PREPARING A BUSINESS FOR SALE

Most business owners only experience the sale of their business once in a lifetime. In these circumstances, "fail to plan, then plan to fail".

Best practice suggests an ideal planning period of 2 - 3 years during which time there are at least four important areas for the business to address.

1. Management Succession

If the owners also manage the business then the price offered for the business will be less if key management roles will be vacated on sale.

BEST ADVICE:

Plan for your succession by recruiting/selecting managers capable of filling those key roles.

2. Financial Information

All businesses need to be measured in financial terms. Consequently, the quality of financial information could determine the best price offered for a business.

BEST ADVICE:

Appoint credible auditors and prepare all financial statements to GAAP standards. Also, ensure that tax compliance is up-to-date and that all non-business related expenses are eliminated together with non-operating assets and liabilities. Remember, whereas businesses seek to minimise taxable profits, the best sale price will be achieved by maximising sustainable profits.

3. Owner Involvement

Many owners are heavily involved in the management of the business as it represents their "life's work". This leads to a blurring between what is paid as remuneration for the job and what is return on investment.

BEST ADVICE:

Differentiate between remuneration and return (dividends) in the financial accounts (unless not in the interests of tax planning). Alternatively, maintain proper records of the two sources of income for the information of prospective purchasers. The calculation of sustainable profit should only include a fair remuneration for the job and not return on investment.

4. Internal Controls

The vast majority of businesses are sold 'subject to due diligence' which includes a form of audit of the financial and other reporting systems. At the centre of such rigorous assessment is an examination of internal controls.

BEST ADVICE:

Invest in internal controls, if necessary, to ensure that financial statements will not be undermined when scrutinised by a third party. In any case, sound internal controls, particularly in relation to the accounting function, are expected in successful businesses.

Immediately prior to commencing the sale process, careful consideration needs to be given to the following aspects of presenting the business.

5. Industry Knowledge

Many businesses are sold to third parties who have extensive industry knowledge. Nevertheless, being able to demonstrate an in-depth appreciation of the sector tends to strengthen the vendor's hand not weaken it.

BEST ADVICE:

Update research into industry trends, key players and any innovations or market developments and include a synopsis of them in any presentation of information on the business.

6. SWOT Analysis

Industry knowledge can be extended into a SWOT analysis where the strengths, weaknesses, opportunities and threats of the business can be presented.

BEST ADVICE:

A clear representation of the business will support the due diligence process prior to legal completion. Involve all management in preparing the SWOT analysis insisting upon an honest appraisal. For many sectors, a PEST analysis (political, environmental, social and technological) is also worth preparing.

7. Know Your Competition

An in-depth knowledge of key competitors is essential for any business. In the sale process, there is the added dimension that it informs you which competitors may or may not be interested purchasers.

BEST ADVICE:

Extend competitor profiles into potential purchaser category e.g. would they benefit from the acquisition by gaining new customers that would not otherwise be accessible and/or would cost savings be generated by such a merger. Beware of competitors seeking commercially-sensitive information with which to attack your customer-base thus avoiding the cost of an acquisition.

8. Business Culture

Evidence suggests that business mergers/acquisitions require some common characteristics to succeed. These include similar cultures and values and a clear mission as to how the merged business will operate.

BEST ADVICE:

Survey employees to obtain an accurate perception on culture and values (go to www.tmsni.com for guidance) and provide a written statement in the information memorandum provided to prospective purchasers. Common sense will normally identify those businesses which would not be suitable acquirors due to a very different prevailing culture (or image) e.g. beware selling to autocrats who do not welcome managers accustomed to delegated authority if that is your culture.

9. Valuation

Business owners are serious about selling when they have the business valued. In preparing for a valuation for sale, it is the perception of the buyer which will determine what price is offered.

BEST ADVICE:

Examine the business for any potential synergies which the purchaser might achieve e.g. better buying margins/rebates, overhead savings and/or plant utilisation. These savings cannot be added to calculations of sustainable profits but should be highlighted in case the prospective purchaser has missed them. Remember, different buyers may recognise a different set of synergies.

10. Potential Buyers

Finally, it is worth attempting to identify who might wish to acquire the business. The main categories of buyer are trade (e.g. competitors), investors (e.g. private equity firms or wealthy individuals) and management (e.g. management buy-out).

BEST ADVICE:

Do not rely upon your own market intelligence when selling your business. Seek guidance and input from a specialist who is experienced in the M&A market and who could have access to interested parties as well as offering expert advice.

THE LAST WORD: There is no such thing as a right price for a business. Ultimately, the price at which a business is bought and sold will be what is agreed between the purchaser and vendor. Presenting the business in the best light to a purchaser will ensure that the best terms are offered.