lead up to selling their business is to increase the value of their business.

Owners need to work to make their business attractive to a buyer by delivering:

  • Increase profits
  • Growth in value
  • Efficient systems; and
  • an effective organisational structure

The best way to increase value is to find the right buyer.

Consider all exit options

Such as:

  • Trade Sale
  • Sell a portion of the business
  • Venture Capital
  • Public Float

Sell before the business gets stale

Selling a business in its peak condition, rather than waiting until its founder gets tired, is crucial to maximising its sale price.

If an owner is tiring of the business but can’t wait to find a buyer, it may be better to hire a manager and step aside

This will make the business more attractive by reducing the business’ reliance on the skills, knowledge or contacts of the founder and instead have a strong management team in place that can move with the business. Businesses are worth more the less the founder is involved.

Get all the stakeholders onside

To make a business easier to sell, ensure all the stakeholders are happy with the sale or their objections can be overcome. For example:

  • Ensure your landlord is happy and that the lease is easily transferable to the buyer.
  • Indentify key employees and consider discussing your sale plans. The last thing a business owner wants is for key employees to walk out of the business while they are trying to sell it.
  • Make sure your key customers will stay with the business once its owner is gone. If you lose an important customer, you could lose the sale.

If you are selling a business that is regulated (e.g. a pub or a taxi business), you will need the consent from the appropriate regulatory authority. They are unlikely to refuse but it will affect your selling time.

Understand the Tax Implications

Knowing how to pay the least tax possible is crucial for the seller because it’s easier to save the tax than it is to negotiate the sale price up by 30% (company tax rate).

And, ensure that, if possible, the seller can take advantage of the small business CGT concessions.

Prepare in advance

For example:

  • Sellers should focus on being transaction ready
  • Get employees to take holdays so there isn’t a big leave loading expense sitting on the balance sheet.
  • Clear out old stock and machinery
  • Get debtors, creditors and tax up to date
  • Unravel and complex operating and ownership structures.
  • Value (in the eyes of the buyer) is driven very simply by the following 3 things (you want to increase the first two and decrease the last):
  1. Casflow
  2. Growth prospects
  3. Risk

Document the business

Owners need to document the business drivers so that buyers can see the potential of the acquisition. For example, buyers should be able to see the conversion rates of leads and what customers are going to buy and when.

It is important to ensure that all contracts are in place, and that you formalise any verbal agreements with key suppliers, landlords and management.

Protect and register intellectual property

Intellectual property is often overlooked in business sale transactions despite being of significant value.

This value pool is often in the heads of very few people within business and the trick is to make those intangible assets as tangible as possible.

It is important for businesses to catalogue what they have registered and unregistered, and to determine who wrote certain documents or procedures – the copyright. And, if needed, IP Assignment Agreements be prepared.

What next

For futher information or advice on the proposed sale of your business, and how our business sale solutions can help secure your future, contact our office today.

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