Prepare A Business For Sale

Eight (8) Things You Must Do
To Prepare A Business For Sale



By Josh Foo,
Founder

UPDATED:  March 08, 2019


Many smaller businesses have little idea on what they must do to prepare their business for sale.   But to prepare your business for sale is an important task that needs to be done properly to maximise the chance of a successful sale on your own terms.  

Nearly all smaller businesses are not properly prepared for the sale. 

Business owners need to prepare their business in a way that minimises buyer objections and minimises bumps on the sale process.  This is to allow you to exit on your own terms. 

To exit on your own terms require an assured supply of buyers who are willing to submit an offer.  You must be supremely confident in your business and your ability to bring buyer to an offer.  But if no buyers (or not enough buyers) ever make it to an offer, then you have a a problem.  

Two things usually happens here.  You wait futilely for a buyer (this wait could be many months or years).  Or you realised one of the most important things you must do is to prepare your business for the sale.  

Unfortunately, the vast majority of smaller businesses are under-prepared for the sale.  By not preparing your business for sale, you are leaving money on the table.  Or worst, you face the possibility of not ever selling.   

So take note of the eight (8) things you must do to prepare your business for sale, especially if time is against you.  

Get your financials in order.Get your financials in order without delay. Photo: Pixabay.com

1. Get Proper Financials Quickly


Business owners who don't have their financials ready for buyers are doing themselves a huge disservice.   Financials such as the Business Activity Statements (BAS) and Profit & Loss Statements are crucial to buyers for purpose of due diligence.

For smaller businesses, the vast majority of buyers are looking for cash flow.  Very often they are buying themselves a job.   The number one thing they are looking out for is profits that they can take home to pay the bills and support the family.  

Hence you should make the net profit look as attractive as possible.   If you are a cash business, you may need to report undeclared cash onto the financial statements.  

Also, refrain from activities that can impede your short term profitability (for example, by incurring large, extraordinary expenses for the quarter).   You may need to consult with a good accountant to make your financials accurate and to present in the best possible light for the buyer.  These financial documents may include Profit & Loss Statements, Business Activity Statements (BAS) and Balance Sheets.


2. Create an Information Memorandum


What do big businesses give you if they want you to invest in their Initial Public Offering (IPO) on the Australian Stock Exchange (ASX)?

They give you a prospectus to tell you how great they are and why you should invest! 

A prospectus is merely a promotional booklet that tells you more about the business and attempts to persuade prospects buy shares in their company.   

Smaller businesses can prepare a similar document known as an Information Memorandum.   It can also be called a Sales Memorandum or Business Summary but they all mean the same thing.

To persuade more buyers to take action, you must have an Information Memorandum.  

Below is a check-list of items for inclusion in your Information Memorandum:


Preparing An Information Memorandum
For The Sale Of Business
(Approx 20-80 pages)

  • An introduction to the business
  • A brief history and explanation of your business (e.g. type of services/products offered, reason for the sale, etc)
  • An overview of the business' customer base and clients
  • S.W.O.T. (Strength, Weaknesses, Opportunities and Threats) analysis for the business, and suggestions to mitigate the weaknesses and threats.
  • Past Financials such as the Profit & Loss Statements, Balance Sheets, Business Activity Statements (BAS), etc. 
  • Business plan and future outlook
  • Lease details and landlord overview.
  • Franchise reports and related information (where applicable)
  • A list and description of the equipment included in the sale
  • Employee and staff operations overview, including the Owner's role.
  • Buyers' Frequently Asked Questions (FAQ) page.  Identify the common objections and concerns from prospective buyers and have ready answers in the Memorandum to reassure them.
  • Testimonials and references from Customers, Suppliers and Franchisor (where feasible)
  • The sales process - instructions for the buyer on what to do next
  • Professional photos especially for retail, F&B and others B2C businesses.


The above table serves only as a guide, as every business is different.   The key is persuasion.  You can include almost anything in the Information Memorandum that helps to persuade your prospective buyers.

Once you have created your Information Memorandum, give a copy to your business broker and prospective buyers.  This should maximises the probability of a sale.   

Remember however, that a poorly crafted Information Memorandum can backfire.  If the content is bad or wrongly crafted, then it can actually repel buyers.   A poorly crafted Information Memorandum is telling the buyer not to buy.  Therefore professional photos and persuasive copywriting are a must for starters. 

If the creation of an Information Memorandum is not your area of strength or if you can't commit to the time to do one, then hire a specialist.  Although this may set you back $1,500 to $5,000, it can help you to exit on your own terms and fetch the price you want (so don't even think about not doing it). 

3. Know How Much The Market Will Pay



You might think of this as business valuation or appraisal.    

There are a myriad of different ways to calculate the value of a business, and different specialists may give you different numbers. 

You should only be interested in one number – the price that buyers will pay you to buy your business in the current market condition.  

However, the vast majority of business owners over-value their business.  They often have a huge inflated view of how good their business is.  Other illogical rationale for the valuation may include:

a.  Putting a monetary value on the hard work they have put into the business (e.g. ‘I have worked 70 hours per week for the last 5 years, so that I should at least sell for $x to compensate for my effort’)

b. Paying too much for the business initially and unwilling to sell for less at exit  (e.g. 'I paid $500,000 for the business 3 years ago so there is no way I can sell for anything less than that')

c.  Pricing the business in a way that does not reflect the market sentiment (e.g. using a price valuation from an accountant or using a method of valuation  that simply does not meet the market) 

d.  Pricing the business based on the perceived (or sometimes inflated) value of the equipment or fixtures

e.  Pricing the business to match the loan still owing to the bank  (e.g.  'I borrowed $400,000 to buy the business so I can't sell for anything less')

Unfortunately, the market (which is comprised of the collective buyers) determines the price.  

