Perhaps you’re retiring — simply moving on — but some planning and forethought can make all the difference.
10 steps to a successful business sale
For many advisers and their clients, the events of recent years have required them to negotiate significant disruptions to their operations. Many have had to assess the viability of their business and reassess their future goals and strategy.
The prospect of exiting a business can prove complex and stressful. However, with careful planning and guidance from a trusted adviser, business owners can achieve the desired outcome and extract the maximum value out of a business then redeploy it to meet their lifestyle objective.
Here are 10 key steps to improve the outcome of a business sale.
- Understand the why
Selling a business can be daunting and time consuming. One of the key questions for investors or potential acquirers is “Why are you selling?” It’s important to understand your intentions and openly communicate this to advisers and potential acquirers as it may become a point of contention later in the negotiations.
- Look at all options
The first offer that comes along is often not the only one available or even the best option. Your advisers can identify and seek out a range of potential purchasers including international corporate buyers, equity institutions, existing management or long-term employees. Identifying and vetting acquirers who strategically align with your exit objectives is key to getting a great outcome.
- Document, document, document
Many business owners are unprepared for the amount of work and documentation required to support the due diligence process demanded by purchasers. Due diligence is an essential part of the exit process as it enables potential acquirers to verify the historic and forecast performance of the enterprise and the associated risks.
It can be extremely time consuming to generate and provide the required materials and historical data. You should compile financial statements, legal contracts and other key information dating back at least three years and looking forward at least 12 months. This information pack should also contain relevant lease agreements, employee agreements, lists of assets, strategic plans, forecast model and business process documents.
- Keep personal and business separate
It’s important to keep personal, non-core business expenditure outside the business. A business sale value is usually linked to a multiple of annual earnings, therefore the inclusion of non-core business expenditure within the operations of the business can reduce its perceived earnings and have a significant impact on the sale price achieved.
Historically, if there have been non-core business expenses recorded in the business, they should be identified separately so the normalised underlying earnings can be demonstrated. Any unintended tax consequences and risks need to be considered. Where possible, maintaining clean and separate records for the business operations will help maximise the outcome of an exit strategy.
- Understand the tax implications
Often the sale of a business is delayed or deferred as the business owner has not fully understood the tax implications of their current tax structure, and they are faced with unintended and unfavourable outcomes. Engage with your tax adviser well in advance of any business sale to explore the most tax-effective sale structures.
- Remain focused on the business
It’s not uncommon for owners to start winding down before exiting the business, especially if you are approaching retirement. However, business value can be eroded if management focus is waning due to reduced sales or increases in expenses or debt. Run the business to its fullest capacity or speed up the progress of internal management teams so business value is not eroded. You should also consider implementing processes to allow the business to operate autonomously and independently from the owners. This can improve the marketability options for the business with prospective buyers.
- Maximise the return on capital expenditure
Closely consider the need to update, replace and expand your capital equipment base. Will the purchase of assets improve the capacity and efficiency of the business? These will have an impact on how your business is valued by a potential buyer.
- Reduce risk for the purchaser
The acquirer of your business is ultimately buying its future earnings potential, so providing a clear business plan and forecast for the ongoing business model that is proven, robust and realistic will reduce their perceived risk and increase your sale price. The real value often comes from the quality of strategic plans and forecasts, as these provide visibility of cash flow that will flow on to the acquirer. Prospective buyers are attracted to businesses that demonstrate growth or that they can bolt-on to boost their current business operations.
- Use specialist advisers
Selling your business is a team effort. Many business owners may only sell one in their lifetime, so it’s important to surround yourself with experienced M&A advisers, accounting and legal professionals. They will help you maximise opportunities, minimise risks and represent your best interests to potential parties.
- Exit in stages
It is not necessary to sell 100 per cent of your business immediately. Some acquirers prefer a staged exit as it has the advantage of protecting customer goodwill associated with the existing owners and allows the new owners time to learn the subtleties of how the business operates.
There is the advantage of receiving an immediate cash release while still retaining an interest in the business which may continue to grow, demonstrating its full value, while reducing your level of responsibility and risk with a clear endpoint.
While there is no foolproof way of executing the perfect exit from a business, following these steps will help ensure the most effective and successful outcome possible. Amid a period of tremendous uncertainty and volatility, having control over the process should provide business owners with a degree of comfort and assurance.
The successful exit from a business can enable individuals to comfortably set themselves up for the next phase of their life.
Nicholas Guest is corporate advisory partner at HLB Mann Judd Sydney.