Preparing your business for sale

Preparing your business for sale is all about creating confidence for the prospective buyer. Potential purchasers will want to inspect both the physical and financial aspects of your business. You therefore need to ensue that your financial records are up to date, with explanations for any anomalies at the ready, and your premises are in good order.

Buyers will expect to see, ideally, the last three to five years. If you have been trading for less this than 3 years it is even more important that your book keeping and accounts are accurate and transparent. Your business accounts may include one-time expenses or personal perks. However, as not everyone is experienced in reading accounts and it is advisable that you use a verified accountant to identify “add-backs” and produce your accounts to show the true earning potential of the business. Beyond the numbers, where possible streamlining your operations so the business isn’t entirely dependent on you can make a business more desirable. If a buyer feels the company will collapse the moment you leave, the value of your business to them will drop significantly.

A professional Buyer’s Pack (often called an Information Memorandum) is your primary sales tool. It should contain:

• a detailed financial history (ideally a minimum of 3 years).
• a full asset list. Where possible include the age, cost, estimated current value and any warranty that is transferrable to the new owner.
• a copy of your lease.
• an anonymised staff contract (or blank contact).
• an anonymised staff rota. A typical weekly rota including pay rates/salaries but excluding staff names or any personal details.

Prospective buyers may also wish to see a breakdown of your customer base. Again, this is about giving confidence to the buyer by demonstrating that the business is stable; ie; there isn’t a “concentration risk” on just one or two clients and the business has scaleability. Being prepared signals to the potential purchasers that the business is well managed and that you, the business owner, is organised, transparent and easy to work with. Building a good rapport with the buyer is very important for the due-diligence phase and also the handover period.

During the due-diligence phase you are likely to be asked for further information and documentation, so it is good to be prepared for this in advance. In this process the buyer is seeking evidence to support your accounts and other information provided, and will usually request official records that evidence your accounts. For example VAT returns, bank statements, Corporation tax returns. Smaller businesses may be asked to show their POS reports/system (Point of Sale) to verify the weekly turnover.

Transparency regarding your handover period is something to consider and detail in your sales particulars. Having this thought process worked through and made clear at the outset greatly assists with speeding up the negotiation process. Most buyers expect some form of training and support from the vendor. The length of handover required will depend on the type of business you are selling and the experience level of the new owner. Consider what is needed to ensure a smooth transition of ownership; what knowledge is the buyer lacking, what support do they need to success. In some industries you may be asked to stay longer on as a consultant. However, if you are seeking a clean break then make that clear at the outset.

Another matter to give thought to is the structure of the sale. Traditionally the full purchase price is paid on completion. However, offers may come with terms such as a deferred payment following the handover or with a Seller Finance offer, instalments over a period of as long as 5 years. Knowing your thoughts on your ideal scenario at the outset of the marketing period is important.

Finally, ensure your legal house is in order. This includes confirming your intellectual property is properly protected and that all supplier contracts are transferable. The goal is to present a “turnkey” operation where a new owner can step in on day one with a clear roadmap for growth. By doing the heavy lifting before you go to market, you increase the likelihood of a higher multiple and a faster sale.

As business brokers, Ellis & Ellis can guide you through all of this and ensure that your business is ready to go on the market. We would store all documents in a “Data Room”, with the information being released upon the prospective purchaser signing a NDA (Non-Disclosure Agreement).