Why is this important?

For many business owners, their business is one of their most valuable assets. It has come to represent many things to each of them. For most, there is an attachment to the business which non business owners simply do not understand.

Perhaps this attachment has been forged through the long hours of working, from meeting challenges, from taking the business to new heights and riding it through the lows. But whatever the reason, many business people define themselves through their business, and see it as their greatest achievement.

However, when the time comes to sell, many business owners stumble at the last hurdle. This jewel they have been working on for all those years starts to lose its lustre, it all starts to get hard and many just want to exit.

But the best time to sell is when the business is at its prime, when things are on the up, when there is plenty of blue sky. This means there should be a plan for when to sell, how to sell and how to get the business ready for sale. This will maximise the value you take out of the business, and let you achieve the reward you have worked so hard for.

This guide will show you how to prepare your business for sale. It will do this by considering what a purchaser is looking for when they buy a business and from that, will assist in developing strategies which will allow you to achieve the best results.

What to do

Key factors

When preparing your business for sale it is important to do so with your potential purchaser in mind. There are a number of key factors which purchasers look for when buying a business as noted below:

• Profitability
• Generates good cash flow
• Good client base
• Low staff turnover
• Systems and procedures
• Reliable income stream
• Business can run independently of the owner

To the extent that any of these factors are missing from your business in its current form it is important that you take steps now to address them. Otherwise, you may not be able to realise the full value from the sale of your business which you could otherwise obtain.

Most prospective purchasers seek to understand the business by analysing the key components of the business in greater depth. In the checklist below you should note the key areas purchasers will review and what information they are looking for:

Sales and customers

Sales trends over the current and prior years

• What are the trends? Are sales going up or down over time?
• It is important that you have this information available and are prepared to answer questions concerning any trends.

Ongoing income from the customer base

• Is there repeat business, or is it just one-off transactions?
• Provide detail to support your position
• Generally, income which is recurring generates a higher business value in the market
• If there is not a high level of recurring income, what strategies can you put in place now to start to make this occur?
• If you currently do have recurring income, are there additional strategies you can put in place to increase this?

Stability of customer base

• How stable is the customer base? How loyal are they? How likely are they to buy from someone else?
• The purchaser is looking for a secure income base in the business.
• Consider what strategies you can implement to retain your customers, and have them buying from you on a regular basis.

Spread of customers within the customer base

• Is there a spread of customers? Are they similar? Do they think the same? Do they buy for the same reasons? How well do you know them?
• The closer the relationship you have with your customers, the more likely they are to stay loyal to your business. This increases the value of your business, and adds more certainty to the income stream the purchaser is buying.

Length and nature of customer relationships

• Understand how long the customers have been with the business, and what the customer relationship and experience is like.
• Once again, the relationship with your customer and the length of time they have been dealing with your business is of importance here.
• What steps can you take right now to consolidate your relationships with your customers?

Dependence on any one, or few clients

• Is the business dependant on any one or few clients? If so, does this make the business vulnerable if they leave? What can be done to overcome this?
• Strategies to broaden the spread of your customer base are important here to reduce the perceived dependency on any one or few customers.

Dependence on any one, or few industries

• Is the business dependant on any one or few industries? If so, does this make the business vulnerable if there are problems in that industry? What can be done to overcome this?
• This is an important question and worthwhile to consider in relation to the strategy for the business. It is essential you keep an eye open for what is happening in the market, and the industry in which you operate.
• Keep your ear to the ground to be aware of any issues which may have a negative impact on your industry, and be ready to react and adjust.

Internal systems

One of the key areas of interest for a purchaser is to understand whether the business is dependent on the business owner, or on the business systems to operate. In general terms, the value of a business increases the more systemised it is and the less dependent on the business owner. The purchaser will look at:

Internal infrastructure, processes and systems

• This is vitally important. The more systemised the business is, the better it can work without you. The role of the business owner should be to manage the system. Ensure there are strong systems in place, and ensure they work well. It is important to build them in such a way as to reduce the dependency the business has on you.

