Selling your business can be a great way to generate liquidity for yourself as a reward for your creativity, hard work, and perseverance to get your business to this point.
The decision to sell should be a long-term strategic decision though, as opposed to a short-term reaction to negative developments. Thus, the process of preparing your business for sale should start long before you announce your decision to sell.
This fine-tuning must take place so that when the timing of the sale is right, you will be better able to maximize your proceeds through effective planning and negotiating from a position of strength. The following steps are necessary before advertising your business for sale.
1. Select your advisory team
2. Conduct an internal due diligence assessment
Select your advisory team
It is advised that you engage the following professional advisors as early as possible:
Business Valuator – The degree of assistance a valuator provides in the sale process will depend on your needs. Some of the valuator’s services may include:
- Assessing your business plan and financial feasibility,
- Advising on the development and assessment of your confidential information memorandum,
- Preparation of a business valuation as well as detailed insight into the valuation process. The outcome of the valuation process and report can arm you with areas to focus on to improve your valuation and negotiation position before selling, ensuring that you receive the highest price possible.
An attorney with knowledge of the relevant local legal framework and laws to prepare the legal documents for the transaction.
Accountants & Auditors who understand legislative framework and tax issues and will be responsible for the accurate preparation of your company’s financial statements.
Human Resources Professional to assist with employee relations during the process.
Tax Advisor – Businesses need to seek tax advice early and structure their company appropriately before any major changes or investment status can take place.
Exit Planner – to ensure a smooth transition into the next phase of your life.
Don’t go in blind!
Internal due diligence assessment
Having made the decision to sell, you should ensure that your business is in a condition that will maximize its saleability and the price received. To do this, you should begin by assessing your company’s strengths and weaknesses. Such an assessment should encompass several factors, including:
- Review of the management team,
- Review of information systems,
- Review of the company’s balance sheet,
- General corporate housecleaning, and
- Market research.
Review of the management team
Your main priority here as the business owner should be to make yourself redundant by building a management team that can maintain and build the business with the same commitment, skills, knowledge, and vision that made the business desirable to an investor in the first place.
Succession planning is important, and it should be part of long-term goals for the company but also the business owner. For instance, if growth and increasing the value of the business is integral to retirement plans (it should be), then having a sense of who is in line to succeed is important. Buyers will want to see that plan.
Review of information systems
Robust information systems give potential buyers confidence that they will have access to accurate data that drive more informed decision-making. Ensure there are reliable and cost-effective information systems that capture the data necessary to not only know how the business is performing now but also inform the next steps.
Review of the company’s balance sheet
Value can be added by removing non-operating assets that are redundant to operations, selling off as much inventory as possible, and evaluating the condition of capital equipment and debt-financing levels.
Often the value of a business is greater than its tangible assets. This premium represents goodwill, which consists of intangible attributes such as reputation, brand recognition, and customer relationships. Understanding this true value will lessen the likelihood of leaving money on the table.
I would caution that the valuation of goodwill tends to get contentious in the negotiation of a sale. Note that there is a material difference between personal goodwill and commercial goodwill:
- The goodwill that many small businesses generate is what is known as personal goodwill. This is typically due to personal relationships with their customers and as such, are generally non-transferable once the owner of the small business owner is out of the picture.
- What has value or what an acquirer would be interested in is commercial goodwill. This is transferable and stays within the business regardless of whether the owner is involved.
General corporate housecleaning
Ensure all corporate statements and agreements, such as contracts, leases, insurance policies, customer/supplier lists, and tax filings, are up to date and readily accessible. Additionally, if possible, secure all significant client agreements as this is especially important if your company is dependent on a few major clients for a significant percentage of its annual revenues.
A sale is a natural evolution of the business, and you should aim to capitalize on its value at the appropriate time.
Buyers typically pay the highest price in advance of a company hitting its peak growth cycle. Market research and an in-depth understanding of the stage of your business relative to the industry’s growth cycle is critical.
It is important that this assessment enables you to understand what bargaining position your company is in and appreciate what it brings to the negotiation table.
You should anticipate that the purchaser will assess the company thoroughly and that any deficiencies will be subject to negotiation. Adequate preparation and disclosure at the proper time may help reduce the impact of any deficiencies that may exist.
These are just some of the many issues to consider before deciding if you and your company are ready to part ways amicably.
Are you building a valued business? Take the Business Value Scorecard to determine if your business is ready to scale, exit, or raise capital at a high valuation.