In an ideal world, business owners would plan to sell their business from day one and go through a preparation process to achieve optimal value. This means refining the operation so that it produces maximum profits and structuring the business so that ownership can be transferred with minimal impact to ongoing operations and profitability. Business owners can adjust costs, increase sales and margins, as well as restructure and review other variables in preparation for the sale. The time to put the business up for sale should be planned for when the business is operating at peak efficiency with a strong earnings track record that is trending upwards.

Get the right records

Some business owners are very diligent in keeping detailed and up-to-date accounts and records related to contracts, customers, staff, leases, ownership of assets, etc. Smaller businesses that operate in a more corporate style may not be as organized. The first step in preparing your business for sale is to update the books so there is a clear picture of your operation, with supporting facts and projections. In addition to your actual accounts, ask your accountant to prepare a set of normalized accounts to show maximum operating profits. This means adding back any (sometimes personal) expenses or purchases that aren’t directly related to running your business. An explanation of such corrections is often required and you should be prepared to discuss this openly.

Eliminate the benefits

You will need to review how unreported cash sales (if any) and personal items paid for by the business, such as travel or entertainment, are managed. Separating personal expenses from business expenses can make a big difference in the selling price. For example, a $20,000 trip paid for by the company is essentially $20,000 off the bottom line and could reduce the selling price by four or five times that amount. Review leased and financed assets to see if they are better converted to wholly owned assets.

Review Accounting Policies

Accounting policies vary widely. In some cases, business owners find that their accounting policies are not the same as those currently adopted by others in their industry. Some accounting policies are tax-driven, resulting in conservative earnings recognition, while others are earnings-driven and seek to maximize earnings. Changing your accountability policies to align with those of your industry can increase the market value of your business.

Are you essential to the business?

A business is more attractive if its success does not depend solely on the owner’s input in terms of operational knowledge, technical skills, or personal relationships with customers or suppliers. It is helpful to have a reliable management team to demonstrate that the business will continue to be successful after the owner is gone. Most buyers expect the seller to continue working in the business for a period of two to four weeks. Others prefer a longer period, which can be negotiated and included in the Purchase Agreement. This sometimes occurs when an owner is a critical part of the business. In some cases, a business owner may wish to remain involved in the business indefinitely.

Should you invest in your business before the sale?

When looking at a business, buyers will consider the level of debt and the quality of assets, particularly in manufacturing operations. In general, the sensible advice is to continue to invest in the business as if you were going to continue to run it yourself. Link brokers can provide advice on these and other aspects as part of a structured program that covers both the preparation and marketing of the business.

Will you offer financing?

It is not unusual for a business owner to be asked to leave finances in the business. This can be a good way to help achieve maximum seller value. It gives the buyer additional confidence in the business, knowing that he will continue to have an interest in maintaining its success.

THINGS YOU NEED

  • Profit and loss accounts for two to four years
  • A program of abnormal and/or non-recurring costs in the accounts
  • A schedule of all personal expense items and drawings.
  • Brochures or marketing information for your product(s) or service(s)
  • Historical background of the business.
  • Leasing schedule for plants, equipment and any equipment
  • Copy of franchise agreement (if applicable)
  • GST returns for the current business year to date
  • Estimation of the value of the shares within 10-15%
  • Details of the lease, including rent, term, renewals, expenses, etc.
  • Staffing levels, including part-timers and contractors
  • Staff employment contracts including EPP clauses
  • Details about trademarks, patents, licences, agencies or intellectual property (IP)
  • Details of the main strengths and/or commercial advantages
  • Competitor Analysis
  • SWOT analysis
  • business organization chart
  • business plan

Financial information must be current and accurate. If you are selling mid-year, ask your accountant to prepare mid-year accounts.

Good luck in preparing your business for sale and look out for more of my articles on the business sale process.