In an ideal world, a business owner would have two or three years to prepare their business for sale and to achieve the optimum price.But even the best laid plans can go awry and a more urgent sale can be necessary – the business owner or their partner could get sick; their personal circumstances could change, leaving them unable to run the business or in need of cash; or they might receive a tempting out-of-the-blue offer for the business.

It’s for all these reasons that business owners should be prepared to sell their enterprise at all times.

“If somebody ever comes knocking on the door and you’re not ready, it devalues the business: if you say the business is worth X but you can’t quickly demonstrate it’s worth X,” says Simon James CA, a partner at HLB Mann Judd in Sydney.

James believes that in the current economic environment it’s more important than ever for business owners to be ready because with shifting supply chains, rising interest rates and business uncertainty, buyers are looking for opportunities.

“Part of being sale ready is actually understanding what your business is worth and what your objectives are for the business. Being sale ready is having a good strategy in place, which is good for all businesses,” he says.

“It’s just good business hygiene – making sure everything is up to date, your numbers work, your strategies are in place, you’ve got no gaps in your management team; that everybody is aligned.”

Extreme makeover

Owners need to ensure the business is ‘tidy’, that it has everything in place, says James. This means up-to-date financial records for a potential buyer to look at and no outstanding tax issues. Ideally, owners should be able to pull out their computer and show buyers cashflows, profit and loss statements, budgets and forecasts.

Legal agreements such as leases and employment agreements should be up to date. Proper systems and processes that comply with regulations should also be in place. For instance, a turn-off for a buyer is a business where the owner runs their personal expenses through the company, James says.

The right team with key people should be in place, along with the right incentive structures.

It’s crucial for businesses to take account of the tax treatment of a business sale and associated capital gains tax, perhaps by better timing the sale or selling the business in stages. Likewise, if a business has a large amount of intellectual property the buyer might be able to claim a tax deduction for it and that could be reflected in the sale price.

“I always say increasing the sale price by 30% is hard, but you’ve got options about reducing the tax leakage by that amount of money,” says James, adding there are advantages for businesses in being ready for sale even if the business isn’t sold.

“Being sale ready means knowing what the business is worth so you are actually investing in the business and building up the volume of the business. You aren’t just running the business just to pull the money out as you go and the business value either stays the same or declines,” he says.

Pictured: Simon James CA

“Being sale ready means knowing what the business is worth.”

Flip or flop

Annè Lensink CA, a director of New Zealand chartered accountants and business advisory firm Villa, has worked with many clients to get their business ready for sale. She says many have found the process to be very helpful in running the business itself.

“It sounds really cheesy, but a business ready to sell is a business worth keeping,” she says.

Some years ago she advised a client to hire a general manager to sell the business because it wasn’t saleable with the owner personally running it. He installed a general manager and found that he could all of a sudden go on holiday and so the business owner decided not to sell after all.

Lensink agrees that business owners should have an idea of what their company is worth.

Pictured: Annè Lensink CA

“Once you know its worth and if you know what you want for it, then you can start filling in the gaps.”

“Once you know its worth and if you know what you want for it, then you can start filling in the gaps,” she says.

Business owners should also get professional advice from a valuer who is familiar with their industry and if it’s a regional business, the local market. Owners sometimes don’t have a realistic idea of what their business is worth. Founders in particular can overvalue their business, while others don’t realise the full value of the plant and equipment they have accumulated through the years.

In particular, owners should focus on profit. Many make the mistake of assuming their business has a particular value based on its turnover, but that’s not much good if the profit margin is only 5%, for instance.

“I always say to my clients: it’s not about turnover, it’s about leftover,” Lensink says.

Owners can start boosting profit by analysing what their turnover is made up of, and which parts or customers are profitable and which aren’t.

“The simplest thing for business owners to do to maximise profit is to actually step away from the business and look at it from the outside,” says Lensink. “A lot of business owners just go about their day to day and their month to month and year to year and don’t actually ever analyse what they’re doing.”

Grand designs

When people sell their house, they tidy up the garden, repaint the property and take care of any other maintenance, but Lensink says it’s surprising how few business owners do the same with their physical premises when they put their enterprises up for sale. Often it’s just simple things like making sure the signage is tidy, that the premises are tidy and the paint isn’t peeling.

Often when a small or medium business changes hands the business owner will have to stay on for the handover period. Another disadvantage of not being sale ready and having systems and processes in place is that this can be a lot longer if the business is unprepared, says Lensink.

Business owners also need to be prepared for a long sale process, because selling a business takes a lot longer than selling a house. They don’t want to be caught in a situation where the buyer pulls out after lengthy due diligence because of something the buyer has discovered and the business owner has to start the entire sale process all over again.

Karl Bennett CA, a director of William Buck in New Zealand, warns his clients of ‘deal fatigue’ – weariness as the sale process drags on. They need to find a way to de-stress away from the deal, be it golf, going to the gym or finding solace in talking to a mentor, or the risk is they will become so tired of the process that they accept a sub-optimal offer.

Pictured: Karl Bennett CA

There is also the risk that they overlook some of the details that are important for getting a deal across the line.

“When you’re in a deal, all the little things matter – tax returns, filings up to date and employment contracts in place, inventory clearly accounted for,” he says. “And if you haven’t got all those little things or you’re missing small things, these things can either create issues with due diligence or erode value and trust.”

Bennett highlights intellectual property as a key area that can derail a deal, when the ownership of intellectual property isn’t clear. The business owner might say they have a patent but the patent filing hasn’t been done correctly or the process hasn’t been followed through.

Likewise, business owners need to ensure they own or control all of the relevant domain names for their business in all of the countries they operate or could potentially operate.

“There’s lots of little things that are in your control. Is your lease up to date? When you got that last lease renewal, did you actually get the lease signed correctly?” he asks.

“Business owners are busy. They’ve got all sorts of things going on. Often, those little things can actually get missed and it’s important that they’re not.”

Love it or list it

The William Buck 2022 Exit Smart Report of Australian and New Zealand small-to-medium business owners reveals that 73% expect to exit their business within the next 10 years and 48% within the next five years.

However, the majority were underprepared for a sale.

Only 45% had an exit strategy in place and most were not executing strategies to increase the value of their business. Many were also not aware of all of their possible exit options or the potential for having to remain in the business for some time post-sale.

Bennett says that for a successful sale, owners need to understand the value chain of their business and the customer problem they are trying to solve, whether they’re selling a product or a service. Only those business owners who can clearly articulate and explain their value chain to potential buyers will receive the best prices for their enterprise.

“All businesses have a varied amount of logistics and support staff, all sorts of bits and pieces that make-up what that business actually is,” he says.

“And so a business owner needs to be able to understand what all those pieces are and then be able to talk about them deliberately to someone else that allows that other person to be able to understand the value of the business.”

Lensink says that ideally businesses would have two or three years to prepare their business for sale, or even work to a five-year plan.

So they should get started straight away. “Don’t delay, get advice,” she says.

From CA Library