Selling a business is rarely something that should begin when you decide to put it on the market. The most successful exits are often the result of decisions made years earlier.
Whether you envisage selling in three years, ten years or simply want to keep your options open, preparing early can make your business more attractive to buyers, reduce risk and potentially increase its eventual value.
You may not be thinking about selling your business today but the decisions you make now could have a significant impact on its value and the ease in which you exit when that day eventually comes.
Here are a dozen important considerations.
1. Build a business that works without you
One of the biggest questions a prospective buyer will have is: What happens when the owner leaves?
If customer relationships, operational knowledge and key decisions all depend on you, a buyer is taking on additional risk. Develop a capable management team, delegate responsibility and document important processes so the business can operate successfully without your daily involvement.
2. Get your financial house in order
Buyers want financial information they can understand and trust. Maintain accurate, timely accounts and ensure there is a clear distinction between business expenditure and discretionary owner expenses.
Ideally, you want several years of consistent financial records that make it easy for a buyer to understand profitability, cash flow and underlying performance.
3. Reduce customer concentration
A business that depends heavily on one or two major customers can appear risky. Losing a significant account after an acquisition could materially affect its value.
Where possible, diversify your customer base and build recurring or repeat revenues across a broader portfolio.
4. Create predictable revenue
Predictability is attractive. Contracts, subscriptions, retainers and repeat purchasing patterns can give a buyer greater confidence about future revenues.
Consider how you can make income more visible and repeatable rather than continually starting each month from zero.
5. Protect your intellectual property
Make sure the business genuinely owns the assets it relies upon. That can include trademarks, domains, software, designs, databases, written materials and other intellectual property.
Agreements with employees and contractors should also clearly establish ownership where appropriate.
6. Document how the business operates
Processes that exist solely in somebody’s head are difficult to transfer.
Document key systems and processes covering areas such as sales, operations, finance, customer service and supplier management. Good documentation demonstrates that the business is organised, scalable and transferable.
7. Strengthen your management team
A strong second tier of management can significantly reduce dependency on the owner.
Give key employees meaningful responsibilities and consider how you will retain important people through a future sale process. Buyers are often acquiring the team and its expertise as much as the company itself.
8. Review contracts and compliance
Before a buyer conducts due diligence, conduct your own.
Review employment agreements, customer and supplier contracts, leases, licences, regulatory obligations and data protection procedures. Resolving issues early is considerably easier than discovering them halfway through a transaction.
9. Understand what drives value
Turnover alone does not determine what a business is worth. Buyers may consider profitability, margins, growth, recurring revenue, customer retention, market position, intellectual property and the degree of owner dependency.
Understanding these value drivers early allows you to concentrate on improving the areas that matter.
10. Start before you need to sell
Perhaps the most important consideration is timing.
Preparing a business for sale when you have to sell can leave you with fewer options. Starting several years beforehand gives you time to strengthen weaknesses, demonstrate sustained improvements and choose the right moment to approach the market.
Ultimately, preparing for sale is simply good business practice. A profitable, well-managed, well-documented company that isn’t dependent on its owner is not only easier to sell – it is usually a better business to own in the meantime!
11. Consider your likely buyer
Will it be a management buyout or part of a succession plan? a trade sale, possibly to a current competitor? or perhaps an investor?
Be clear on your most likely route and even identify potential names.
As you would with your marketing then look to create a ‘Dream list’ of potential buyers. Then establish what is important to them and how they value the worth of your business – why? – because that helps you shape your business to the point it is attractive to them!
12. What’s your Valuation
There are different ways to value a business but the ultimate valuation of your business is how much you are prepared to sell it for that matches how much someone is willing to pay you for it!
What’s your number?
Is it simply a desired number? Is it a calculated number based on the retirement pot you need to serve your future lifestyle?
Write it down now on a piece of paper and put it somewhere safe but accessible.
Then when the time comes, when emotions are high, you can just reflect back to that number and remain strong on ‘your number’ that will guide your negotiations and acceptance of offers.
PS the valuation will potentially be impacted by factors such as whether you are prepared to stay in the business for a period as a handover or whether you want the money upfront or as a earn out (not recommended) – but be mindful of these matters that will potentially impact your ability to obtain the valuation you desire and deserve.
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