Getting ready for sale

The Small Business Company

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It doesn’t matter if you’re planning to sell your business to an acquaintance or use a business broker to sell it on the open market. To get a good return on your investment, you need your business to in the best possible shape when it goes up for sale.

Hard At Work: 26/09/06

Some business owners just focus on presentation but it doesn’t take much to discover a business’s real worth. For this reason, putting in a final effort to get everything ship-shape before you sell is always a good course of action.

Finances

While it is up to the buyer to make sure they are buying a profitable business, you should never consider cooking the books to manipulate the financial outlook or performance of your business. It’s easy to spot and once it is spotted, you’ll lose the potential buyer for good.

Instead, you should simply make sure the business is financially primed for someone else to take over the reins. In principle, this means making the business lean and agile so it can be taken in any direction the new owner wants with as little inherited cost as possible getting in the way.

  • Increase working capital by reducing stock levels, reviewing credit issues and reducing unnecessary overheads and variable costs – things you should do anyway to increase profitability.
  • Analyse all equipment and asset usage and sell anything your business doesn’t use. But don’t go crazy – most potential buyers will want to grow the business and will be more attracted to the opportunity if they know the right tools are already in place.
  • Cease investment in any long-term projects or goals and bring all costs back to short-term spending.
  • Reduce instability – or peaks and troughs – in your financials. Buy large-cost items according to your sales cycles or run special deals in your traditional slow season. Buyers want to see stable growth and can be spooked by any erratic figures, even if they’re not performance related.
  • Produce a realistic financial forecast for your business. Any exaggeration or unwarranted optimism will be spotted by a good business adviser. If the numbers don’t support the amount you’re asking for your business, consider selling for a lesser amount or reinvesting in the business to make it a sellable commodity.

Strategy, systems and communication

A potential buyer won’t want to inherit a poorly conceived business model, bad management systems or outdated, inefficient ways of working. They need to have confidence that you didn’t make things up as you went along (even if that was the case).

Business plans

Dig out your business plan and refine it into a professional document (if it isn’t already one) and update it. Properly research areas that have proven problematic in the past so you can present buyers with ready-made plans for addressing them.

If you haven’t got a business plan, don’t shy away from the task of making one. It does require a lot of homework, but buyers will ask for one and not producing a business plan can harm your prospects of selling.

Working processes and systems

If you’ve suffered because of inefficiencies or failures in the processes you and your staff use but haven’t had the time to look into them, it is essential you now do so. If an issue adds up to needless time wasting or limitations on the owner’s control of the business, it can seriously put buyers off.

Streamline processes and improve team communication as much as you can before bringing buyers through. The more questions you can answer quickly with detailed, accurate answers, the better – and you won’t be able to do that if the right systems aren’t in place.

Human resources

Prepare staff for the possibility of a new owner and address any HR issues long before you put the business up for sale. Potential buyers aren’t going to want to inherit workplace dramas or staff walking out with needed operational knowledge.

Look at your management team too. If you’re the only source of operational knowledge in the business, you might be called in by the new owner to help them after the sale. If you don’t like the sound of that, it might be worth making sure you have a management team or a subordinate in place who has the knowledge to run the business until the new owner can properly get to grips with it.

Assets

This one’s relatively obvious – make sure every piece of machinery has been well-maintained and all the premises are clean and don’t require any major remedial work, such as borer treatment or a near-term compliance upgrade.

Risks

Think of your business as a ship facing an approaching storm. You want to batten down all the hatches and secure everything on deck to make sure you come out the other side. That doesn’t mean to say there’s a storm approaching, but that’s the way a wary potential buyer will be thinking.

Lock down any vital suppliers and customers into contracts and make sure the business doesn’t rely on just one or two key clients. Sort out any looming housekeeping issues – like paperwork to address a compliance change – so the new owner can hit the ground running.
You also need to make sure you’re completely up-to-date with all health and safety standards and any other legislative obligations you have as a business owner or employer.

Legal

Nothing can raise the alarm to a buyer like uncovering a court case you failed to mention or a dispute over intellectual property that threatens the core competitive advantages of the business.

  • Settle or resolve all legal disputes before putting your business up for sale.
  • Lock down all intellectual property as assets with trademarks and patents. Find out more with intellectual property protection.
  • Make sure all the operational assets on the balance sheet are actually owned by you (as a sole trader) or the company before selling.

Information memorandums

An information or sales memorandum is basically the ad for your business. This doesn’t mean it should be filled with real estate jargon and unrealistic information.

As a marketing document, it should present your business as an attractive proposition, but make sure you draw it up with a professional adviser so you can present an outlook that is both grounded and appealing.

An information memorandum should be big on hard facts and emphasise how easy the business could be to grow, improve and change tack if needed. Needless to say, it shouldn’t contain any personal, competition-sensitive or confidential information.

Make sure it can be easily read with clear language, concise sections and an executive summary that gets straight to the point by stating what the business has to offer and why you’re selling it.

Find out more about executive summaries in writing a business plan.

General advice

No two businesses are identical, but when it comes to selling a business it’s always advisable to:

  • Be honest and upfront with your staff.
  • Hire professional advisers such as an experienced acquisitions and disposals lawyer.
  • Research the market so you know what potential buyers will want to see in a business opportunity.
  • Have an ideal buyer in mind but not put all your eggs in one basket by irrevocably changing the business just to suit them – because you’ll probably put off everyone else.
 
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