For the successful sale of a business, preparation is key. Indeed, diligent preparation for a sale may result in not only a higher price, but more favourable terms, and a more efficient, less disruptive selling process.

While every business is different, below is a high-level summary of some of the main areas in which a business can begin preparing for a future sale. It is a similar process to a homeowner decluttering and redecorating their home prior to their first open for inspection.

Deal Team

Selling a business is major undertaking. For many owners, it represents a significant wealth creation opportunity – one that may never be repeated in their working lives. On occasion, it is a complex and uncertain process with many avenues for less-than-optimal outcomes, that can be both deeply frustrating and financially damaging for the owners.

Therefore, it is important to assemble and engage a competent and motivated deal team. This will typically include accountants and lawyers as well as an investment banker or business broker and possibly other advisers.

Owner Dependence

Many businesses are heavily reliant on their owner. This can make some business unsellable because effectively, the owner is the business. They hold all the industry “know-how” and own all customer relationships. In less extreme cases, a heavy reliance on an owner can result in a business selling at a discounted price, or a purchaser insisting the owner remains with the business for an extended period.

A key part of sale preparation is assessing the extent to which a business is reliant on the owner and developing strategies to minimise that reliance leading into the sale.

Accounting Information

Accounting is commonly referred to as the language of business. It is undoubtedly the language of deals. A business’ financial performance will be central to discussions about value. Poor quality accounting information not only makes those discussions more difficult, but it also creates a negative impression of the business.

As part of preparing a business for sale, it is important to engage with the business’ accountants to ensure that the accounting information being prepared is both robust and up to date.

Profit Normalisations

A major part of any business sale is negotiation around value. These discussions typically revolve around the business’ underlying profit and what, if any, normalisations or adjustments can be applied legitimately to its historical performance. These adjustments relate to things such as one-off income and expenses or non-commercial transactions.

An important part of engaging with a business’ accountants is identifying and justifying which adjustments should be applied to a business’ historical performance.

Financial Forecasts

A prospective acquirer is principally buying a business’ future performance. It is the business’ expected future cash flows that will be the source of their return on investment. The business’ past performance adds credibility and sets expectations around what the business is likely to achieve into the future. However, acquirers are buying the future – not the past.

It is for that reason that as part of sale preparations, it is important for a business to develop a robust and defensible set of financial forecasts for the next six-to-twelve months at a minimum.

Balance Sheet Improvement

A prospective acquirer, in addition to reviewing a business’ financial performance, will typically look closely at a business’ financial position – its balance sheet. There are several markers that indicate a financially well-run business versus one in which the owner looks financially pressed and in need of selling.

To that end, part of sale preparation is closely reviewing a business’ balance sheet and identifying opportunities for improving working capital and leverage positions.

Revenue & Profit Enhancement

Generally, a business with higher levels of profit and stronger top-line growth will be valued more highly than smaller, more stagnant businesses. Larger businesses are generally perceived to be less risky and those with higher growth rates suggest they will generate stronger returns more quickly for the new owners.

Accordingly, it is important for owners considering selling their business to vigorously explore opportunities for credible “quick wins” in terms of revenue and profit gains.

Right Sizing the Business

As part of seeking to maximise a business’ profitability ahead of a sale, it is worthwhile conducting a review of current staffing levels. This is intended to ensure that human resources are being deployed optimally.

That’s not to suggest that the goal should be to cull staff ahead of a prospective sale. That can itself undermine business performance and it also has a human element to consider. However, assessing staffing levels remains a useful exercise.

In addition, it is important to consider whether the business has fully documented agreements in place with all employees and contractors.

Brand & Image Enhancement

When reviewing an acquisition opportunity, even the most sophisticated and numbers-focused acquirer will inevitably visit the target’s website and form an overall impression of the business’ branding and general market presence and position.

For that reason, it can be worthwhile as part of sale preparations to revisit the business’ touchpoints to identify cosmetic opportunities for a refresh. Further, it can also be helpful to generate positive news coverage of the business through PR.

Taxation Considerations

When a high-profile business is acquired, the headline sale price is what typically attracts the most attention. While it is gratifying to sell a business for a high headline price, what is even more important is the amount that ends up in the owner’s pocket. Often tax considerations can have a significant and unexpected impact on that amount.

Therefore, an important part of the sale process is engaging with the owner’s tax advisers to ensure that any future sale is structured in the most tax efficient manner possible.

Legal Considerations

When selling a business, there are a wide range of legal issues that can undermine or complicate a sale transaction. These can include specific change-of-control provisions in key contracts, potential regulatory or compliance issues or matters relating to the ownership of assets, shareholder agreements, property leases and so on.

Therefore, a key part of preparing for a sale is engaging with the business’ lawyers to identify, assess and pre-emptively work through any such issues.

It is also important to identify all current, past and prospective civil and criminal matters involving the business. Where possible, resolving any current or impending matters prior to commencing a sale process is beneficial. Remember, too, that trying to conceal these matters from a potential acquirer is always unwise.

Corporate Housekeeping

Many small-to-medium-sized businesses do not necessarily invest the time needed to maintain fully up-to-date records. While this does not undermine their day-to-day operations, it can create an impression in the mind of a potential acquirer of a business that is run in a lackadaisical fashion.

As part of sale preparations, it is important to review a business’ record keeping and to fill in any gaps. This can include board minutes, shareholder correspondence, regulatory filings and so on.

Material Preparation

When marketing a business to prospective acquirers, there are a number of standard documents that are commonly used. These include a no-names flyer (2-3 pages), a no-names profile (3-5 pages), a detailed information memorandum (40-60 pages) a PowerPoint presentation for acquirer meetings.

In preparing for a sale, it is useful to begin collating the necessary information needed to prepare these documents and constructing the key selling propositions of the business.

If you are interested in exploring how CFSG may be able to assist you in preparing for and completing the sale of your business, we invite you to contact us.