How do you prepare a company for sale?
There is no doubt that early preparation is key when selling your business. Selling your business is often the culmination of years of hard work and dedication. Preparing your business for sale will ensure not only a smoother sales process but can also increase the value of your business from a buyer’s perspective.
Getting your business systems and documentation in order, your financials up to date, working on areas that increase the value, recruiting and keeping key employees and reducing risk in your business are just some of the steps on how you prepare a company for sale.
In this blog, I’ll look at some of the key areas you should explore when you are preparing your company for sale.
How long does it take to prepare a business for sale?
How long you have to prepare your business for sale will very much depend on how quickly you want, or need, to sell. However, to maximise value and prepare for all the steps below we would recommend early-stage planning before selling your business, allowing as much time as possible for the pre-sale preparation. This typically enables you to choose the best time to go to market.
If you are looking for a quick sale, it’s important to focus on the primary areas that will prepare your business for the due diligence process and scrutiny that potential buyers will put your business under. If you have more time to prepare before you sell, then you can also focus on other factors that will increase the value of your business but take longer to implement. Giving yourself enough time to prepare your business for sale will give you the best possible chance of achieving a successful result.
How do I prepare my company for sale?
To help make your business ‘sale ready’ make sure you consider the 10 key steps below:
Detailed review of the business
Firstly, you will need to conduct a thorough review of the business. This covers all aspects of the business including, but not limited to, areas such as the financials, the operations and the management and employees. The idea is to highlight areas that are potential issues or devaluing items from a buyer’s perspective.
Get a valuation
Many business owners tend to over value their own business. Having realistic price expectations for a business is key to a successful sale as you don’t want to outprice all potential buyers before you even start.
You will need to understand the valuation, and the various value drivers within the business, to ensure you make the right decisions about selling. As a result, you should better understand what areas you should focus your time on to increase the value of the business in the run up to a sale.
An experienced firm like Barnes Roffe can provide a business valuation and re-evaluate the business at various stages throughout the sale process, based on changes you have implemented since the detailed business review.
Barnes Roffe will assess the value of your business based on a number of factors, including current and forecasted financial performance, the industry the business operates in, wider macroeconomic conditions, specific USPs of the business, along with a number of other value drivers.
The sale process is a time consuming one and you want to give yourself the best possible chance of achieving a successful result. That’s why it is important to seek professional advice as early on as possible to enable the best possible chance of achieving maximum value.
Financial performance and information
Once terms have been agreed with a potential buyer, it will undertake its own review of the business thorough what is called “due diligence”. A key part of preparing for sale, that immediately follows the detailed business review, is putting in place processes that aim to get relevant information in a regularly accessible format ready for due diligence.
First impressions count, so having strong financials and excellent financial information readily available will allow you to respond to requests quickly and therefore send a strong message to potential buyers, providing them with comfort regarding the quality of the information.
Both past, current and future financial information will be under scrutiny during the financial due diligence process, however, due diligence is not just about analysing the company’s financial information.
Other than the financial aspect, due diligence will also include legal and commercial aspects.
It’s important to understand that past and present underlying performance supports future earnings projections, as well as understanding other contingencies and risks involved with any transaction. Get your accountant and advisors to work with you and look in detail at areas such as volatile revenue streams, profit, expenses, cash flow, working capital etc.
Your financials will significantly affect the value, or perceived value, of your business. Buyers will often request two to five years of management accounts as a base point of the due diligence process, which highlights the importance of having enough time to prepare the information pre-sale.
Manage risks and over dependency
Managing the risk profile of the business on the run up to a sale is critical to increase value and make your business sale ready.
Customer and supplier dependencies, key employee dependencies, technological disruption, changes to the competitive environment in your markets, and threatened changes to regulatory or legal frameworks can all impact the overall assessment of risk, business value and can derail a deal.
Having knowledge, information and an assessment of risk is important. It shows that you are a well-run business, and a business is far more likely to achieve maximum value if it looks professional, manages its risks, has suitable controls in place, and is stable and well-organised.