If you wish to sell your business at a higher price than what the market is willing to pay, then it will be very difficult to find a buyer. And even if you did, it is because you got lucky.  Many business owners can't depend on luck to exit.   They have pressing reasons to sell or a deadline to get out.  

But it is not all bad news.  As the business owner, you can take measures to improve your turnover and rectify problems in the business that are putting downward pressure on your asking price.   

It is nearly impossible for you to see the blind spots in your own business.  An external consultant or specialist can analyse your business and provide suggestions for improvements to the business.  By implementing these suggestions, you may be able to ask for more. 


Business for sale retail shop frontWhen selling a business, first impression counts. Photo: Pixabay.com

4.  Staging And Aesthetics


If a business looks unpleasing to the eye, it may be difficult to sell.  First impression counts, always have and always will.

For brick and mortar businesses such as a restaurant, staging and aesthetics matter because buyers will seek to affirm what they know with what they can see.  If your Profit & Loss Statement shows a very healthy profit but the restaurant is dirty, filthy and infested with roaches, then buyers will be shunned immediately.  

Even if buyers are not repelled, they may very well offer a much lower price to commensurate for the state of the physical premise.   This is partly because they may need to invest money to upkeep the premise or to reduce their risk in the business.

Rusted hinges, unswept floors, messy office, unkempt and foul garbage, broken furnishings, loose cables hanging, dirty windows, damaged flooring and poor hygiene on premise require your immediate attention. 

A new coat of paint, new flooring and a spring clean can make the business for sale much more attractive to buyers.  Think of your business like a house for sale.  To fetch the best possible price, you'd need to stage the house for inspection. 

Buyers will psychologically associate aesthetics with performance.  For example, a clean restaurant is usually a successful one.  A messy office means unhappy customers.       

Business for sale - Managing employeesPrepare your employees for the sale of business and transition. Photo: Pixabay.com

5.  Manage Your People For Sale And Transition



Your employees are an integral part of the business for sale.  A good portion of the price that buyers are willing to offer is because of your employees. 

Buyers are looking for good people (employees) to work with. The types of people you have in your team can make or break a deal. 

You will need to manage your employees for the sale of business and the transition after, even if you wish to keep the sale a secret to your team.  

Firstly, uphold performance standards for all employees.  Ensure all employees are performing to your high expectations.  You can't afford to have bad employees dragging the business down when you are trying to sell.

At the right time, you may need to have the necessary conversation about their future and find out if they are willing after the sale.  Most buyers want the existing employees to stay as a purchase criteria.  If you can find this out early on from your employees, then you can make allowances for any contingencies.

If your employees are aware of the sale, then teach them to say the right things to prospective buyers.   To avoid disgruntled employees airing their unhappiness to prospective buyers, you may have to first address any known grievances of theirs. 

Where possible, gradually take yourself out of the business.  Train the employees, especially the senior team members to operate the business without you for as long as possible.   The more you can divest yourself away from the business while retaining the same profits, the more attractive the business is to a buyer.  

Finally, terminate (fire) under-performing and bad employees.  If you have been procrastinating, now is the time to remove the bad eggs from the team.   These bad eggs in your team will scare off buyers and lower the price buyers are willing to pay. 

6.  Assemble Your Advisors



In the current market conditions (or in fact in any market condition), you can't afford to make mistakes because you may only have one chance to sell your business.

You will need to hire a competent team of specialists such as business brokers, solicitors, management consultants, accountants, marketers, bankers, financial advisors and any other experts that can help you to get your business sold. 

Choosing the wrong lawyer or anyone incompetent could be the weakest link in your team.  For example, an incorrect valuation from an accountant that doesn't meet the market could keep your business on the market for years.  A bad lawyer could frustrate or dissuade a buyer unintentionally.  

Above all, these specialists should understand the market and position your business correctly so as to fetch you the highest price possible.

Calculating your taxes when selling a businessGet your tax structure ready for selling your business. Photo: Pixabay.com

7.  Organise Your Tax Structure


Quite literally, sellers can go from ecstatic at a buyer's offer to anxiety when they realised how much tax they'd need to pay on the sale.  

By then, it'd be too late to organise into place the tax structure for business exit.  To avoid taxes, the seller may be tempted into shady arrangements with the buyer (such as taking a portion of cash not declared on the sale-of-business contract).

It can easily take 1 or 2 years to organise the proper tax structures into place so that when you sell your business, you can pay the least amount of tax possible.  So talk to your accountant early.  

However, not all accountants are knowledgeable in this field.   So choose an accountant that specialises in business exits.

While you may need to pay fees to your accountant for advice, it could potentially save you many times over in tax payable, and of course a peace of mind knowing that the ATO (Australian Tax Office) has nothing on you.

Also visit the www.ATO.gov.au website to ascertain your tax obligations when you sell or close your business.

8.  Stay Focused On The Business


You are still in the business until the day of settlement when the buyer officially takes the keys to your business.    

Until then, you can't take your eye off the business.   A buyer can pull out of the sale at any time for reasons beyond their control.  

Many business owners list their business for sale because they are tired or mentally drained.   They have lost the motivation to drive the business to higher grounds.

But once your business is listed for sale, you have to 'up-your-game' so that prospective buyers can inspect and witness your business at the top of your game.  The last thing you want is to give buyers reasons to offer a low price.   

Also, during the trial period where the business needs to meet a turnover target as stipulated on the sale contract, you can't afford to go easy lest you don't meet the target and the buyer can choose not to buy. 

So stay focused on the business until it is sold.  It is not an option. 

(If a buyer wants to meet, what happens next?)



Josh Foo contributed to this article


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