Preparing a business for sale

The sale of any business is the culmination of years of hard work. It can be a complex process but getting in right at the onset is an absolute must.

How do you maximise the return when preparing your business for sale? Here are some key elements to consider prior to entering into the sale of any business:

What is your objective?

Before you commit to a sale you need to decide whether you would like to remain involved in the business, sell a minority stake, sell a specific element of your business or do you want to retire and exit altogether? Any legal advice you receive will be tailored to your specific circumstances and the route you wish to take to exit.  

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Think ahead

You want to get the best price for your business and this means starting the sale process at least a year prior to completion and commencing the preparation in earnest at least six months prior to that. The value of your company will be affected by the market at the time of the sale. You should therefore work closely with us at Stephensons to best market and present your business for sale. This includes managing the unrecoverable debts, mitigating any potential claims against the business and ensuring a sound business model / plan is in place.

The business will also need to manage dividends, drawings and expenses well in advance of the sale. It is vital that you work with your accountant to ensure you are able to demonstrate the profitability of the business. The due diligence searches will uncover the steps you have taken demonstrating that your business has been run effectively and efficiently.

You should also ensure that your key contracts with customers and suppliers are all in order. If you are intending on selling shares in a limited company then a shareholder’s agreement should be drawn up as a priority to ensure that the shareholders are all in agreement as to what will happen upon a sale.

Develop a realistic growth plan

What are the potential expansion opportunities available for a buyer? You need to be well versed in the state of your specific marketplace and the opportunities available for the new owner as well as the evidence to back this up.

Audit your business from the viewpoint of a buyer. This means looking at everything that contributes to your business’ success from facilities, products and people to marketing and your brand image. Reflect on the findings and take time to improve on anything you see lacking prior to commencing the sale process.

It might seem trivial, but assess the physical appearance of your premises as first impressions can influence the negotiation process.  Also make sure that your lease has a sufficient term left on it to be saleable to a buyer. This can be particularly important in some sectors where the goodwill is largely in the premises, such as retail and leisure sectors.

You need to be able to present the potential buyer with hard data on how predicted future growth and expansion will be achieved. You will need to have a clear business plan which is supported with evidence of what has been achieved previously and the prospects of predictable and consistent growth.

Establish a management structure

How is the current management structure set up and will it ensure the business continues to operate effectively and profitably when the current owners and shareholders are no longer part of the team? Any potential buyer will want to be reassured that the transition of the business to new ownership will be seamless. It is important to consider succession planning and leadership.

The juggling process of preparing for a sale and the transaction itself, whilst continuing to run a business, can be a daunting task. Serious consideration should be given to appointing a director or a general manager to run the day-to-day business in the interim.

Remove cost inefficiencies

A buyer will be dis-incentivised by an acquisition which will require a significant investment post sale. Equally, by cutting unnecessary costs the profitability of the business will increase, leading to higher returns in the sale. Therefore, carefully review any major expenses which will affect profitability along with general overheads which can put a heavy financial burden on a company.

Review and maintain your current accounts as well as cash flow and management accounts. Avoid complexity and beware of unusual items on the balance sheet. You also need to be prepared to explain any anomalies on your accounts as part of the sale process.

Financial controls

Buyers will want to see the company’s current accounts amongst other financial documentation. This information needs to be presented in a simple format and any discrepancies on the balance sheets need to be explained.

What is my business worth?

A business is usually valued as a multiple of sustainable profits, adjusted to take account of things like finance charge and excessive director salaries, which are usually added back. This multiple can vary widely anything from two to as much as ten times, but the average will be around two to six times. The multiple applied will be determined from various factors. Invariably a business is valued on adjusted sustainable profits. You should seek to maximise this figure.

Identify a buyer

Beware of commencing the sales process too soon. You want to avoid being involved in the process of putting things right in the business when you have your potential buyer and their advisors observing and scrutinising your progress!

Discretion is key

The sale of a business can create considerable unrest among your team, customers and suppliers. So, keep it under wraps until there is a committed buyer and a deal on the table. It can be difficult to keep the sale confidential but brokers and blind advertisements in the marketplace can help to get the word out to potential buyers.

Seek professional advice

Identify your professional advisers early on in the process. You will need the best available advice from a lawyer, accountant, specialist tax adviser and broker or corporate finance adviser to find a buyer and negotiate the sale.

The advisors you have chosen can assist in deciding on a realistic valuation, gather financial information, discreetly solicit possible buyers, produce the sales memorandum and confidentiality agreement for interested parties and negotiate a beneficial sales agreement.

If you are thinking about selling your business and need expert advice call one of our corporate lawyers on 0203 816 9303 today.

 

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