The price may be right, but is your business ready for sale?

David Newport has advice on how to make your business sale-ready should a keen buyer suddenly appear.
Most business owners have a snappy line if you ask them whether their business is for sale: “Yes, if the price is right”.
Too many of them have obviously been watching that cheesy game show on TV because the majority do not have a clue about what it takes to make their business sale-ready should a keen purchaser turn up on their doorstep.
The condition of a business and its future prospects determines the asking price. The ‘science’ behind setting and achieving the price is the ability of a purchaser to verify the business in question’s past and future maintainable profits.
There are a number of key requirements business owners need to accomplish to make their company sale-ready should a keen buyer appear on the scene. Most of them are apparent no-brainers for good business practice as a whole, but even more so if a business owner wants to be sale-ready at any time.
First, there is aesthetics. Perception is reality in most people’s eyes. It’s a bit of a hackneyed phrase but it is a truism that you don’t get a second chance to make a good first impression.
The appearance of the business premises – including paint, signs, gardens, flooring, and general tidiness – is crucial.
Two years ago, Switch Business marketed a food manufacturing business with an asking price of about $1 million. We suggested the owner tidy up the premises and perhaps even paint the filthy concrete floor.
His reaction was “We comply with health regulations, and cleaning and painting is not going to make any more profits for the company”.
We had several parties very interested in the business, but once they had visited the factory they lost interest very quickly. After receiving feedback from six parties, the owner agreed to take the business off the market for two months and tidy the place up. Once the tidy up was completed, we sold the business to the first person who looked at it.
A potential buyer might have heard good things about a company’s product, or profitability, but that might be as far as they get if they turn up to find a mess.
A key factor where many business owners go wrong is failing to keep their personal and business lives separate when it comes to finances.
There are obvious benefits of business ownership relating to personal expenses, but it needs to be kept to a minimum because a prospective purchaser is not likely to look favourably on this kind of activity.
Finding out that a business owner has operated by handshake for years with customers, suppliers, lease providers and sometimes even key staff, is a sure way to send a would-be buyer screaming for the hills.
It is important to have current contracts in place for as much of the business as possible. ‘Handshake’ deals mean nothing to a purchaser or his/her financiers, or in modern business circles.
Verifiable financial records are essential to demonstrate a company’s historical performance. Year-end financials and monthly management accounts are the minimum requirement.
Debtors should be in check. Time spent negotiating excellent supplier payment terms is well spent, because the ‘working capital’ requirements of a business greatly impacts its saleability.
Any experienced purchaser will add a business’s working capital requirements to its listed sale price. If working capital requirements are out of control, the perceived ‘price asked’ for the business being ‘Net Profit plus working capital/Sale price’ will make the return on investment look less attractive.
Time should be spent bringing receivables into line. Poor collection practises allowing accounts to become 60, 90 or sometimes more than 120 days overdue sound warning bells to purchasers. The more money outstanding increases the working capital requirements.
Stock and its treatment in any sale process is another one of the major potential sticking points. Businesses which hold stock should ensure that it is current and in good condition. A modern stock control program can show any prospective purchaser how the company’s stock lines move.

The business that wasn’t ready
A perfect example of how not to have a company sale-ready, should a buyer come knocking, was a 30-year-old import/distribution company run by a father and son. They had done very well out of the company, but had not kept up with modern business practise.
The majority of their supply agreements were handshakes, but the biggest problem was the working capital and stock levels. The business was worth about $3.5 million and they had about $2.5 million in stock.
There was no dedicated stock management program, so the company had no idea of the age or saleability of its stock.
Would-be purchasers quickly realised the working capital required to finance the stock was close to $1 million and this greatly affected the sale price. The company eventually sold for the value of the stock.
It is crucial for any company to have a sophisticated and up-to-date business plan which shows the direction it is heading in. Would-be purchasers expect to see budgets, targets for growth (customer or products/service), margins etc, and current performance measured against targets.
The value of any business is based on the risk associated to ‘future maintainable earnings’. That risk can be minimised by having a professional business plan.
Many business owners are incredibly busy, but time taken to put together a comprehensive procedure manual is time well spent. The risk associated to ownership transition can be greatly mitigated if there is a manual in place for a new owner – it’s not much use if procedures are only found between the current owner’s ears!
A prospective purchaser and his/her advisers will relax markedly in due diligence if they are able to see in writing how a business operates day-to-day.
First impressions are incredibly important in business sales because the last test for most purchasers when they have completed due diligence and taken on all their advisers’ advice, will be to rely on ‘gut instinct’.
This was reinforced in our minds when a couple who were interested in buying a transport business, and were the perfect buyers in many ways, did their first site visit. One look at the filthy toilets on the day was enough to kill the deal stone dead – the woman literally walked out. She later said that if a company can’t keep its toilets clean then that kind of standard will be reflected in the rest of the business.
It is never the wrong time for a business owner to get organised. You never know when a keen buyer will turn up on your doorstep.