Five Things to Do Before You Sell Your Business
Selling your business is a bit like selling a house – you want to present it in the best possible light to get the highest possible price. And just like selling your house, there are many ways to increase the value of the business and make it more attractive to potential buyers.
1. Minimise the negative
Make sure everything is in good order, asking questions such as:
- Are appropriate, current contracts in place for all your staff, suppliers and customers?
- If you employ contractors, do you have the paperwork to show that they are liable for their own tax and NI?
- If you hold any patents or licenses for your business, are they in the business’s name rather than your own?
- Is the business compliant with current relevant regulation? For example, I once worked with a business that hadn’t told anyone that they no longer used the top floor of the building to house a caretaker. Sorting out the council tax and permission for change of use retrospectively was not straightforward!
- Do you have the required licences for all the tools (e.g. software) that you use?
- Are there any legal claims/ disputes/ employee grievances outstanding?
If you have premises, ensure they are tidy and clean.
Clear up these issues before offering the business for sale. A good buyer will discover them during the due diligence process; at best they will use these issues to negotiate a price reduction, at worst they will pull out wondering what else you are hiding. If there is anything you can’t sort out, then highlight it and make the potential buyer aware before they find out for themselves.
2. Maximise the positive
There will be some opportunities in your business to easily increase its attractiveness:
- Profitability – where can you strip costs out of the business without affecting performance?
- How does your business compare to competitors; are you ahead of the rest; can you demonstrate this?
- Can you identify opportunities for growth that you are not currently developing?
- Extend key client contracts if possible – they add value and longevity to your business;
- Increase notice periods for key staff, ideally to three months.
3. Get your finances and management reports in order
When you decide to sell your business you will usually need at least three years of management accounts to show how the business is running. Not only does this show the actual figures but it also demonstrates that you have control over the way that your business operates. The bigger your business, the more detailed the information should be, e.g. understanding which products and customers/ sectors generate the most revenue and profit; identifying the return on different types of marketing spending.
Valuations are often based on a multiple of annual profit, but many businesses try to keep profit low to minimise their tax liability. Note any relevant items to explain to your broker/ negotiator.
4. Think about timing
When should you start to think about preparing your business for sale?
‘I’m thinking of selling my business in the next 5 years’
You have time for some of the measures to take effect; e.g. streamlining your operation to reduce costs and give improved profits for a number of years, which will benefit you, as well as increasing the business’s value. (Going back to the house analogy, the sooner you replace your old boiler the more you benefit from reduced fuel bills as well as removing a potential obstacle to sale).
‘I want to sell the business as soon as possible’
If you want or need to sell the business more quickly, you can still do a lot to improve its value and appeal, but the earlier you start, the easier it is to make changes with less pressure and a better pay-off.
5. Make yourself redundant
Two reasons for this: first, a buyer will need to be convinced that the business won’t fall apart if you aren’t there; second, selling a business is time-consuming and you need to be able to focus on it.
- A good deputy or management team that runs the business without constantly involving you demonstrates the business’s independence from you
- Good policies, processes and procedures, including a Business Continuity Plan to deal with disasters, ensure that everyone knows what to do without reference to you
- Ensure that client relationships are with the business not just with you personally.
If you are thinking of selling your business or retiring and want to know more about how to increase its value, contact Susie Collings at Exilia for an exploratory conversation.