Advance planning is key when preparing to sell your business. Here's how to prepare your business for sale, giving yourself the best chance of finding a buyer and a price you're happy with.
Selling a business – the process
Ready to sell your business? Potential buyers will want to know why you’re exiting, especially if you’ve advertised what a great business it is. Honesty is important because it will set the scene for all your dealings with a potential buyer.
Some common reasons you might want to sell include:
- you're planning your retirement
- you're considering relocating
- you're keen to try something new (a career change)
- there are other circumstances, such as ill health.
You may also feel you’ve given the business your best shot and that both the staff and the business may have better prospects under a new owner.
Identify your objectives
When preparing to sell your business, jot down your specific objectives in writing. These might include:
- selling by a given date
- selling at a target price
- continued involvement in the running of the business.
Is your business currently structured in the best possible way for a sale? For example, if the business owns its premises, will this make the business as a whole too expensive for a potential buyer?
If so, consider restructuring the business into two independent businesses: one business owns the building and the other business owns the trading part. You might then decide to sell the trading part and keep the business that owns the building and use the rental income to fund your retirement.
If your business owns expensive plant and equipment, you might follow a similar tactic. Split into two businesses – one business owns the plant and equipment that you then lease to the trading business. Speak to your accountant first to find out what other ideas could suit your business before you sell.
Get the right advice
Contact your accountant, lawyer, wealth adviser or a business sale broker, who specialises in selling companies. Good advisers can fill many roles, such as:
- offering tips on how to add value to the business
- boosting your credibility with buyers
- providing a realistic business valuation
- explaining how to sell a business privately, and approaching potential buyers without revealing your identity
- widening the list of possible buyers
- allowing you to continue running the business while they concentrate on selling it.
Grooming the business
To get the best possible business purchase price, you need to show your business at its best.
Demonstrate a good financial record
Buyers will want assurance that your business has a stable history and a sustainable future:
- Try to show stable financial cash flows through the year.
- Delay or bring forward major purchases to help achieve this.
- Be realistic about depreciation figures and the timing of income in your accounts.
- Provisions for bad debt and old stock should also be realistic.
- Improve your working capital position by selling underused equipment and assets.
- Efficient stock management and tighter credit control will also improve working capital.
Offer excellent systems
Buyers will see more value in your business if you have good systems and can obtain accurate information quickly. Any errors will undermine their confidence in your business.
If necessary, improve your systems or develop new ones. Show that:
- your accounting systems are accurate and capable of generating up-to-date reports
- you regularly monitor key performance indicators and act on them
- your business has a stable customer base and good customer management systems
- your staff follow clear procedures laid out in operating manuals.
Good systems show buyers that you have the business under control and that it’s not dependent on you for survival.
A tip is to prepare your business as if you intend to franchise it. What systems would a new owner need to run the business?
Reduce the buyer’s risk
What steps can you take to make the business less risky from the buyer’s point of view? Some suggestions include:
- turning informal deals with suppliers and customers into formal contracts
- ensuring suppliers won’t cut any established lines of credit if you sell your business
- implementing incentive schemes to encourage key employees to remain with the business
- widening your revenue and supply sources to reduce your dependence on a few large customers or a single source of supply
- tying up any loose ends; e.g. if your tenancy agreement is due to expire soon, make sure the landlord will agree to a new one in writing
- offering financial help to a purchaser such as payment in instalments or finance at a competitive rate.
Remember that a buyer may have the alternative of setting up a new business from scratch, so your goal is to make life easy for them.
Marketing the business
Marketing your business to potential buyers has a number of stages.
Find potential buyers, such as:
- competitors, suppliers or customers
- new market entrants, including foreign companies
- your management team
- financial investment companies.
Your accountant, lawyer or wealth adviser may be able to put you in touch with interested parties, so share your plans with them.
Make the approach
You may want to keep your own business anonymous by using an adviser or business broker.
Alternatively you could directly approach a business that might be interested. Give careful consideration to how you will make the approach – is a phone call or a posted letter more appropriate?
Weighing up offers
There are many ways of paying for and taking over a business and you’ll need to carefully weigh up what is on offer. It’s always important to qualify the buyer – however good an offer may sound, unless it’s properly financed, it’s worthless. Consider the following issues.
What form will the payment take? What are the tax implications of selling a business? It's important to consider all your options.
- Cash payment up front. This may may be the safest and most attractive option, but is it also tax-efficient?
- Vendor finance. You may be asked to leave some money in the business (vendor finance) and, if so, you’ll need to thoroughly check out the buyer’s reputation, track record and business skills.
- Deferred cash payment. If the buyer offers this, establish whether it’s guaranteed. The payments might be in the form of earnings payouts, linked to future sales or profits. If so, retain some form of management control to ensure performance targets are met. You may otherwise have to sell your business for less than you initially expected.
You might continue to have some responsibilities and liabilities. For example, you may be tied to warranties and indemnities for a year or longer. You might also be asked, or required, to remain involved in the business but it's important to remember you’ll no longer be in control.
Your attitude to the sale may also be affected by the buyer’s intentions.
- How will the business be run in the future?
- What expansion or sales plans does the buyer have?
- Will any parts of the business be sold off?
- How will the deal affect employees?
Completing the deal
The buyer’s offer will be subject to further due diligence and to a detailed sale agreement. The due diligence may involve the buyer’s accountants and lawyers.
The accountants will want to look at every aspect of your business’s finances and the lawyers will want to check that the business has full legal ownership of all key assets (eg. property deeds and licensing contracts). They’ll also want to look at the legal relationships with customers, suppliers and employees.
Many legal issues may be covered by warranties and indemnities that you, as a vendor, will almost certainly be asked to sign. Read these carefully and get professional advice before you do sign.
You may have to involve certain members of your staff during the due diligence process. Bear in mind the feelings and possible reactions of your employees when communicating your plans, as staff may fear their jobs are in jeopardy. Carefully consider who you’ll tell and when you’ll tell them.
- Consider planning for the possible sale of your business. Good preparation will help you maximise the value you get.
- List all the points you can implement in your business to improve its value.
- Assemble a team of experts to help you get the business into top shape.
- Include your accountant, lawyer, wealth adviser and NAB Business Banker. Get expert advice on whether you need to restructure your business to make it more attractive and to make the sale more tax-efficient.
- Consider all your options for exiting your business. You may be unable to find a buyer, so consider alternatives such as a management buyout or passing the business on to a family member.
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The information contained in this article is correct as of July 2018 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.