Selling your business is similar to selling your home. In the same way that you repaint the house and tidy the gardens to get ready for sale, your business needs a solid spruce up too.
Regardless of whether your business is large or small, strong preparation is a must. It may take two to three years of planning in order to realise the largest possible value of your business and, as a starting point, it’s absolutely crucial to make sure all your financials are up-to-date. This means current, robust financial statements that will withstand scrutiny and review, and accurately reflect the performance of the business.
Who would buy?
Next, it’s strategic thinking stage. Consider who might be a potential purchaser, how you will go to market, how potential buyers will hear about your business, and how they will engage.
Also, will you utilise professional support, such as your accounting and legal firms, and will you also use a business broker or other referee? It is critical to do this analysis in order to present your business in the best way possible.
Identify the value drivers for a successful purchase.
Any business owner looking to sell needs to be able to answer two questions:
- What is it that buyers will value?
- How will they look at value?
While valuations are generally complex, a layman’s rule-of-thumb is to take the last year’s profit, and multiply that by the relevant industry multiple.
It’s critical to understand how a business in your industry is valued, as well as the key value drivers within the business.
The key drivers of any business are its profitability, the cash flow and the risks of the industry and the market in which it operates. While it can be difficult to assess market risks, doing so improves the perceived value of your business.
You can conduct a form of internal SWOT analysis to review the internal risks and uncertainties by asking yourself:
- What are the key risks?
- What can I address and mitigate?
- What am I dependent on? I.e. one or two key customers, particular members of staff, key suppliers?
- Are key staff locked-in with contracts and appropriate incentives? Will they come across to the new business?
- What is the dependence on you as the owner?
Reducing dependency on you – the owner!
This can be difficult, however there are strategies you can put in place to address this issue. Try implementing the following steps:
- Ensure you put key people in place around you as soon as possible.
- Document the process and systems within the business, from marketing and sales through to operations, customer experience and finance.
- Develop a management succession plan that ensures other people in the place know how to manage the business without you.
Look for your strategic value. Make the invisible visible!
By now you’ll understand that determining financial value is about looking at the profitability of your business, and applying a multiple to it to determine the valuation and sale price.
Strategic value, however, is that blue-sky value – something beyond the initial or standard financial value. For example, a buyer might want your business because you have a particular product or process they could release to their existing customer base. Alternatively, you might have a customer base that a buyer wants to have access to. This kind of value is generally not on your balance sheet.
Positioning and selling the sale is key to making the invisible visible. You would present this business with, “here are our assets, but look at all of these (soft or hard) assets we have, and what they mean to you and the financial growth of the business in the future.”
Understanding where the strategic value is in your business is the key to achieving a higher value sale.
Restructuring for best personal outcomes
To sell your business you also need to know whether you should restructure the business to reduce risk around the existing structure, or to minimise tax?
Next, if you are going to do that, it must happen long before you sell your business…
Be prepared for your sale – seller’s due diligence.
Any buyer will do detailed due diligence so, in preparation, it can be a great idea to do your own in return. In this process, consider what you would want to see detailed if you were a buyer looking at the business. What are the items and documents you or anyone else would expect to review? Then, be sure to prepare.
When you do this thinking, strategy and the work required, you are far more likely to have a successful sale. As Jim Collins says in his book, Good to Great, “we must begin with the end in mind!”