Selling a business at the right price and terms often takes a year or more.
Owners who desire to sell their businesses should begin to maximise the value of their business at least two and preferably three or four years prior to the sale.
Selling before you have to allows you to take a deliberate approach to what is probably the most important deal of your life.
There are a number of methods to increase value within this time horizon and the increased payoff can be enormous relative to the company’s current value. Some of these methods are discussed below.
Increase profitability
Buyers tend to base their purchase offers on the most recent three or four years of earnings. A trend of increasing revenues and profits is the key to obtaining the best price. The reliability of earnings over a long period of time assures the buyer that it should pay a premium price. Increasing profitability in the business is not always easy. The first step is to eliminate unnecessary administrative and operational processes. These processes tend to be non-value-added procedures that your customers will not miss.
Know your buyer
Understanding what buyers are looking for in a business also allows you to identify potential buyers. Develop a list of possible buyers and their requirements and begin to model your company so that it will be attractive to these buyers. If possible, develop business relationships with these prospects. This allows you to negotiate over several years, maximising the overall price and reducing the amount of non-cash terms in the sale.
Financial information
Most buyers expect to have access to audited financial statements. These should be prepared at least two years prior to the time you want to sell. The audit process provides a more accurate picture of the company’s financial performance and enhances credibility. It is also important for your business to demonstrate that its reporting systems are simple, accurate, and timely.
Consult a professional
A professional intermediary, such as your accountant, can help ensure that the business has been fairly valued. The valuation process is important. Every business is different and requires an independent analysis. The mechanics of selling your business are best accomplished by a knowledgeable professional who can guide you through the complexities of the selling process. Working with your accountant can be a valuable resource and guide.
Avoid deal killers
The most common deal killer is an insistence on a high price that cannot be justified by the expected return on investment. Other issues that buyers tend to shun are contracts that cannot be modified and long-term leases. Be a clean company with no environmental, safety or compliance problems. Good housekeeping, repair and maintenance are essential for making a good and valuable impression.
Openness to change
Given the time, most companies can improve their earnings. In some cases, a business in a crowded niche should consider purchasing other businesses or product lines to improve its own strategic value to potential buyers. Owners should be open to change in their own business to enhance value over time.
CASE STUDY: The Next Chapter
After 40 years in the industry, May Edwards wanted to sell her small business and transition into retirement. She was a widow with no family available to support her with this transition. She had no clear plan and limited documentation to demonstrate the value of her business and its growth potential.
Problem
Her problem was how to market her business and get the best price as quickly as possible. This was her primary asset and best chance for a decent retirement.
Solution
May sought the help of her accountant. She wanted as much help as possible, as the process was daunting.
Accountant’s Role
May’s Accountant assisted with the preparation of financial data and due diligence for the purchaser, and negotiations around purchase price and the structure of the transaction.
In particular, her accountant provided detailed advice with a view to effectively minimising the tax implications associated with the transaction and moving the proceeds into the most tax-effective environment.
The accountant also provided a referral for a lawyer and worked closely with that lawyer throughout the transaction. The settlement of the transaction and handover process was seamless for both May and the purchaser, and the estate planning and financial planner referral allowed May to move on into retirement with financial peace of mind.
Benefits for Client
A stress-free transition into retirement and the successful sale of her business.