Selling a business is a significant milestone that can yield financial rewards and open new avenues for future ventures. However, to maximise value and ensure a smooth transition, meticulous preparation is essential. This guide will summarise the critical steps to prepare your business for sale, from financial planning to operational enhancements and how to take the business to market.
1. Evaluate Your Motives for Selling
Understanding why you want to sell your business is crucial. Common reasons include retirement, a desire to pursue other opportunities, health issues, or simply wanting to cash in on your investment. Clarifying your motives will help you set realistic goals and expectations for the sale, as well as the options available to you.
For some, the motivation may be speed, the motives of the buyer or the investment which comes from the deal. For others, it may be the best price regardless of how long it takes.
The ‘why’ also steers your strategic decision-making when it comes to succession planning, and structuring your leadership team. You may wish to implement a strategy which makes you an owner, not an operator, employing a management team to run the day-to-day sometime before the sale. Alternatively, you may be prepared to remain with the business for some time on an ‘earn out’ or similar structure – or perhaps something in between.
Sales are rarely quick, and the best deals are often those where the seller has started considering what they want, and why, a significant amount of time before the sale – taking the necessary steps to prepare the business for the sale they want!
2. Get a Professional Valuation
A professional business valuation may provide an indicative estimate of your business’s worth. But that’s all it will do.
It is vital to remember that something is only ever worth what someone else is prepared to pay for it. It is very common for owner-operators to value their emotional attachment to a business, rather than looking at a more objective and realistic valuation.
You should try not to attach yourself to a professional valuation, but use it as an independent view on an indicative value based on elements such as:
- Financial performance: Revenue, profits, and growth potential.
- Market conditions: Industry trends and economic outlook.
- Tangible assets: Equipment, real estate, and inventory.
- Intangible assets: Brand reputation, customer base, and intellectual property.
Consultants or advisors will also be able to research similar sales by competitors or other market participants, which is often a great indicator of the type of buyer within a market and the types of valuations they are prepared to arrive at.
Be cautious of a valuation which is based on the general approach of a multiple of 4-6 times EBITDA (which for most businesses is effectively profit before interest, tax and depreciation), unless this is backed up by similar sales made in your industry, with companies with a similar customer base, size and structure.
Commercial advice is often most helpful as they are likely to consider the ‘buy side’ factors, rather than just the financial metrics.
3. Organise Financial Records
Buyers will scrutinise your financial records to assess the health and potential of your business. This process is often very invasive so it is important to prepare and organise your financial records, systems and processes as early as possible.
This includes ensuring your financial statements are accurate, up-to-date, and transparent. Key documents include:
- Statutory accounts: At least three years of full accounts, as filed at Companies House (or similar)
- Balance sheets: Records showing assets, liabilities, and equity.
- Cash flow statements: Detailed records of cash inflows and outflows.
- Tax returns: Ensure all tax documents are in order and reflect your financial statements.
- Management Information: This is good for showing proactive financial governance, as well as considering forecasts and budgets. This is also vital to monitor ongoing performance and how this may impact the valuation.
4. Streamline Operations
Efficient operations and a well-designed organisation make a business more attractive to potential buyers. Evaluate your operations and identify areas which may need some attention to achieve your exit ambitions. Do not rush this, you want to ensure that the downside risk of any change is protected as much as possible as any misstep at this stage could extend your exit plans.
- Develop clear, documented procedures for key operations, including accountable leadership etc.
- Reduce excess inventory and improve turnover rates.
- Ensure the business isn’t overly reliant on a single customer, supplier, or employee. Buyers will often explore ‘concentration’ levels in their valuation decisions.
5. Strengthen Your Management Team
A strong management team can add significant value to your business. If your business heavily depends on you, it’s essential to build a capable team that can maintain operations smoothly post-sale, particularly if you are seeking a complete exit and are not prepared to undertake an ‘earn out’ (where some of the consideration is deferred and paid through a handover period).
Areas to consider include:
- Look at what team structure you have now. What does this need to look like if you were not there? Consider investing in leadership development programmes to enhance skills and leadership qualities and consider professional succession planning advice to ensure the structure is prepared for sale. Again, do not rush this process and start this as soon as possible – it takes time and any prospective buyer is going to want to see sustainable performance from any change before they ‘buy-in’ to its objectives.
- Implement retention strategies as part of the transaction, encouraging the buyer to consider long-term incentive plans for key leaders, to retain key personnel through the transition.
This process requires very careful navigation!
