Seven ways to get your business ready for sale

With valuations reaching record levels, many business owners are considering to capitalise on the seller’s market by cashing in on their assets. But how can business owners best prepare for a potential sale? Jo Hands and James Ciuffetelli from consulting firm Whiteark share seven steps how owners can get their business ready for sale.

1. Be clear on the why

Identifying the key objectives driving the decision to sell the business will help determine the right exit strategy and timing. Objectives can be financial including: liquidity; valuation; or taxation/estate planning.

Examples of non-financial objectives are: succession planning; employee or stakeholder concerns; and family dynamics.

2. Get your house in order

One of the first steps in preparing your business for sale is to assess current business performance and operations. This provides an opportunity to take an objective view of there where the business is today, where it is heading, how the business is operating and how the current workforce supports this.

This review enables the business owner to determine areas where the business may need improvements and put a plan together to address these before engaging with potential buyers. A well balanced, considered and well-packaged presentation of the business is likely to increase a buyer’s confidence and comfort level about the business they are looking to buy and increase the likelihood of a successful sale.

How to get your business ready

• Build an effective workforce plan
• Organise business operations and assets
• Get commercials & agreements in place
• Know your business & financials

3. Identify value enhancements

Sometimes business owners just want to sell the business, but more often, the best thing to do is make some changes and adjustments to the business first before going to market. The changes may occur over a 6-12 month period but there should not be significant changes in strategy because those take too long and are risky.

The nature of changes that should be considered are valuable changes to management team or business strategy/operations that make the business more attractive in a reasonably short period.

Consider the competitive advantage of the business, customer relationships, attractive growth opportunities or quality of management and once the business’ fundamental value drivers are understood, the business owner can determine where action may be required prior to initiating the sale process to allow the benefits to flow through the financial position.

4. Determine the target buyers

The starting point would be to consider who might be the ideal buyer for the business and how they might value the business. By better understanding a potential buyer’s philosophy and attitude about what drives value, a business owner can better understand how to position those attributes as part of the sale preparation process to maximise the value of their business.

Finding the right buyer is possible only when the business owner has thoroughly considered their objectives and priorities – business and personal, financial (liquidity, sale price, taxation/estate planning) and non-financial (succession, legacy and reputation, employee and stakeholder concerns, family dynamics, and other special interests).

The right buyer is often the one who will attach the maximum value to the business but choosing the deal that’s right for the business may not be all about the sale price but other terms.

5. Understand what your business is worth

A host of external and internal factors must be considered in valuing a business. Even after a strong year of profits and growth, if market conditions are deteriorating it may not be the optimal time to sell. Value is influenced by the market, by the situational influences of the principals in the transaction, and by the unique aspects of the particular business being sold.

It is important for a business owner to appreciate that value can be subjective and it is important to see the business and its value through the eyes of a potential buyer. To a great degree, value depends on the buyer: strategic buyers are interested in the firm’s operations, and financial buyers are focused on short to medium term returns.

Further reading: Surging M&A proves the value of multidisciplinary due diligence.

A business owner who can better understand a buyer’s philosophy and attitude toward value, they can apply this outlook to the attributes of the business and the valuation.

6. Tell your story

A well-packaged and presented business summary increases a potential buyer’s confidence and comfort level and increases the likelihood of a successful sale. A business owner spends years establishing brand name recognition, market niche, vendor relationships, operation & production systems, management, personnel, distribution channels, customer loyalty and numerous other intangibles. This is a story that needs to be properly told to educate potential buyers.

Potential buyers have a lot more data than even five years ago to value businesses, including benchmarks. The one piece of information they do not have is your story – what you have done and what the business can do next. This sets up a clear and credible case for the future prospects and profitability.

7. Negotiate the terms

One of the mistakes made by business owners is to not properly negotiate the letter of intent. Often a potential buyer will provide a term sheet or letter of intent that lacks details about the key terms of the transaction.

However, the business owner’s bargaining power is the greatest at the time just before signing a letter of intent or a term sheet. These documents, while not binding on trading conditions, are extremely important to ensure the likelihood of a favourable agreement for the business owner.

The business owner needs to negotiate the terms of the letter of intent or term sheet, with the help of its legal and financial advisors, as if it were a binding document.