Quality control procedures

• How well does the business do what it does? What quality control processes and checks are in place? What is involved in maintaining this quality? Can it be improved further?
• This is an area of constant work, and continuous improvement.  This needs to be a continual process.

Dependence on owners, from both customers and staff

• This is important to understand. If your business is dependent on you it becomes less attractive to a potential purchaser. They will be worried that when you leave, your customers and staff will also leave.
• This highlights the importance of building your business to the point where it is not dependent on you for the day to day running of the business.

Quality of existing staff and length of service

• A potential purchaser will be keen to understand your existing staff and how well they work in your business.
• Is the business dependent on them? What happens if they leave?
• For staff to be of interest to the purchaser, they will need to be well trained and fully aware of the key aspects of the business, or at least, the areas they are involved in.
• This might mean you have them undertake additional training.
• This gives you an immediate benefit as you will take advantage of the new training they put to use.
• Further to this, the length of service of employees is usually a clue as to what your employees think of you and the business. What can you do to continue to enhance this?

Suppliers and business inputs

The purchaser will also want to understand the relationship you have with your suppliers and if there are any special arrangements they will be able to take advantage of.  They will want to know:

Length and nature of supplier relationships

• Provide details on how long the business has dealt with its key suppliers, and what the supplier relationship and experience is like.
• Explain the terms of trade which are in place, and any special arrangements. They will be looking for these.
• Provide evidence of good deals done in the past, and indicate which arrangements are likely to be maintained with suppliers.

Dependence on any one, or few suppliers

• Is the business dependant on any one, or few suppliers? Is the business vulnerable in this area? Are there preferential supply arrangements in place? Can these be improved?
• Purchasers are typically looking to continue the business on in a similar way to its current direction. They are likely to be watching for areas where the business is vulnerable and negotiate harder with you because of that.
• What strategies can you put in place now to reduce your vulnerability in this area?

Competitors and the marketplace

Potential purchasers will want to get an idea of how competitive the market is and how your business is placed in terms of its competitive position. They will want to gain an:

Understanding of your competitors and your competitive position

• Who are the competitors? What do you know about them? Do you know your competitive position? Can it be improved?
• It is important that you have the information to hand to answer these questions
• You will gain an immediate benefit from finding the answers to these questions, and be able to use this information straight away in your business.

Understanding of the market the business operates in

• What do you know about the market? Is it growing? Shrinking? What is the future of the business in this market? Is overseas competition likely?
• Again, these are important questions to know the answers to and you will be able to develop appropriate strategies in response.

Financial analysis*

*At this stage, it will be useful for you to read How to Understand Financial Statements, as it more fully explains the financial terms used in this next section.

In addition to the above information, the purchaser will want to do a financial assessment of your business. There are a number of specific areas they will look at, and these are likely to include a review of:

Current ratio

• This is a measure of the Current Assets of the business compared with the Current Liabilities. You should expect it will be checked for at least the last three years.
• This is a key measure of liquidity and tells us how well the business can meet its financial commitments.
• To the extent that you can put in place cashflow improvement strategies to improve this area, the better placed the business will be.

Debt to equity ratio

• This is key indicator of risk and measures Total Liabilities against Owners Equity.
• The purchaser will be looking at the level of risk the business has been operating at. This ratio compares the levels of debt against the levels of equity the owners have in the business.

Assets to sales

• This is a measure of the efficiency of assets utilised in the business and compares Total Assets to Sales.
• The purchaser will be looking to see if assets are being utilised efficiently to generate sales.
• This is an important measure for all business owners to be mindful of and you will do to check this figure for your business now.
• Once you have checked this, you may consider what strategies can be implemented to increase the efficiency in this area.

Sales trends

• What are the sales trends for the business? Are they growing or is there a downturn?
• Provide information to compare sales for the current year with prior years
• From a sales analysis perspective, what percentage of sales do the Top 10 customers represent?
• What percentage of sales do the Top 20 represent?