6. Enhance & Monitor Your Customer Base
A diversified and loyal customer base makes your business more appealing to buyers. Do not get distracted by the thrill of a prospective deal, or a valuation which you have your mind on. Instead, ensure you continue (or your team continue to) focus on:
- Customer retention: Implement strategies to retain existing customers and increase repeat business.
- Customer acquisition: Develop marketing campaigns to attract new customers.
- Customer satisfaction: Regularly seek feedback and improve your products or services based on customer input.
Monitor this very closely and take action as required to ensure that you are protecting the value of the business.
7. Address Legal and Regulatory Issues
Ensure your business is in full compliance with all legal and regulatory requirements. Address any potential legal issues before putting your business on the market. Any issues which may arise during due diligence will likely cause unnecessary issues and may affect your ability to negotiate.
Revisit your compliance and ensure that you have the necessary evidence maintained in a suitable process which can easily be interrogated and reviewed/audited.
- Licences and permits: Verify all necessary licences and permits are current and valid.
- Contracts: Review and update contracts with customers, suppliers, and employees.
- Intellectual property: Ensure trademarks, patents, and copyrights are protected and up to date.
- Legal disputes: Resolve any outstanding legal issues or litigation where possible. Where not possible, ensure that you bring this to a prospective buyer early in negotiations (subject to your own legal advice of course).
8. Finding the Buyer
You now need to know who is likely to buy your business and know how to access those people. You should strongly consider hiring a strategy consultant to help with the strategy of taking the business to market. If required, they can also advise on the right corporate finance partner to sell your business effectively.
- Identify target buyers: Determine whether your ideal buyer is an individual, a competitor, or a private equity firm / professional investment firm. This is often determined based on market research, the size of your company and the various strategies (ie: could your buyer be a customer or supplier as a strategic option).
- Create an information memorandum (IM): The IM is a detailed document highlighting your business’s strengths, financial performance, and growth potential. It is effectively a sales deck for your business to share with prospective buyers, often under a non-disclosure agreement (NDA). Your strategy consultant or broker will usually put this together.
- Generate genuinely interested and qualified parties: Typically businesses want to approach a sale confidentiality, meaning it is crucial to know where to reach potential buyers through industry contacts and professional networks for example.
9. Prepare for Due Diligence
Once you have considered offers from interested parties and accepted one of them. It is customary to enter into a ‘Heads of Terms’ setting out the terms of the deal in principle. This is followed by the due diligence process, or ‘DD’ for short. This is often carried out under an exclusivity clause which allows the prospective buyer to conduct their DD without the seller going elsewhere whilst this takes place. During DD, buyers and their advisors will thoroughly investigate your business. Prepare for this scrutiny by organising all necessary documents and information into a ‘data room’. It is often advised to make a start on this during the strategic planning phase using a typical DD scope. Whilst most buyers will have their own approach, it tends to commonly cover the following elements:
- Finance: Detailed financial review of previous performance and current performance. This will extend to cash flow, bank balances, balance sheet analysis, profit and loss verification, tax due diligence etc.
- Operational: Detailed information on operations, supply chains, and customer relationships and contracts. Many buyers will also look into IT and other operational functions, depending on the business and their ‘scope’.
- Human resources: Employee roles, salaries, and benefits as well as their contracts etc.
- Property & Assets: Detailed review of assets, their value and any debt, as well as verifying their existence etc.
- Legal & Regulatory: Legal agreements, leases, intellectual property documents etc.
10. Plan the Transition
A smooth transition is critical for maintaining business continuity and preserving value. Develop a transition plan that addresses the transition as if it were a mobilisation or carefully executed contract.
The elements to include in this plan include;
- Handover procedures: Clearly outline the steps for transferring responsibilities and knowledge.
- Customer communication: Plan how and when to inform customers about the sale.
- Employee communication: Keep employees informed and reassure them about their future with the new owner.
Even the most positive of transitions can unsettle teams, customers and other stakeholders. Strong, transparent communication as well as swiftly demonstrating the value of the transaction to the respective parties is vital.
The buyer is very likely to bring in external support to ensure this process is well planned and executed and to preserve the value of the asset they are buying.
Conclusion
Preparing your business for sale is a complex but (hopefully!) rewarding process that requires careful planning and execution. It requires a well-considered approach which often starts long before any transaction is agreed upon to prepare the business for sale strategically.
Remember, the more effort you put into preparation, the more successful and profitable your sale is likely to be. If you are looking for guidance on selling your business, consider speaking to a business mentor if you are an entrepreneur or small business, or gaining formal exit strategy consulting if you are a corporation.
