Preparing your Business for Sale
Are you thinking of selling your business now or in the near future. If so, preparation and planning are essential to a smooth transaction and achieving the highest possible sale price. Generally, the further in advance you are able to start planning, the better. Unfortunately, life is not always predictable and sellers can sometimes be in a position where a quick sale is required. This can limit the preparation and planning time available.
Let us now look at some of the planning and preparation that can be done in the short and longer term:
Short Term Planning
Presentation: First impressions count. If a prospect visits your business for the first time and finds a well presented, well organised operation, they are likely to feel positive about it from the outset. This is likely to increase their likelihood of proceeding further with the transaction. On the other hand, a buyer who finds an untidy, run down operation may immediately be put off and may not wish to evaluate the business any further.
Some things you can do to improve presentation include:
- Ensure that all signage is fresh, or at the very least, clean.
- A lick of paint will help to make the premises look cared for and appealing.
- Get rid of any garbage lying around the premises. Ensure that floors are swept and windows etc are clean.
- Remove personal items from the business premises (e.g. boats, personal gym equipment, household furniture etc.)
- Remember, the potential buyer is looking at their future workplace. The better is looks, the more they are likely to be able to imagine themselves working in it.
- BAS statements
- Tax returns
- Employee wages reports
- Accounts receivable reports
- Accounts payable reports
- Customer orders
Having the information readily available will make the business seem organised.
and will also help the prospects feel that nothing is being hidden. They will possibly be making the biggest investment of their lifetime and will want to be confident that the information provided is accurate.
Stock: Prior to putting your business on the market, it is a good idea to clear out any slow moving or dead stock. Having a sale could be one way to clear out this older stock. This could also be a good way to bring in a bit of cash. If stock is covered in dust, this could be a hint that it is passed its use by date.
If you are able to have only current, saleable stock on hand, it will help to make the business appear well run.
Employees: Do you or do you not tell employees that the business is for sale? Not all business brokers agree on what the answer is to this question. In smaller businesses, the owner often has very personal relationships with employees. They are almost like family. In that instance the owner often tells employees that they are planning to sell the business. Occasionally an employee may actually be interested in buying the business.
To help you make up your own mind about whether or not to tell your employees, here are some pros and cons of telling employees that the business is for sale:
- Employees could work with you in the sale of the business
- There will be no unexpected reactions from employees when they are advised that the business has been sold
- One of the employees may be interested in buying the business
- Uncertainty about their future may make employees unmotivated, particularly if the sale process drags on
- Employees could start looking for jobs with competitors
- Employees may leak the sale to suppliers and competitors.
- Employees may leak the sale to customers
The best approach will depend on the employees and business that is about to be offered for sale.
Some sellers prefer to keep the sale process confidential until such time as an offer has been accepted. In that way employees are given some notice of the change of ownership, but are not left in limbo throughout the sale process.
Medium to Long Term Planning
Appraisal: Have an appraisal or valuation done on your business. It is amazing how many business owners have absolutely no idea how much their enterprise is worth, even though it may be the largest asset they own. If the value is not what you expect, you can perhaps work at improving the business and its likely selling price. It is better to know the likely selling price long before you put the business on the market.
Making the Business Less Reliant on You Personally: In many cases, the owner of a business is the business. Customers may be dealing with the business only because they like the owner. In some instances, the seller is the only person with the skills and knowledge to actually run the business.
Buyers may be uncomfortable with a business that is overly reliant on the owner. If you can make your business less dependent on you, its saleability and value are likely to improve. Some ideas for reducing reliance on yourself include:
- Write up a procedure for each activity within the business (e.g. how to operate a particular piece of machinery, how to answer the phone, how to take an order etc.).
- Document the systems in the business. For example the system for processing a customer’s order may be; receive order, enter the order into your software, product a production docket, manufacture the item, package the item, produce a delivery docket and invoice, call up a courier, send the package and invoice to the customer. Franchise operators are often very good at documenting systems and procedures. This enables them to place someone into a new franchise who has no industry experience.
- Train other staff members to perform key business functions.
- Allow customers to deal with various people within your business. In this way, when you leave, customers are likely to still want to deal with the business.
- Allow capable staff members to take on more responsibilities.
Plant and Equipment: Many business owners keep a significant amount of old equipment that they no longer use. A new owner is unlikely to want to pay for equipment that is not useful. With this in mind, it is a good idea to try and sell off this older equipment before placing the business on the market. A benefit of doing this is that prospective buyers will see a more modern looking business with equipment that works. Having removed redundant equipment, it is likely that workflow will be improved and your business will look less cluttered.
Equipment Leases: You should consider the timing of taking on new equipment leases when preparing your business for sale. Usually all equipment needs to be paid out prior to settlement. As such, you may want to avoid having to pay out large, expensive leases.
In printing businesses, digital equipment tends to be handled a little differently. Most printers will lease digital equipment and will upgrade each time a lease expires. Purchasers may be willing to take over such leases.
That said, not every buyer will want to take over expensive leases. This is particularly the case when two businesses are merging together. The buyer may already have similar equipment and may not want to double up.
After considering the above, one important point to bear in mind is that you should always think about the business first when deciding whether or not to take on new leases. The business may take some time to sell and you need to ensure that you are able to continue trading strongly and profitably until the business is sold.
Premises Lease: For businesses that are location dependent, e.g. a retail shop, having a good lease in place is critical. To ensure that the purchaser is able to hold onto local walk in trade, the buyer is likely to insist on a secure lease.
The situation can be quite different for businesses that are not location dependent. Take for example a factory based business. An industry buyer may want to merge the business into theirs. In this case, the buyer will probably not want to take over the seller’s premises lease.
With a merger like this, a long lease would not be ideal. The seller may be stuck with a large lease payment liability. The existence of a long lease may make the business sale uneconomical.
Sales and Profitability: Businesses with a history of increasing sales and profitability are obviously more appealing to buyers that those with declining sales and profitability. With this in mind, it is a good idea to develop and implement a progressive sales and marketing plan in the years leading up to the business sale. In this period, you should also be also be careful about controlling costs to ensure that profitability is also on the rise as the desired sale date approaches.
Professional Advice: Speak to your accountant and solicitor about the proposed sale. They can advise you on tax and other implications of the business sale.