How to prepare your business for sale

Ready to sell your business? A little preparation goes a long way. Here’s what you need to do in order to make your business more saleable.

Deciding to sell your business can be both exciting and scary. You may be retiring, considering a new venture, or perhaps changing careers altogether. Some people start their business with a view to selling within five years, while others may not consider it until well after they’ve established the business and they feel ready to step back.

Whatever the case, selling your business isn’t something to rush into. So, where do you start?

Q2 sees a lot of business owners ready to retire or sell a business, who need a few tips on how to make their business ready.

They spoke to business broker Tim McLaren from Clyth MacLeod Business Sales about how to make your business as saleable as possible.

Tim says many business owners don’t take the time to adequately prepare their business for sale. The first step, he says, should be to reduce the risk to a new owner. Owners often don’t realise that their perception of risk is very different from that of a potential purchaser.

“An owner who’s been on the inside of their business for years may feel very confident about the value of their business and comfortable with the risks and all the elements within, but a purchaser looking in from the outside will see many risk factors,” he says.   

How to make your business more saleable

First, you need to consider how you can make your business attractive to a buyer on the outside looking in.  Ask yourself: is it profitable? Do you have good systems in place? Will your staff stay with the business? Do you have a secure premises lease?  Is it viable to secure key suppliers and/or customers with contracts?

Tim says that two major factors contribute to the value of a business. The first is the future earnings and the second is the risks to future earnings. Risks can be reduced with systems and procedures in place that allow for a smooth transition to the new owner.

The longer your track record of performance of profitable trading, the better. Ideally, a business owner should start planning the sale of their business at least two years in advance, although five would be better. This allows plenty of time to work on maximizing profitability and improving internal systems.

“By investing time and energy in preparation, you can get a lot more from a sale,” Tim says. “In a perfect world, someone should be thinking of how they’d sell their business from the moment they set it up.”

Essentially, everything that reduces the risk for the new owner will help to increase its value.

This should include:

·         Good financial reporting. Reports going back at least four years are ideal.

·         Transferring as much personal goodwill (owner-dependent relationships and knowledge) away from the owner and into staff and/or documented manuals and procedures.

·         A secure premises lease in place. Any business that is dependent on its premises or location needs a medium to long term binding lease agreement on fair commercial terms.

·         Well-maintained plant and equipment that is fit for purpose, but without over-investing.

·         A robust HR policy and employment contracts.

·         Report on business specific requirements such as roster structure, current employees, and any recommendations for changes to staffing structure.

What makes a business attractive/unattractive?

In most cases, the factors that make a business attractive are excellent earnings, a low-risk profile and an easy transfer. The less work a potential purchaser has to do, the more motivated they will be to buy.

Appeal also depends on what a potential business owner is looking for. Someone in the smaller end of the SME market is essentially looking to “buy a job” where they’re their own boss. In this case, they may be looking for a type of business that matches their skills and experience.

However, these buyers will compare the business earnings with what they are able to earn if employed. If someone can get a job earning $70k a year, they might feel it’s easier to do that than buying a business that’s making $70k a year.

An investor-type buyer, on the other hand, may be looking to build their business without being involved with the day-to-day operations. This may mean that certain types of business requiring hands-on involvement from the owner – such as a cleaning franchise – may be less attractive if their earnings will be directly proportional to the hours they must spend cleaning.

“If a business requires you to work ‘hands on the tools’ for 40 or 60 hours a week, it’s hard to scale up because all your resources are drained by delivering the product or service,” Tim says.  

A business that relies on highly specialist skill sets can also be more difficult to scale as it can be difficult to recruit the required skills.

How To value your business

This is where having good accounting advice can help you to maximise the value in your business.

An attractive business is one with good systems in place that allow for a smooth transfer. A good accountant can guide you through establishing these systems and getting your records in order so you can get the best price possible. When selling a business, it’s important to know the “goodwill” value. Goodwill refers to intangible assets over and above the physical assets the business owns, such as customer loyalty and brand reputation. This premium can be attributed to things such as reputation, future growth, brand recognition, or human capital.

Goodwill is usually linked to “super profits”. Your super profit is the profit made over and above your market salary.

You’ll also need to calculate the average maintainable profits from previous years, adjusted for various items such as financing costs and the market salary of working owners.  Be aware that if you are not returning all cash sales in the books this will negatively impact the value of the business.

The value of goodwill will also depend on the type of business:

Self-Employed: You own a job. Your business is almost solely reliant on you (the owner). Goodwill value is usually personal goodwill: this makes it difficult to transfer the goodwill and profits to another party. 

Business Owner (employing 5-15 people): Your business is not as reliant on the owner. Goodwill is usually personal and business goodwill: this makes it easier to transfer the goodwill and profits to another party, especially if there is a transition period. 

Investor: Business is not reliant on the owner and can run well under management. Potential for scale and business goodwill as a result of systems and branding: this makes it possible to quickly transfer the goodwill and profits to another party through a business or share sale.

The key factors are the earnings multiple and the super profit – and the earnings multiple increases as the reliance on the owner diminishes. For example, a business heavily reliant on the owner may not be able to be sold at all, or be worth just 2-4 times the super profit.  Whereas, a mature business with great systems may be worth 10-12 times the super profit.

Article supplied by Q2 Business Strategists and Chartered Accountants. If you’re thinking of selling your business in the next 5 years, you’re invited to this free workshop!