Getting your systems, equipment, processes, controls, procedures, contracts and leases in order is a critical part of pre-sale preparation that will be reviewed by both the commercial and legal due diligence.
Understanding ‘who owns what’ in the business is an important element of the pre-sale process. If asset ownership is split between different people or companies, the buyer may become concerned and seek to lower the price or, worse still, stop the potential sale altogether.
It might include things like property, intellectual property rights, lease agreements etc.
It is a key part of the pre-sale tax planning aspect of the process, which follows next.
Maximise tax efficiency
Maximising tax efficiency and reorganising your business to be as tax efficient as possible before sale should be a priority. That will likely increase the physical monies you would receive compared to not receiving any tax planning advice, based on the same business valuation.
This may mean reorganising your business or group structure, or de-merging parts of the business prior to sale, and these things can often take time to embed themselves post the reorganisation taking place.
The tax you pay on sale will depend on the corporate structure you have. You need to understand the tax consequences of selling the business long before you sell to ensure that the structure the company deploys allows you to achieve maximum value on exit.
Lock in and incentivise key people
Recruiting and retaining key people in the years running up to selling the business is essential.
Your management team and key people will be critical to the value of your business and pre-sale preparation. A strong management team will demonstrate to a buyer that there is no over-reliance on any one person, including you as the current owner.
Warranties & indemnities
An important part of your business sale is the legal contract. This contract will include a ‘warranties and indemnities’ section.
These warranties and indemnities are given by you the seller on various business areas. For example, you may give a warranty that all tax returns have been filed on time, or that if a tax bill arises, you will pay for it. It may also include a warranty that no legal disputes remain.
Warranties and indemnities can result in barriers to the sale completing and in costs to you, so your aim should be to limit the issues that could arise by highlighting any potential aspects in the detailed review of the business.
Seek professional advice
The earlier you speak to, and appoint, professional advisors, the better. Professional advisors and corporate finance experts such as those at Barnes Roffe can help you navigate the various aspects of preparing your business for sale.
You are able to utilise their experience in the field, not only increasing business value but also taking the heavy lifting away from you throughout the sale process. This allows you to keep your focus on running the business and avoid any negative knock-on effects from you becoming distracted with the process. This ultimately gives you the best possible chance of successfully selling your business for maximum value.
What does the sale process look like?
A typical sale process will follow the steps below:
- Consultation and valuation
- Preparing the business for sale
- Creating marketing documents
- Marketing the business
- Buyer pre-screening & confidentiality agreements
- Offers and negotiation
- Heads of terms
- Due diligence
Who should be involved in the sale of my business?
Make sure you appoint the right team to give you and the other shareholders the best possible outcome.
Ensure that your lawyers, accountants and other professional advisers have an in-depth understanding of your long term strategic and commercial goals and a good track record in the type of deal you’re embarking upon. This will help you to prepare correctly and avoid the pitfalls that can impact on its success. It will also make the process much more efficient if your advisors deal with the same type of transaction day in and day out.
Having the right internal team to manage the process is also critical. It’s important this internal team are clear on your objectives and have the time to commit to the preparation and deal process. This ensures that the deal doesn’t adversely impact the day to day running of the business.
Barnes Roffe understands that selling a business is often a once in a lifetime event. Planning your exit can be a time-consuming process, one which can impact family and business life. Whilst you may not be thinking about an immediate sale, preparation is key when it comes to selling your business.
Many business owners are not fully ready for the sale process, with many underestimating the time to plan and the scrutiny that your business will be under from potential buyers. You will be far better prepared for the sale process with as much advanced preparation as possible.
Barnes Roffe Corporate Finance can advise and support you with the whole process, from cradle to grave. This includes all of the parts of the sale process mentioned above, including helping you to prepare your business for sale, as well as valuing your business and selling your business.
Contact us if you would like to find out more about how Barnes Roffe can help you prepare your business for sale.
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PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.