When selling a company preparation has to start as early as possible. It can take a full years preparation before your actually put your company on the market. If you want to sell your company fast you will most lightly not get full value for it. Having good preparation in place increases the chances of you getting on the buyers short list.
Knowing The Reason
Its important to know the reason why you are selling in the first place. Knowing This will help us determine the alternatives to selling your company or what type of buyer we need to target. Once this has been determined we can move forward and discuss what needs to be prepared before we begin the selling process.
There could be a number of reasons you wish to sell your company. Perhaps you want to retire or perhaps you still want to be involved in the company but wish to work less (semi retired). Maybe your company is going through some financial difficulty.
Knowing the reason often determines whether its best to sell or not. As well as determine what kind of buyer to target. For example, should you want to keep a share of your company but remove yourself from the management position. We would need to find an investor capable and willing to add local management. Perhaps you just tired and feel you trying to squeeze blood from a turnip. For the right strategic buyer this might not be the case. In fact, quite the opposite, should there be synergies to be found.
Please Read the process involved for selling a business or property for more information.
Possible Types of Buyers
As previously stated knowing the reason for selling your business will help determine what type of buyer to target. For example.
Selling to a strategic buyer will most lightly get you the best price for your business.
Increasing the company’s capital might be the best solution for you. Selling shares to a PE (Private Equity) group or a getting a loan could be a good alternative to selling.
An MBO or MBI could be an alternative should you want to retain the company culture, vision, values and sense of purpose (DNA).
What Needs To Be Prepared Before Selling Your Company
Keep in mind that selling a business is a lot like selling a home. When selling a home you make certain cosmetic changes and keep it clean before you have an open house. The same should be expected when selling your business.
If you are vital to your business what is the buyer supposed to do after you leave. A succession plan should be in place. As a business owner, one should take the necessary steps to build a management team capable of running the company without assistance from you. This will assist you in achieving a profitable exit. From the point of view of the buyer the business should be able to grow without the founder.
Have your Financials clear and audited, done by a external firm with a good reputation. Preferably you would have at least 1 to 3 years of audited financials ready to show serious buyers.
One of the financial preparations that could be prepared earlier on is the separating the company’s real estate holdings. Sometimes you can receive a greater return when you sell your real estate to one buyer and the business to another.
If an exit is possible within five years we advise against drastic changes for example, factory relocation. This could disrupt growth or at least give the impression of growth disruption.
One should also try to minimise personal expenses. Try to normalise your expenses to that which a normal director might use.For example your business might be paying for your personal vehicles lease. This could be be excluded from the buyers analysis.
Our professionals at C.R.E.P. can normalise financials during due diligence or in an information memorandum. However,It would be ideal if no normalizations would need to be made to your annual accounts.
3 Corporate Structure
Examination of the corporate structure is an important part of the preparation to sell a business. The correct legal structure needs to be in place to attracts the right buyer. As well as protect you against negative tax consequences after you sell.
It is important to keep in mind the 2 main types of legal structures the sale can take. These structures are Asset sales and Entity sales. Nearly all sales of business with less than 2 million revenue end up being asset sales. Asset sales are comprised of a list of assets that make up the business (including the company name and location) are sold. In this case you sell all the assets to a buyer but you retain your company stock with in the corporation or membership interests within the LLC. In this case you would still own the entity.
Entity Sales are when you you sell either your shares in corporate stock or your membership interests in an LLC. This includes the business assets. For example, real estate ,inventory and accounts receivable. These assets continue to owned by the entity. The entity will then be owned by the buyer.
It is important to select the right option in order to avoid negative tax consequences.
4 The Customers
It is risky for a buyer when customer relationships depend heavily on the business owner. This will decrease the value of your company. If the company is to attract a buyer willing to pay a premium price for the business. Buyers should see that the existing customers wont leave with the business seller.Showing Customer Diversification will decrease the perceived risk of losing a large portion of the businesses customers. Ways to improve Sustainability of Earnings must be implemented should they not already be.
5 Procedures and Relationships
The documentation of all procedures, policies and unwritten rules the company runs on is advised. This will allow any buyer to take over and run the company with ease. This will also decrease the reliance the buyer has on you . Your employees should have their roles clearly explained and documented. As well as their designated set of tasks.
Examine the existing contacts your company has with its suppliers.Be sure that these contracts will not need to be regenerated when the new owner steps in.
Its best to Have all your suppliers and the relationships you have with them documented. Also if possible, convert any verbal agreements you have with those suppliers into writing. Having as much as this documented as possible will build confidence in prospective buyers as it makes your business look stronger.
6 Competitors and your Industry’s Landscape
It’s time to look forward. The value of your company will increase with a 3 to 5 year strategic vision. This business plan should be updated annually in accordance with the expected developments within your industry. An operational budget for the next year should be included in this plan. Keep in mind that your business should stand out from the competition. Showing how you differ from the competition should be well described.