Tips for Preparing a Business for Sale

Tips for preparing a business for sale are provided below. Attending diligently to each of these will optimise the likelihood of a successful sale for the highest possible price. Business owners should:

• Build a team of appropriately qualified people who can operate the business without them. A business that's completely owner dependent is less likely to be sold, let alone achieve an attractive price.

• Reduce reliance on key customers, employees and suppliers. A business that's too dependent on any of these can negatively impact its saleability. It may also necessitate an earnout payment structure where a portion of the sales price is paid upfront rather than in full, with additional payments contingent upon future performance.

• Ensure current and signed versions of all relevant corporate and legal documents are available. Examples of documents prospective purchasers will typically review as part of their due diligence include:

  • the company constitution;

  • key customer, supplier and employment contracts;

  • property leases;

  • title deeds;

  • licences;

  • insurance agreements;

  • certifications; and

  • intellectual property registrations.

• Compile the business" key documents in a data room. These should all be reviewed by the owner's mergers and acquisitions advisor and potentially lawyer and accountant through the lens of a buyer. Any issues they identify that would cause concern for potential buyers should be addressed before the start of the sales process.

• Prepare management reports at the end of each month. These should:

  • analyse movements in key profit and loss line items between the current and prior year; and ideally against a current year budget so that the business' financial performance can be easily explained to prospective purchasers when they perform their due diligence.

• Prepare normalised historic profit and loss statements for the preceding 3 financial years. Significant time is usually spent preparing these with the business' accountant because they underpin the price prospective purchasers are prepared to offer for the business in the sales process. It involves adjusting earnings to reflect the business actual performance from its core operations by:

  • backing out all one-off and non-business-related income and expenses;

  • reflecting market salaries and wages for the owner and any family members working in the business; and

  • presenting the accounts on an accrual rather than a cash basis of accounting, as this is the method for reporting earnings most commonly used by prospective purchasers in their business valuations.

• Prepare a strategic plan supported by a profit and loss forecast for the next 3 financial years. This is particularly advisable for a business with growth opportunities, because:

  • prospective purchasers typically pay a premium for businesses that are expected to generate strong future earnings growth

  • supported by a proven historic track record and clear and realistic strategic plan.

• Obtain tax advice from an accountant who specialises in tax planning. It is important to obtain advice on how the business' ownership should be structured and whether a share or business asset sale is preferable to transact the sale of the business in order to maximise the after-tax proceeds received from the sale.

Preparing a business for sale can therefore take an extensive amount of time. It is therefore recommended that business owners begin attending to it up to two years before launching a sales process. Doing so will optimise the likelihood of the business being sold efficiently, for the highest possible price.