Ensure legal and financial issues are in order
Just like selling your house – it’s important that you present your business to buyers in the best possible light. Buyers will go over your business records in detail, especially your financial records. So, prior to a buyer doing this, it makes sense to do it yourself.
Put your business through a due diligence process (also called Vendor Due Diligence [VDD]). This process is undertaken by your advisors and can identify areas where your business may need work (e.g. no Key Supplier Contracts or Employment Agreements in place). At the same time, you and your accountant can go over your financials and ensure that any ‘wrinkles’ that may have lowered your profits (e.g. personal expenditure) are ironed out. This process is often referred to as ‘normalising’ your accounts.
Every dollar that you can legitimately add to your bottom line will amplify the final sale price when a multiplier is applied to your profit. Many deals have been derailed, or had their original sale price renegotiated post-contract by issues that come up in purchaser due diligence.
Due diligence advisors acting for buyers are often asked to find issues that will undermine a contracted sale price. Your position can be seriously compromised during this post-contract period if buyers identify legal or process deficiencies in your business. Avoid this by performing your own due diligence process and ironing out any issues you uncover before a buyer discovers them.
It is best business practice to always have your business ‘buyer ready’. Businesses that are legally and process healthy are generally more profitable. You cannot predict when a buyer will emerge for your business, or when you may be forced to exit your business (e.g. ill health).
Identify your Target Buyers
Other than internal buyers such as co-shareholders, employees or family members, there are two main types of buyers: financial and strategic.
Strategic buyers will often pay a premium for the strategic advantage of acquiring your business. Think laterally – often businesses outside your direct sector may be strategic buyers. They will analyse your business from a different perspective than a financial buyer.
Acquiring your business may enable them to gain entry into another country or market segment for their product or service. They can assimilate your business with theirs to create scale and increase their overall profit margin. Some businesses making small profits have been sold for huge sums because of their strategic value (e.g. Microsoft’s acquisition of Skype).
Financial buyers are buyers who are primarily interested in the return that your business can generate for the capital they invest. They want to see evidence of sustainable and secure ongoing profits and cash flows.
Your strategic approach to positioning your business for sale will differ based on the strategic / financial buyer pool available at any given point in time. It’s worth identifying your likely buyers early on.
Research supports the view that the best outcomes for sellers are achieved when a number of well-funded strategic buyers are competing for a business. Make sure that the professional advisor, investment banker or business broker you engage is sufficiently experienced, independent, and can expose your business to the widest and highest quality of potential buyers.
There are nine key factors identified in US-based research that have significant influence in determining the ‘sell-ability’ of your business and the price you will receive:
- Quality of your management team;
- Profitability growth potential;
- Low reliance on narrow supplier, customer or employee base;
- Sector growth;
- Low market share;
- Recurring revenues;
- Size of business;
- High customer satisfaction levels; and
- Financial performance