Whatever your reason for putting it on the market, selling your business require some care planning if you want to avoid problems.
Your remote preparation
Since potential buyers will want to see at least three years of your financial records as they perform their due diligence, make sure that all of your accounts are in order. They should cover only the income and expenses of your business, and be consistent in their format and presentation.
This is also the time to ensure that your supplier and customer agreements have been formalised and kept up to date and that the business can operate smoothly under new ownership.
As part of the due diligence process, buyers can normalise your earnings to focus on what they feel are abnormal income and expenditures, incorrectly accounted for items or one-offs.
Adjustments may include one-off legal expenses, employee leave, inaccurate expense capitalisation, high debt write-offs or other inadequate provisions.
Dealing with your employees
Note that formal contracts with key employees should already be in place and determine how they will react when they learn that the business is on the market. In addition, you may have to create an incentive package to encourage them not to leave the business when it is sold.
You should also have established essential systems and structures that will foster a smooth transition when the business is sold, including the following steps:
All of your policies should be clearly documented.
You should have an operations manual as well.
If you decide to sell your business, make it a point to obtain the tax advice you need to ensure that there are no obstacles that will delay the sale when you are ready to close the deal, and to minimise your tax burden as well.
Determining what your business is worth
Your asking price may be based on economic conditions and conditions in your industry when you decide to sell. If the commercial environment is competitive and multiple potential buyers are interested in your business, you may be more successful than you would in an unavoidable quick sale due to illness.
The valuation multiple that applies here is related to the time value of funds, the amount of risk entailed and the growth of the business, and a riskier business will acquire a lower multiple.
The opposite can generally be said for a company with some certainty related to future earnings and favourable growth potential.
Clarifying what is for sale
Explain whether you are selling shares in the company or the business itself, and specify the assets and working capital that will be included in the sale. Its value includes all assets including debtors and fixed assets used in the businesses. However the sale price will be adjusted if there are any assets or liabilities that are not included in the sale.
What you decide to sell may be based on tax considerations, and the buyer may be mainly interested in purchasing the assets.
If you plan on selling the equity the buyer will need to conduct major due diligence and ask you to provide extensive warranties that could represent the total value of your business, or perhaps more, for a lengthy time period.
A buyer will also be concerned about transferring goodwill. Because of this, the seller is often asked to stay with the company for a while when the sale is completed to provide the new owner with their contacts and expertise.
Above all, they will want to discuss major operational issues that include the following:
- accurate financial reporting, correct accounting for provisions, regular stock takes, forecasts and budgets created with the results reported, and
- the provision of detailed customer relationship summaries and contracts indicating how long the customer has dealt with the business, contract expiry date, option for extension and annual sales value.
Finally, if potential buyers have access to a business plan and marketing plan, they often find those documents to be very useful in determining how the business could evolve and what the goals of the management team are.
Author: Andy White
Andy White holds a Masters of Business Management and after a career as an Officer in the Australian Army, worked as a Business Consultant and now operates his own successful Real Estate business on the Queensland coast.