Preparing Your Business For Divestment
Refine the operation so it produces maximum profits and structure the business in a way that ownership can be transferred with minimum impact on operations and profitability. Business owners can adjust costs, increase sales and margins as well as restructure and review other variables in preparation for sale.
1. Get the Records Straight
Some business owners are very diligent at keeping detailed, up-to-date accounts and records relating to contracts, customers, staff, leases, asset ownership etc. Some are not so diligent. The first step in preparing your business for exit is to get the books up to date so there is a clear picture of your operation, with supporting facts and projections. In addition to your actual accounts, ask your accountant to prepare a set of ‘normalised’ accounts to show maximum operating profits. This means adding back any expenses or purchases (sometimes personal) not directly related to the operation of your business. An explanation of any such corrections is usually required and you should be prepared to discuss this openly.
2. Eliminate the Perks
You will need to review how unreported cash sales (if any) and any personal items that are paid for by the company, such as travel or entertainment are managed. Unravelling personal expenditure from that of the business can make a big difference to the selling price. For example, a $20,000 trip paid for by the company is essentially $20,000 off the bottom line and could reduce the sale price by four or five times that amount. Review leased and financed assets to see whether they are better converted into fully owned assets. In an ideal world, business owners should plan for the sale of their business from day one and work through a process of ‘grooming’ it to achieve optimum value.
3. Review Accounting Policies
Accounting policies vary widely. In some cases, business owners discover that their accounting policies are not the same as those currently adopted by others in their industry. Some accounting policies are tax driven, resulting in conservative profit recognition. Whereas others are earnings driven, seeking to maximise profit. Changing your accountancy policies to
conform to those of your industry may increase the market value of your business.
4. Are You Critical to the Business?
A business is more attractive if its success is not solely dependent on the input of the owner in terms of operational know-how, technical skill or personal relationships with clients or suppliers. It is helpful to have a reliable management team to demonstrate that the business will continue to be successful once the owner has left. Most buyers expect the seller to continue working in the business for a period of two to four weeks following the sale. Others prefer a longer period, which can be negotiated and included in the Sale and Purchase Agreement. This sometimes occurs when an owner is a critical part of the business. In some cases, a business owner may wish to stay involved in the business indefinitely. The financial information must be current and accurate. If you’re selling half way through the year, ask your accountant to prepare half-year accounts.
5. Should You Invest in Your Business Prior to Sale?
When looking at a business, buyers will consider the level of debt and the quality of assets, particularly in manufacturing operations. Generally the sensible advice is to continue investing in the business as if you were going to keep running it yourself. LINK can provide advice in these and other aspects as part of a structured programme covering both grooming and marketing of the business.
6. Will You Offer Finance?
It is not uncommon for a business owner to be asked to leave finance in the business. This can be a good way of helping achieve maximum value for the seller. It gives the purchaser additional confidence in the business, knowing that you will continue to have an interest in maintaining its success.
Things You’ll Need
LINK assists you with the preparation of the following
information, in association with your advisors, to ensure the
information is presented in the appropriate manner.
- Profit and loss accounts for two to four years
- A schedule of abnormal and/or non-recurring costs in the accounts
- A schedule of all items of personal expenditure and drawings
- Brochures or marketing information of your product(s) or service(s)
- Historical background on the business
- Schedule of plant, equipment and any equipment leases
- Copy of franchise agreement (if applicable)
- GST Returns for current trading year to date
- Stock value estimate within 10-15%
- Lease details including rent, term, renewals, outgoings, etc.
- Staff levels, including part-timers and contractors
- Staff employment contracts including EPP clauses
- Details on any trademarks, patents, licenses, agencies or intellectual property (IP)
- Details of any major strengths and/or commercial advantages
- Competitor analysis
- SWOT analysis
- Business organisational chart
- Business plan