Selling Your Business
Firmer Future – Selling Your Business
If you were preparing to sell a house, you would probably take time to get it in order and make it look good to potential buyers. When selling a business, putting matters in order and making the business look as appealing as possible will similarly improve the price you get. Remove anything that says this purchase may be a risk to the buyer.
The Company’s Possibilities
The main potential gain for a buyer is access to your customer base. Therefore concentrate on the sales and marketing information that you can share with the buyer. Once you have List your major customers and their volume (past 3 years). What is the changes in customer composition? Order Book, classes of customers and the industries served. Play on your reputation and your relationships with customers.
What is the market for your products? What is your record of growth? What is your strategic plan? What is your marketing? Describe your sales force and method. What are your advertising methods, media types and budgets?
Show the uniqueness of products. Write a description of product offerings/product lines, their sales history and market shares, their costs and contributions. Who are your suppliers and what are their contractual agreements and specific terms. What is your manufacturing process and capacity. Who are your Sub-contractors?
Are there any major competitors or indirect competition? Is there potential for future growth in market or market share?
What synergies are there with other businesses?
The buyer needs to understand the synergy that will be created when they add your business to theirs. To sell your business well an agent needs to see where they can add value to the combination. Experiment with the sales reporting functions to show how you can demonstrate your sales breakdown. Place key reports on file ready for a business sale.
The records need to show transparency rather than tax avoidance, clear records of sales not tax planning. Initial impressions are very important in attracting and retaining the interest of potential suitors. Dubious practices indicate an unreliable partner with whom to make a large business purchase.
Information Systems
The better your information systems and records are, and the more controls in place, the better a price you will fetch. If you are seen to have poor systems, this will reflect on the reliability of all information that you provide to a buyer. The more money they have to spend on verifying the information you provide, the less they will want to spend on your company.
If you are one of our clients we expect that your systems will already show that you are in control of your affairs; however you and your staff must not only know what you are doing, but you must be able to show you know what you are doing.
Premises
The physical condition and financing of assets of your company blur into one another. We have all seen enough property TV programs to know that a business that is doing well in a factory that looks about to fall apart will not sell. Inspections and repairs are essential before you sell up. Simple things like repainting, clearing out offices, tidying outdoor spaces and performing maintenance will help convey the impression of a productive and efficient working environment. It doesn’t need to look spotless, as work has to be obviously continuing. But you need to look as efficient with space as with your finances.
It may be that there is some renovation or upgrade that the company is very clearly needs. If you decide to buy larger premises before selling, for instance, you must be prepared to go through with it before sale. It will be a big black mark against a company if it is undergoing a significant re-fit or computer system upgrade as it is being sold.
Compliance
Take some time to methodically examine your company to determine where you may be in breach of law. It is very easy to unknowingly operate in contravention of equal opportunities, disability or environmental regulation, for instance, and quite costly to bring yourself into line with them. Again, these are not issues that you want to address for the first time at the negotiating table.
In some cases it will be sufficient to carry out your own checks, but in others you may benefit from bringing in environmental auditors, health and safety inspectors, or external accountants or consultants.
Finances
The bottom line for a buyer is how well the company is performing, and how well it is likely to perform in future. Questionable tax-avoidance techniques will not make a good impression. The various methods of hiding earnings from the taxman will create problems when you try to demonstrate profitability to a potential buyer.
The buyer will generally be someone who understands the pressures on business owners, but the use of ‘inventory cushions’ or the deliberate undervaluing of stock, for example will be a clear warning sign to a potential buyer. Dubious practices like these will signal that there may be trouble ahead with the taxman. So before you sell up, untangle those loopholes. Paying a full tax bill for a year may cost, but it will improve the sale price far more.
Get your books formally audited. Many buyers will not consider buying a company that does not provide at least three years of audited statements. Audits will often uncover and force corrections to most profit-masking and profit-flattering.
Anything on your company’s books that you want to hold onto after the sale – such as land, personal property, or outstanding loans – needs to be bought or paid off outright now. You should not attempt to sell something within the business that you want to keep. Ancillary operations may be best split off, and either sold separately, or bought outright by yourself.
Do the same with bad debts and over-valued stock. These will almost certainly be uncovered by the auditor sent in by a potential buyer and counted against the value of the company. Write off the bad debts and devalue any stock that you know you can’t shift. At the worst, you can write them off and take the tax deduction.
It is important when you sell a business, that you put matters in order and make the business look as appealing as possible to potential buyers.
Accounting needs if you are selling your business (Word)
Build a management team for transition
The single greatest asset that your company has is its people. Your hard assets do not generate earnings or market share; rather, your employees do. Therefore, potential acquirers want to know that the same people who developed your company for you will remain to run it for them.
A buyer’s greatest fear is that the owner of a business flees town just after his business was acquired, leaving the buyer high and dry. It is imperative that you take the time to develop an experienced and dedicated management team before approaching suitors. Buyers not only want a commitment from an owner to remain for at least a transitional period, but they also like to see a competent second-tier of management, capable of one day assuming control. Buyers want to be made confident that the company can survive its owner.
Businesses that solely revolve around the abilities of their owners are very vulnerable. As far as possible, you should delegate responsibilities and decisions to subordinates, developing a broader base of abilities and experience within the company. The appearance of a phalanx of assertive, capable and dedicated managers anxious to grow the business will make your company much more attractive to buyers.
Contracts
Agreements with staff and suppliers must be formalised. If you lease premises or equipment, terms and conditions must all be in writing. Make sure all your employment contracts are up-to-date and meet best practice guidelines. A buyer will be buy up into all the existing relationships that a company has established. The more informal or irregular these are – for example, if you have preferential rates from a supplier – the greater the potential risk to the buyer of these relationships changing. The buyer must know that the current operating costs can be expected to last.
As with renovation, if a major contract is due to expire, you are better off seeing though the renegotiations yourself.
Pensions are a hot issue currently, and an under-funded pension scheme is a liability that no buyer will want to pick up. It is essential to examine the depth of any problem in this area, especially with a final salary scheme, with a reputable and independent actuary.
Record-keeping
It is easy not to bother with maintaining good business records. But when you want to sell up, it is vital to be able to provide all the information a buyer will want. Get your filing into order and make sure you can provide a prospective buyer with
complete sets of minutes for directors’ and shareholders’ meetings
- complete tax records
- articles of incorporation
- proof of compliance with relevant regulation (particularly with regard to health and safety, environmental and employment law)
- property leases
- contracts
- mortgage documents
- payroll records
- contracts with suppliers, customers and financiers (including bank loans)
- documentation relating to patents, trademarks and copyrights.
Due Dilligence
The buyer will conduct a process called ‘Due Diligence’ on your firm to establish whether the final accounts are consistent with the terms of the sale of the business. The list of documents required is intimidating. However most of them can be provided from your MYOB system, if your records are accurate and up to date.
Financial Due Diligence Documents (Word)
General Due Diligence Documents (Word)
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Please contact us if you need further advice, have any questions about our services, or would like a free consultation or a fixed quote.