5 key steps to prepare your business for sale
So, you’ve built up a successful business and have now decided to sell, or been approached by a prospective buyer. Selling your business can be exciting and, at the same time, very stressful. We have summarised our top 5 tips to prepare your business for sale to make this process smoother.
Whilst these are our 5 top tips it’s important to remember that the sale of a business can be significantly more complicated and involve multiple steps, depending on the size of the business, value and volume of assets, number of employees and detail of negotiations. Be prepared for a long-haul journey rather than a short sprint, as selling your business could take a significant amount of time. Generally, the more you prepare upfront, the easier you will find the sale process.
1. Get your house in order
Any prospective buyer will conduct due diligence on your business. You will save yourself a lot of time and stress by preparing for this process well ahead of time. Also, an organised seller creates confidence in a prospective buyer, which is very important from the outset.
- Get your financials in order. Speak to your accountant and financial advisors. Make sure your tax returns and filings are up to date. Have financial statements for at least 2-3 years including profit and loss statements, balance sheets, inventory, earnings and cash flow. Most lenders and investors want to see detailed financials to ensure they are buying a profitable business. Financials will also help determine the sale value of your business.
- Ensure any payments due to employees, contractors or third parties have been paid and are up to date and you have the documentation to prove this.
- Make sure you have contracts with all contractors and suppliers, they are all signed and you have retained copies of these contracts.
- Clean out any skeletons in the closet such as any regulatory compliance issues, outdated security interests registered against your business or unpaid invoices, taxes or fines. Also, tidy up any related party loans and assets that will not form part of the sale.
2. Determine valuation and focus on increasing value
Once your house is in order you will be in a better position to put a dollar value on your business and consider how much you would like to sell it for.
- Consider why you are selling your business and what your objectives are.
- Engage with market and financial advisors to determine a fair market value for your business.
- Focus on increasing the value of your business before sale and showing it will be profitable well into the future.
- Consider key questions for the running and transition of your business. Is your business dependent on you running it? Are there key employees? Will you need to remain on as a director or key employee to ensure its succession in the transition period? Are there employees that are key to the business’ success?
3. Engage with purchasers regularly and early
Finding potential buyers could be one of the most challenging aspects of selling your business.
- Prepare a pitch that outlines why your business is a great purchase. Set out the numbers and how the business will grow into the future.
- Communicate often and early with potential buyers to ensure you are on the same page and pre-empt any issues.
- Conduct and prepare for due diligence. Set up an online data room to store all documentation for prospective buyers. This shows that you are prepared and facilitates simple sharing of documentation and avoids any confusion down the track about who sent what document.
- It’s important that you also do your due diligence on any prospective buyer. There’s no point going through negotiations and paying legal and other professional service fees only to discover that a prospective buyer does not align with your expectations or requirements (e.g. if you are required to stay on during a multi-year transition).
4. Organise the process and deal with the details
Organising the sale of a business can be lengthy process. If you start planning from the beginning and thinking of the details, it will reduce the stress when it comes to crunch time.
- Decide on how you will sell your business and the structure. Will it be a sale of shares or assets? Do you need to set up another vehicle for the sale or internally restructure before any sale?
- Do you need any further advisors to assist with the purchase?
- How will you transfer assets? What will you do with any leftover stock?
- How will you transfer intellectual property?
- What will happen to any employees? How will you manage the transition and communication with employees?
- Once you have a potential buyer, discuss the details with them and sort out the main issues from the start.
5. Get the legal documents right from the beginning
It may seem obvious but engaging lawyers at the beginning of the process and having accurate legal documentation will help you mitigate risk and force you to consider more issues from the beginning.
- Once you have a prospective buyer, discuss the main details of the deal and agree upon these. Put these details into a Heads of Agreement or Memorandum of Understanding document. These documents are generally expressed to be non-legally binding so generally you do not have to comply with all of the details if you change your mind. However, it’s a good idea to agree on the bigger issues to avoid large rounds of negotiations (and potentially much larger legal fees) during contract drafting.
- The contract of sale should incorporate any conditions precedent to the deal, that if not met either party may be able to walk away from the deal. It will also cover issues including resignation of any directors, regulatory issues, assets, what will happen to employees and how payment is to be completed.
- Tailoring the contract of sale to your particular business is important.
Engage a legal team who is well versed in the sale of businesses from the start, and who can assist and advise you through the process.
