You are a small business owner – some time in the next few years you want to sell, but have no immediate plans. But things can change quickly and without warning – health, family circumstances, or maybe someone comes to you and wants to buy your business. Is this the right time – and if so are you in the best shape to make the most of the opportunity?
Even if you are not planning to sell in the near future it is a good idea to be ready “just in case”. The best way to ready yourself is to look at your business as a buyer – what would you want to know about it, what attributes would you want?
Below we discuss the top 8 factors prospective buyers take into consideration when looking at a business of interest. It is important to have these in order so you can maximise the sale price of your business whenever the opportunity or right time may arise.
1. Reliable Financial Information
Are your financial records up to date and accurate? Normally a buyer will want to see the last three years of accountant-prepared financial accounts and tax returns, plus up-to-date reliable figures for the period since the last signed-off financials.
You may be completely up to date with your tax filings, but do the accounts give a clear and accurate view of the business’s position? Are there any one-off or extraordinary items that might have distorted the figures, such as a big end-of-lease make-good expense, or major marketing expenditure on a business expansion? If so, it may be necessary to prepare “normalised” accounts to identify and explain the unusual items.
Likewise, if you have multiple profit or cost centres in one set of accounts, it is wise to break them out as separate divisions, so a buyer can see the true picture.
This normalisation process can take time, so it is ideal to do it as you go, rather than to be scrambling when the buyer knocks on the door. A helpful by-product, of course, is that it helps you know your own business better, which is always a good thing.
2. An Up-To-Date Documentation Hub
It is vital to ensure that you have a comprehensive document hub that consists of all important and relevant business documentation. Whether you retain your documents in paper or electronic format, it’s important to ensure everything is up to date and easily accessible by authorised team members.
Your document hub should include:
- Commercial information. This includes any supplier accounts, registration papers, operating permits, licences, insurances and more.
- Operational information. This includes your business history, customer information, stock inventory lists, strategy information, procedures and processes, rosters, strategy information, marketing collateral and more.
- Legal documentation. This includes all staff and customer contracts, leases, health & safety guidelines, franchise agreements, incorporation papers, trade marks and more.
3. Trademarks and Other Intellectual Property
We say this a lot, but properly protected and promoted intellectual property adds substantial value to your business: value that far surpasses the cost of acquiring and maintaining this protection. If you have built up a reputation for quality or value (even a local reputation), in most cases this the driving force that attracts potential buyers, who will pay to receive the goodwill associated with your reputation.
Therefore in order to keep your business sale-ready, it is important to reflect on the following questions:
- Do you have any brands capable of being registered as trademarks, and if so have you registered them? If not, why not?
- Do you trade under any business names (as distinct from your company name), and if so are they registered with ASIC?
- Have you secured the web addresses associated with your business and its branding?
4. Security Interests
Have you ever looked up your own business on the Personal Property Securities Register <link>? You may be surprised, even alarmed, at what you see.
If you are in the business of selling goods, as a retailer or otherwise, it is likely that every one of your suppliers will have registered a “security interest” in the goods they supply to you, to secure payment of their monthly invoices. That usually doesn’t matter to a buyer, because those security interests drop away as the suppliers are paid.
Perhaps you financed motor vehicles or other equipment, or have a working capital facility from your bank, or even a bank guarantee for the premises lease? If so, the financier will almost certainly have registered a security interest over the financed equipment, and in the case of the bank over the whole of the business. A buyer will insist that those securities be cleared on or before completion. If they are current facilities, you cannot do much until close to completion of the sale, other than make the necessary arrangements with the financial institution concerned.
However, it frequently occurs that security interests for long repaid and forgotten finance facilities are still on the Personal Property Securities Register. Banks, particularly, often accept repayment of the debt but don’t get around to releasing the security. Getting these old security interests removed can take weeks. You may not have dealt with the institution for years or your contact person may have moved on. In this situation, all you can do is call the main number and start the process of finding someone who can help. Given the time-consuming nature of getting this done, it’s important to do it now and not at the last minute when a delay of this kind can jeopardise the whole deal.
How do you arrive at the “right” price for your business? Ultimately it is what you are willing to sell for and what somebody else is willing to pay. However, objectivity is key when it comes to establishing how much your business is worth.
A professional valuation will give you a solid basis for gauging potential buyer offers as well as an idea of what you can expect to net from the sale. It will also confirm your business’s market position, financial situation, strengths and weaknesses (the last of which you can start to correct prior to selling the business).
Business valuation is a complex and sophisticated process. There are many different methodologies, depending on the industry sector and the circumstances of the particular business. Your accountant will be able to help you collect the information on which a valuation is based, but not all accountants have the expertise to advise on or implement the most appropriate methodology for your business, as this is specialist work. If your own accountant does not do business valuation themselves, they will probably be able to recommend someone who does. If not, talk to your business colleagues or other advisors to find a suitably qualified valuer.
You do not need to do a full-blown business valuation at this preparatory stage, but it is important to get some preliminary advice on what methodology is most appropriate and will yield you the best sale price. Even though you may not have any immediate plans to sell, it is immensely useful to understand the basis on which your business would normally be valued. It may be that making some fairly simple changes to your business will add significantly to its value. If so, better to know now, so you can make those changes.
6. Management Succession
Key man risk is a common issue among businesses. If you are the founder or leader and are absolutely vital to your business, who will the buyer be able to rely on to help run the business after you leave?
In most cases, privately owned businesses are largely dependent on the founder or leader, making their knowledge and skills critical to the continued success of the business. Therefore when planning for the sale of your business, it is vital to have a succession plan.
This plan will be instrumental in transitioning your knowledge to a management team that will eventually possess the knowledge and expertise needed to replace you, enabling the business to run smoothly and succeed without you.
7. Define Your Goals
There is no doubt a key goal of selling your business is to ensure you receive the maximum return on all the hard work and time you have invested over the years. However it’s important to consider the finer details of what you hope to achieve when selling the business. For example: do you want to sell 100% of the business and walk away with the cash? Or would you like to retain some level of equity? Do you want to pass it to family members or employees? Are you interested in staying on after the sale of business? How important is it that the brand continues?
Ensuring your business is prepared for sale is important, however it is equally important to ensure that the sale aligns with goals and objectives. This is what will define and direct your path towards getting your business sale-ready.
8. Last But Certainly Not Least..Your Why.
For all the financials, advisers and documentation that form part of a buyer’s decision process, there is one simple question all prospective buyers want to know: WHY. Buyers are always curious as to the reason someone wants to sell a business, therefore you need to reflect on your why and be prepared to articulate these reasons.
As you can see, there are a few things to consider when it comes to selling a business, and there will be others, unique to your business. What is important is to start thinking and preparing, it truly is never too early.
If you have any queries or would like further information, simply contact our team on 02 8215 1521 or via email@example.com