How To Create a Business Someone Else Will Want to Buy
Friday, January 16, 2015
A successful sale of your business starts long before the ‘for sale’ sign goes up.
Unlike selling a house, or even a commercial property, there’s much more to selling a business than cleaning up the yard, tidying up indoors, and perhaps spraying that “freshly baked bread” smell around.
If you’re going to achieve the best possible price, planning needs to start at least three years before the time you want to sell. That’s because the buyer – and their accountant – will want to see at least three years’ trading figures.
For instance, if you’ve been charging your lavish holidays to the company as ‘marketing excursions’ that will have lowered the profit. Great when it comes to tax time, but not so great when you consider the most common way of valuing a business is a multiplier of net profit.
A lot of businesses have been founded by the seller, and an intricate web of personal connections with suppliers, key staff and even some customers are what seems to be the secret to its success. In fact all of them would be highly likely to remain after it was sold, but a nervous buyer will find that hard to believe. Time to bring in a General Manager or a Sales Manager to handle those relationships for a few years, and allow you to show that they remain intact.
This early planning phase is sometimes called an “exit strategy”. Exactly how long this will take will depend on a number of factors:
- The state of the market for your business. Most industries have cycles. Selling right at the peak will cause a buyer to doubt they can improve things, and most people want to leave their mark. Selling during a trough is obviously not a good idea either. The ideal time, if you can plan it that way, is as the industry starts to trend upwards.
- The state of your record-keeping, and in particular your accounts.
- How close it is to the end of the financial year. Sometimes this is a factor, especially if sales were down three years prior to the current year but have improved and been steady since. By waiting till the new financial year (assuming it’s only a few months away), that year can “drop off” the three years Profit and Loss presented to the buyer.
- Whether or not your business is ready for someone to simply step in and take over – often someone with far less industry experience than yourself. For example, sometimes a business might be expecting to sign a major contract in a few months – and strong forward orders are always going to reassure a buyer they’re investing in a secure enterprise.
There are, essentially, four steps to selling your business, whether it’s a major manufacturer or a one-person service operation:
Step 1: Deciding to sell
Selling your business will change your life, so it’s wise to consider all the implications before you do. Some sellers want to ease into retirement, so they offer to remain with the business as an employee after settlement. This is often welcomed by buyers, both for its practical value and because it gives a much longer period for the outgoing owner to introduce the new owner to everyone associated with the business (a post-settlement handover period of a few weeks is standard in most sales agreements).
Step 2: Preparing your business for sale
Once the business is on the market there’s often very little time to change anything, and it’s almost impossible to implement major changes such as hiring senior staff or installing new plant and equipment because you can’t be sure those processes will have concluded by the time the buyer is ready to settle.
Poor preparation can lead to your receiving less than the best possible price for your business, so here’s a simple “to do” list:
- Document the policies and procedures that exist as unwritten rules.
- Systemise the various functions of the business and create a procedures manual. Both these steps will help to reassure a potential buyer that they’ll be able to operate the business in your absence.
- Draw up position descriptions. Each employee should have a clearly defined role, and a set of tasks and procedures to perform which leads to measurable outcomes.
- Sell all your obsolete or slow-moving stock. This will both improve your sales figures, and eliminate disputes about the value of inventory during the sales process.
- Also sell off any redundant or obsolete plant and equipment, machinery, spare parts, and scrap.
- Try and see your premises as a potential buyer would. Clean up, maintain, and even paint the premises where necessary. Ensure they comply with all regulations, both state and council.
- Ask your staff to take their leave and other entitlements prior to the sale, otherwise the sale price may be reduced by the value of their entitlements.
- Unless you want to keep the sale confidential from your employees, discuss which ones are prepared to stay with the business. Retaining key employees is an important selling feature, so handle this process carefully.
- Review your leases and ensure they’re not about to expire, or require renegotiation during the time when you’re planning to sell the business; although if a business can be relocated with minimal fuss and expense, this can sometimes be a positive point for a new owner.
- Document the key business relationships, such as with suppliers and customers. Ideally, convert any verbal agreements into written ones, which will make your business look stronger and build confidence in potential buyers.
- Collect all payments that are overdue from your clients, and ensure you are not late with payments to your suppliers.
- As well as your Profit and Loss statements, it’s helpful to have monthly sales reports to demonstrate to the buyer both your ability to monitor and manage performance and that any seasonal fluctuations are just that.
Step 3: Setting the right price
Invariably, a seller wants to set the highest price the market will bear so that they’re rewarded for the years of hard work they've put in, while the buyer wants the highest future profitability for the lowest possible price.
A professional valuation from a licensed valuer will help reassure both seller and buyer that the price being asked is fair, and grounded in fact.
Step 4: Making the sale
How you sell your business can often be the most difficult part. Simply placing an advertisement in the paper, or on a general ‘for sale’ type website, will result in you receiving either hundreds of replies (if your ad makes the business sound far better than it is) or very few (if you’ve been too cautious).
There are several specialised business sales websites that allow you to advertise your business and which have a higher chance of finding you genuine potential buyers. These are well worth investigating.
Migration agents are often another good source of leads, as they usually have a list of would-be immigrants wanting to enter Australia on a business visa.
Depending on the type of business, the local newspaper or state newspaper may be suitable; generally, simple-to-operate or franchise operations are advertised there though some sellers have had success with more complex businesses.
Your industry peak body probably has a website and an electronic newsletter and many have a printed magazine – your business may attract a competitor who wants to absorb it as a means to grow. Business networking groups and the Chamber of Commerce can also be useful to get the word out.
You may of course decide that you’d rather rely on specialist skills in valuation, advertising, negotiation and sales. Especially since, while all this is going on, you have the ongoing demands of running your business. In that case you may wish to consult a licensed business broker.
Whichever way you choose to do it, follow these steps and you’ll be prepared.