Gross profit

• What are the trends reflected in Gross Profit? Is Gross Profit increasing in real terms? In percentage terms? Compare over the prior three years.
• Be prepared to provide this information
• Be prepared to justify or explain any significant variations in this figure across the years analysed

Net profit

• What are the trends reflected in Net Profit? Is Net Profit increasing in real terms? In percentage terms? Compare over the prior three years.
• Be prepared to provide this information.
• Be prepared to justify or explain any significant variations in this figure across the years analysed.

Stock turnover and stock days

• How many times does stock turnover each year? How many days are tied up in stock? This is a critical measure as it indicates how long your cash is tied up in stock. The longer it is tied up, the longer till you can use it.
• The purchaser will be looking at this, and asking themselves how long they want their cash tied up in stock.
• What strategies can you put in place now to turn stock over faster, and reduce the days cash is tied up?
• Be prepared for the purchaser to want to do a physical stocktake. They will want to physically sight the stock and check for sale ability and obsolescence.

Debtor turnover and debtor days

• How many times do Debtors turnover each year? What are the average Debtor days? This is another important measure as it indicates how long your cash is tied up in Debtors.
• This is also a useful indicator of the customer relationship with the business. Quick payers are usually good customers and this indicates they are happy with the service they are getting.
• This is also a good measure to show how effective your debt collection procedures are
• If they are not so good, what strategies can you put in place, now, to improve in this area?
• Also expect the purchaser to want to review aged receivables over the previous eight quarters and seek an understanding of any bad or doubtful debts.

Creditors turnover and creditors days

• How many times do Creditors turnover each year? What are the average Creditor days? This is another important measure as it indicates how long the business takes to pay its bills.
• This then becomes a good indicator of any payment arrangements which are in place.
• It is also an indicator of whether you are taking advantage of any early payment discounts.
• These are important as they can have a significant impact on Gross Profit.

Dividend history

• Review the payment history of dividends paid to shareholders
• This review also indicates how profitable the business has been over the years, and how well the business has been able to provide returns to shareholders.
• This will be a useful exercise for you to undertake. It will give you a chance to stop and reflect on whether or not the business has provided you with the returns you expected.
• If not, what strategies can you put in place now to maximise the returns you can get from the business?
• Not only will you get the immediate benefit, but it will stand the business in good light for a potential purchaser when they see the business has been paying good returns to the owners.

Checklist of other items

In addition to the above items, there are many other issues to consider when preparing your business for sale. The following is a checklist of other key areas to work on:

Marketing

• Is there a current marketing plan in place? How effective is it?
• Do you know how customers are attracted to the business? Provide details.
• Do you know how service is delivered once customers transact with the business? What is your level of customer engagement? Can it be improved? Provide details.
• How do you retain your customers? Can you improve in that area?
• What ongoing relationship support is in place?
• How do you get new customers? Do you work your referral network?
• These are vitally important questions and cut to the very heart of your marketing and sales efforts. It is so important you know the answers to these questions. Not only will a potential purchaser be asking us, but you just simply need to know for the ongoing health and prosperity of the business.

Tax and compliance

• Review the tax liabilities of the business and ensure they are up to date. These include, Income Tax, GST, FBT, Payroll Tax, Workers Compensation and Superannuation,
• Ensure all Income Tax returns, BAS forms have been lodged
• Also confirm that the financial statements tie in with the income tax returns as lodged.
• Be prepared to share this information with prospective purchasers. They will require this information as a minimum.

Management systems

• Prospective purchasers will check on the business management culture of the business as this has a major impact on the profitability of the business.
• Do you have a management structure in place, and do you have minutes of previous meetings on hand?
• Do you have position descriptions in place for all positions? If not, why not? These must be done as a matter of urgency. They are a fundamental component of effective management.
• Do you undertake performance appraisals on a regular basis? If so, how effective are they? Can they be improved?
• What strategies can be put in place now in regard to this.

