Preparing a business for sale – part 2

The first article on this subject looked at the issues surrounding selling a business within a short time frame. The article offered advice as to what measures and actions a potential seller could undertake to increase the value of their business. The second part to this article looks at business owners looking to sell in the longer term.

Determine the exit priorities of the owners

It is important to consider the goals and aims of all partners and shareholders.

  • Is there a consensus for sale
  • Are time scales agreed
  • Is there a target sale figure in mind

It essential to have an understanding of the value of your business, indeed your future lifestyle depends on a successful sale of your business.  From a survey of 13000 businesses it has been established that there are 8 factors that affect the value of a business.

  • Financial Performance. To understand how much someone will pay for your business it is necessary to understand a potential buyer will be looking at the future profitability of the business. They may be using a formula that discounts the next ten years of cash flow at an appropriate discount factor.
  • The nature of the recurring revenue. Contract based business sales are of greater value than a non-recurring stream of income.  It would be worthwhile to try to increase the contrast term or look to offer further sales.
  • The degree of reliance on small number of customers, suppliers or employees. It would be benefit the company to cultivate a greater number of suppliers and potentially increase the number of supplying companies.  Reliance on one or two suppliers can create stock issues.  It stands to reason that a company should have a large portfolio of customers. Use Pareto analysis to establish whether you have an 80/20 split.  If so look to sell more to the smaller customers.
  • Levels of customer satisfaction. This can be done by simply asking the question How likely are you to recommend this company to a friend? See for example Reichheld and the Loyalty Effect.
  • Growth Potential. Some key growth questions

preparing a business for sale

  • The fluctuation of cash flow. Take a fresh look at stock levels and slow moving stocks. Reduce debtor days and examine long and short term loan provision.
  • Hub and Spoke – The dependency of the business on the owner. Dependency reduces business value. It would be worthwhile to look at your organization and establish whether a new process or employee can reduce your workload.
  • Control over pricing. Points to consider:
  1. Are there many competitors in the market
  2. Are you able to differentiate yourself and charge more.
  3. How does your brand compare to market leaders.

Prepare for Due Diligence and legal scrutiny

First and foremost once the decision to sell has been made it is necessary to conduct some financial and legal due diligence to mitigate any issues which may arise later in the sales process.

  • Resolve any outstanding legal issues
  • Ensure all company law documentation is in place, ensure board minutes and contracts will be available
  • Reduce debtor days & therefore reduce the working capital requirement to the new owner
  • Identify directors payments and benefits including related party transactions
  • Reconsider capital spending and investment. This may also include new employment commitments.

Key Points For Long Term

As a starting point it would be wise to obtain a valuation from a professional business broker.  Although your accountant can advise on this he will generally not have wealth of experience of a professional broker.  You can also take the ‘Value Builder Survey’, which provides a guide on your company value and includes advice on how to increase the value of your business.