Preparing a business for sale is a complicated process and needs a plan. Business owners who have not prepared nor understood the hard truths about selling a business, risk damaging the value of their business and wasting years of hard work.
Growing value of an enterprise takes time; anybody wishing to exit, needs to start the planning process well in advance of actually selling. Valuing a business is tricky, but there are a core of 'desirables' that help drive value including profitability, growth opportunities, the quality of the product or service, low debts, minimal liabilities, low capital expenditure requirements, quality of management and a convincing growth plan.
When the decision has been made to sell, everything possible should be undertaken to deliver the best outcome achievable, including adopting the following processes:
- Get on top of your numbers – otherwise it can impact the valuation process and make businesses and their owners seem less credible. Having your financial statements reviewed by an accountant will pay dividends and may point out weaknesses in the business's controls and financial operations giving the time to correct issues and put in place more robust measures.
- Create a growth plan – remember, buyers are interested in the future. Having a strong growth plan laying out a path for future growth and profits, showing that the business still has opportunities ahead of it, is key.
- Divest business dependency from one to a few – business assets, such as key customer relationships and IP, need to be transferable and spread over a number of key employees to avoid the issue of value being ascribed not to the business itself but to a key individual (for example the owner) which can be an insurmountable risk for incoming buyers.
- Get on top of housekeeping – key customer or supplier contracts that are not formalised create a significant risk for any incoming buyer and not being on top of more administrative items will add time and costs to the exit process.
- Establish adviser relationships – engaging in early dialogue with professional advisers, is key to achieving a successful exit. Instruct advisers with relevant experience and specialisms who can strengthen the sale preparation plan and take owners through the sometimes complex transaction process.
- Incentivise management – a buyer often places value on the ability of the ongoing management team, who can hold huge sway over the future growth and profitability of the business. Ensure these individuals are adequately incentivised, to avoid disruption to the sale negotiations.
- Cut out unnecessary costs – many private businesses are run to minimise tax liabilities of the owners and shareholders. Cutting expenses that are not critical to the operation of the business and shifting focus to show as much profit as possible should pay dividends at the valuation stage.
- Know your buyer – understanding the buyer type will help steer focus on the exit plan, the presentation of the business and the value drivers that a particular buyer will be concentrating on.
For more information, please contact our Entrepreneurial and Private Companies team.