For established business owners, the prospect of selling all or part of their business can be exciting. It provides the opportunity for business owners to realise some of the wealth they’ve built in their business, and it’s an opportune time to ensure the business is optimally structured for sale.
Whether buyers have approached your clients or not, being ‘sale ready’ can have a material difference to levels of buyer interest, the amount offered and ultimately the successful completion of a sale. Helping your clients be sale ready also means that they can act quickly if a buyer expresses interest, but, first, you need to ensure all facets of a client’s business have been analysed.
What do buyers want?
Business owners are very clear on the expectations from clients of their own product or service, but not as clear on understanding how a buyer may see their business.
Buyers want certainty. Primarily, they want certainty surrounding the current value of your client’s business and its outlook. They gain this certainty by accessing quality financial and other business information that accurately paints a clear picture of your client’s business, how it works, and how it interacts with clients, employees and stakeholders alike.
The more certain a buyer is about the risks and rewards of an acquisition, the more likely they are to submit an offer that adequately values your client’s business. This often results in a higher price and more favourable contract terms.
Conversely, a lack of clarity equates to more risk for the buyer. This is likely to result in an undervaluation of your client’s business, deferred consideration payments or onerous contract terms. Ultimately, if the buyer perceives the risks to be too great, they are likely to walk away.
The ‘sale ready’ process
It’s not always easy for a business owner to see the value of the business they have been so closely attached to for many years.
The following 12 recommendations make up the foundation steps of preparing a business for sale. Working through these steps will give your clients a head-start in beginning the sale process should the opportunity arise.
Does your client have a business plan?
A good business plan has benefits whether your client is planning a sale or not. Make sure the plan is kept up to date, and all key staff are adhering to it and working towards its goals.
Are your client’s business processes and procedures recorded and up to date?
Your client needs to document their major operating policies and procedures, including accounting policies (recording of WIP, cut-off procedures, accruals and provisions, calculation of long service leave etc) and ensure the accounts reflect these procedures. A potential buyer will need to understand how the figures have been prepared before using them to value your client’s business.
Are all records and registrations up to date?
Ensure all records and registrations are up to date including insurance policies, business name and ASIC records, right through to bank signatories and software subscriptions.
Corporate and Legal records
Is the corporate structure appropriate for sale?
Make sure that your client has all the details correctly recorded in a copy of the group structure. This should record the legal structure of each entity (i.e. company, trust or partnership) and the name and percentage of ownership of each shareholder. There is no ‘right’ structure for sale – having complete information of the ownership structure is more important at this preliminary stage.
Have tax returns and indirect and employment taxes been lodged and paid on time?
Ensure that your client has a recent extract of their ATO accounts for all entities involved.
Does the business own any intellectual property?
Make a list of all intellectual property including trademarks (registered and unregistered), copyright, business names, licence agreements, and confidentiality agreements that are owned, used by, or to which your client’s company is a party.
Are accounting records maintained and accurate?
Ensure that your client’s debtor, creditor and inventory registers are accurate and reconcile to the balance sheet and that a breakdown of revenue/sales by customer, product and division all reconcile to your client’s profit and loss statement.
What are the normalised earnings?
Ensure that your client’s accounts identify one-off and abnormal revenue and expenses and provide supporting documentation and accounts that clearly explain their existence.
Has your client prepared forecasts and cash flows?
Ideally originating from the Business Plan, forecasts are useful in tracking the direction of your client’s company. Provide details supporting short to medium forecasts, clearly explaining all assumptions and providing evidence for assumptions where possible.
Customers, suppliers and employees
What is the spread of customers and suppliers?
Next time your clients are exporting their quarterly or monthly financials, ask them to include a breakdown of annual sales per customer, region or site and do the same for the purchases made from the top ten suppliers.
Key Customers and Suppliers
Prepare and review the details of your client’s key trading terms and make sure they are up to date and adhered to by all parties. In your client’s regular financials include a breakdown of annual sales to key customers and purchases from key supplier groups.
Are contracts in place with key employees?
If not, what are the reasons that they will stay post-transaction? Ensure that your clients are up to date with employee schedules, including start date, position, current remuneration, and leave (annual, long service, and personal) balances.
Completing the above will put your clients in good stead to ensure their business is sale ready. To learn more about improving the value of your clients’ businesses, and how to manage and address the issues that reduce business valuations, contact one of our Pitcher Partners experts.