By Pamela Wynne
You may not be considering disposing of your business right now or even in the short-term.
However, you may need to move on from the business for many reasons and it’s good to have a plan as well as an understanding of what’s needed to make a successful sale.
Buyers generally look back at a business’ performance for the past 3 – 5 years, therefore it is necessary to start preparing your business for sale now.
The following guidance may be useful in preparing for the sale of your business.
Focus on Sales
Continuing to drive sales is critical to increasing the value of your business. A Euro worth of profit is worth more in a growing business then in a stagnant one, so the value of your business will correlate closely to increases or decreases in sales.
An entity buying your business may be able to absorb certain overhead costs and functions, so don’t ignore easy sales just because you think the net profit may be small. Their focus may primarily be on the sales figure, rather than the net profit line.
When considering the sale of your business, a key hire can result in a twofold reward, one being a material increase in sales and second being the distancing of the owner/manager from the business.
Consider Business Structure
What is your vision of the perfect outcome? Clarify your ideal result and allow time for tax, financial and strategic planning or restructuring.
Are some of the assets or properties used by the company owned in a personal capacity by the directors?
Are some assets in the company, non-trading assets?
Is there a division of the business that you do not want to sell?
Develop a Management Team
It is important to be able to demonstrate to potential buyers that the business will run just as smoothly without you, the owner, at its helm. Develop a team that has the skill set and experience needed to run the business.
New hires may be necessary within the business. Existing roles should be reviewed and revamped, job descriptions updated, and job titles allocated so that a buyer can easily see that a clear organisation structure exists.
In the event that the owner/manager is a critical element of the team, this usually leads to the owner being asked to carry on as an employee for a number of years. While this can suit some, it is not always ideal as it often means that a portion of the sale price is paid in stages or on an ‘earn out’ basis, depending on performance targets being met.
View the business through the eyes of a potential buyer to identify potential issues.
Do you depend heavily on one key customer or supplier?
Are there contracts in place with key customers?
Is there exclusivity with key suppliers?
What would be the impact of a key employee leaving?
Are there outstanding tax/HR/insurance issues?
Any disputes or legal issues?
Are there any practices in place that may cause a concern – cash payments to employees or directors.
If there is anything that would concern you, if you were buying the business? This should be identified at an early stage to review possible solutions.
What could be done now to minimise any risks? Commercial, legal, financial and tax due diligence will be carried out during the sale process, so minimise surprises by addressing potential issues now.
Review your Operating Costs
Your business should be lean and efficient. Regularly review your operating costs when preparing your business for sale. Are there any costs that could be reduced, or removed altogether, without affecting the operational effectiveness of your business?
Some excess costs can be adjusted for in a ‘maintainable EBITDA’ working, such as director’s pensions, excess director’s wages etc., so you don’t necessarily need to stop making these types of payments.
Deal with Old or Obsolete Stock
A Purchaser will complete an in-depth analysis of stock. They may look to impair stock to account for unsellable/obsolete/bad stock. While this is very sector dependent, generally any stock held over 12 months will be subject to heavy scrutiny.
Look to offload any poor/old stock now. By doing so, you might get some value for it now, rather than nil value in a share sale transaction.
Prepare your documents
Financial statements and tax returns dating back three to four years will be reviewed as part of the due diligence process. Be aware of that and flag any potential issues.
Have relevant documents ready for review, such as:
Documents regarding financial arrangement, guarantees, security etc.
Don’t underestimate the Due Diligence Process
The Due Diligence process can be challenging and strenuous. Do not underestimate the time it will take.
Not only do you have to continue to run the business, but a significant amount of your time may be taken up with legal, financial, tax and possibly other due diligence assignments (such as insurance, commercial, IT etc., depending on your sector).
It is important that you have a strong financial controller/bookkeeper in place who is aware of the demands of the DD process and is committed to promptly dealing with queries. If your financial controller / bookkeeper is already working to their maximum capacity, they should be given assistance and possibly an incentive arrangement should be agreed to reinforce their commitment and ensure a smooth due diligence process.