Well-prepared businesses are more likely to win a higher sale price than those that raise questions in the minds of the buyers.
ASK ANY REAL ESTATE agent how best to prepare a property for sale and their list of ideas will be endless from landscaping the garden and redecorating the bathroom right down to brewing fresh coffee on inspection days.
Preparing your business for sale, however, can be far more complex. Perhaps unsurprisingly few business owners are aware of the steps required to present their business in the most attractive manner to potential purchasers. Ideally the preparation of your business for the market should form part of an overall exit strategy. Many experts recommend planning your exit strategy and preparing your business for sale from as early as the start-up period. For most business owners, however, this is no longer an option. Nonetheless it is important to consider issues that may affect the value of your business as early as possible.
A comprehensive valuation of your business can act as the first step in maximising its value and increasing its chances of reaching its optimum sale price. A valuation can act as a health check for the business highlighting its strengths and exposing its weaknesses.
The valuation process enables the business owner to think objectively, like an investor, and ascertain who is most likely to purchase their business – a crucial factor to preparing the business for sale.
Generally the purchasers of private businesses fall into one of the following categories:
- Investors looking for a business to operate for themselves
- Venture capitalists or private equity firms
- Industry participants, competitors or suppliers; and
- The current management team, with or without third party funding.
Each purchaser will have a different perspective on which qualities are considered attractive. For example, an investor may be attracted to a business with a highly qualified and experienced management team who can assist in running the business following the departure of the vendor.
A competitor who wishes to integrate the business into existing operations, on the other hand, may be interested in creating synergies or acquiring key assets and such as technology, intellectual property or customer lists alone. For this purchaser, the presence of an expensive management team may be disconcerting as they could be faced with the prospect of having to fund a number of redundancies in order to reduce overheads.
By recognising the key characteristics of potential purchasers and the value drivers sought, it will become easier to groom your business towards this market. Generally, however, businesses that attract high sale prices are those with the following characteristics:
- A comprehensive understanding of the market to which they belong, with regular analysis
- Strong protected revenue with sound profit margins
- A strong management team that is not heavily reliant on one or two individuals
- Comprehensive and detailed financial records; and
- Procedures implemented to continually review performance, particularly in comparison to competitors.
Business owners conversant with desired value drivers are better able to identify and highlight them in their business prior to sale. Similarly it is crucial to identify issues, which may challenge the sale of your business or depress the sale price. Business owners who are unprepared for sale often only discover such weaknesses during the purchaser’s due diligence, which will invariably have a negative impact on their position in negotiations.
Each business will have its own unique impediments to sale. The first step in rectifying weaknesses is in their identification; as such a thorough review of the business should be conducted. MJ Accountants & Business Advice can facilitate this process through undertaking preliminary vendor due diligence and conducting an indicative valuation to assist in the identification of any impediments and the implementation of strategies to minimise their impact.
Some impediments to sale (when identified) take little more than common sense to rectify while others may be considerably more challenging. It may come as no surprise therefore, that they will require different amounts of time to address.
While some concerns may be very quickly and easily remedied it is of utmost importance that adequate time is allowed for benefits to be realised and evaluated. Generally, the biggest determinant in achieving a favourable sale price is the business’s bottom line. Having implemented strategies to improve the value of your business it is important to allow at least a year for the improvements to be translated into financial results. One of the biggest and most common mistakes made by business owners is to leave preparation of their business for sale to the last minute.
Business owners spend time and money presenting business products or services for sale; why not give the same care and attention to the business which houses these products or services? A timely and comprehensive analysis of the business should give the owner the necessary tools to prepare the business for sale and increase its value long before the decision is made to sell.
Impediments to Sale
- Gross profit margins are too low:
Businesses with low gross profit margins relative to their industry are considered more vulnerable to change. A thorough analysis of the business is required to identify products or services with low profit margins and steps should be made to reduce the cost of goods or eliminate those products if necessary.
- Static or declining turnover:
When selling a business you are selling the future not the past. Past achievements will be obsolete if the business is not growing. If turnover is declining consider delaying the sale of your business until an upward trend is demonstrable.
- Existence of redundant or non-core assets:
A thorough review of the business’ assets and their operational function is required. Where assets are redundant or do not relate to the core business operations the vendor should consider selling them separately.
- Low market share:
Generally, businesses with a large market share enjoy a higher sale price. The time allocated to preparing the business for sale will determine the success of increasing market share prior to sale.
- Reliance on too few customers:
If discovered too late this weakness can be difficult to rectify. The establishment of a solid customer base should be a long-term objective.
- Reliance on too few products or services:
Businesses whose revenue is derived from a few key products may be vulnerable to a loss in value if it loses its competitive edge in these sectors. Product development, sourcing and innovation should be ai ongoing process throughout the life of the business.
- The business is too diversified:
Where the business operates in a number of different sectors it will be more difficult to attract a purchaser. It may be worthwhile breaking the business into units which can be sold individually.
- Lack of protection of intellectual property:
Where possible, intellectual property should be protected by patents and trademarks etc.
- Lack of written agreements and records:
It is important that all agreements between customers, staff and suppliers are recorded. While many relationships are built in a casual manner, they should be documented as contractual agreements for potential purchasers.
- Lack of statutory compliance:
In areas such as occupational health and safety this can be a big concern for purchasers. By staying up-to-date with the latest legislation it should be fairly simple to ensure that your business complies. If practical, a formal audit may also be an option.
- Obsolete technology:
This may be more of a problem for some businesses than others. If possible, obsolete technology should be updated in order for your business to continue to remain competitive.
- Goodwill is not transferable:
Often in private businesses the goodwill (customer relationships, technical knowledge etc) is tied to the business owner. It is crucial to train key members of staff to ensure that goodwill is not lost when the business is sold.
- Inadequate financial records:
Purchasers are generally wary of businesses with inadequate financial records. Accurate and clear financial records reassure the purchaser that you have nothing to hide. Professional accounting records should be prepared and available for at least three years prior to the sale of the business.