Review assets being sold with the business

• Undertake visual review of machinery, plant and equipment, computer systems, office furniture, chairs, facilities.
• Ensure regular maintenance has been carried out where required.
• It’s common practice for purchasers to obtain their own independent valuation of assets being acquired.
• Ensure your assets are in prime condition prior to valuation.

Additional payments to owners

• Be prepared to disclose additional payments to owners or directors, such as directors bonuses, extra superannuation contributions, overseas travel, directors fees etc.
• Not that there is anything wrong with this, they just needs to be added back for valuation purposes as they are not strictly operating costs of the business.

Appearance

• Look at the appearance and tidiness of the business premises. What message are you sending out?
• This often gives a clue as to how well you look after your customers, staff and suppliers.

Employees

• Ensure your payroll system is fully up to date and employee entitlements are correct and accurate.
• The prospective purchaser is likely to seek your opinion on staff in order to understand their knowledge, capacity and work ethic.

Other factors typically considered by the purchaser

Apart from the business itself, the purchaser will usually consider the business in terms on an investment opportunity. Accordingly, it is important to consider the following issues from their perspective:

Return on investment

• A prospective purchaser will typically be looking for a good return on their investment. This will need to be better than the term deposit rate on funds with a bank.
• As a useful rule of thumb, many purchasers look for a payback of their investment within 3 – 5 years, depending on the specifics of each case.
• How does your business measure up against the 3 – 5 year payback benchmark?
• What strategies can you put in place now to improve its profitability, and hence make it a more attractive investment option?

What is the upside?

• Purchasers are also typically looking for an upside, ways in which they can improve the business from its current position to a better position.
• What savings can be made?
• What improvements can they make?
• How can they make this a better business?
• How can they make more profit?
• The issue here is that you should be asking yourself the same questions, but asking them now, and putting strategies in place to address them.

Risk

• Purchasers will also be evaluating the risk of their investment.
• What levels of risk surround this business? The industry it operates in?
• Is it subject to government regulation, or the economy, or other factors over which you have little control?
• You should be prepared for questions such as these and have responses at the ready.
• You should also carefully consider these questions and put in place strategies to reduce your vulnerability in these areas.

In addition to the above information, there are a number of other matters you will need to take care of as you prepare the business for sale.

Legal issues

There will be a number of legal matters which will be your responsibility:

• Contract for Sale of Business
• Confidentiality Agreements, which should be executed by any prospective purchaser before any information is provided

You should also be prepared to receive from the purchaser’s solicitor:

• Restraint of trade as vendor
• Restraint of contact with customers and staff for defined period of time
• Non compete clauses

These will all need to be checked by your lawyer.

Other matters

There are a number of other items which need to be dealt with as part of the preparation for sale. The following checklist will give some guidance as to the type of areas you may need to attend to.

Information memorandum

• This is a summary of the key information about your business. It is often one of the first pieces of information provided to the prospective purchaser before they undertake due diligence.
• It provides background information on the business, and an overview of what the business does, its history, current performance, and expected future plans.

Registrations

• Will you be required to deregister from any membership organizations or other obligations?
• Cancel any policies or registrations which are in your name, if not transferred across with the business sale.

Bank and finance

• Advise business bankers and confirm your exit from the firm when complete,
• Withdraw and remove any relevant guarantees, particularly in regard to bank facilities, lease arrangements, or any other areas relating to the business once sold.
• Ensure any financial payouts are made for those financial obligations for which you are responsible.
• Ensure leases or hire purchase agreements are transferred on any equipment being transferred.

Handover

• Prepare for customer handover, and training as required.
• Advise insurers and confirm your exit from the firm.
• Ensure your obligations cease in regard to business and property insurance.

Insurance

Creditors

• Advise creditors and confirm your exit from the firm.
• Ensure responsibility for all utilities has been transferred as required.

As you can see, there are many issues to consider when preparing your business for sale. We trust this guide has been a useful aid in highlighting many of the areas to look at and wish you every success in the eventual sale of your business.

Where to go for help

Do it yourself

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