Preparing for a Business Sale – Key Elements

Are you preparing for a business sale? Strategic buyers are sitting with a record amount of cash on their balance sheets. As organic growth has been difficult to achieve, strategic buyers have been very active in the acquisition market. Private equity buyers who have raised many millions of dollars are seeking acquisitions. They are the major players in the market today both in finding platform companies or making bolt-on acquisitions.

For CEOs and business owners who want to take advantage of this seller’s market, exit the business and earn the maximum value for their company. Here are key items to consider in preparing for a business sale.

Preparing for a Business Sale – Be Ready to Sell at All Times

An opportunity to sell your business may walk through the door at any time, not often but does happen. Have your business investor ready, ensure that you have optimised your processes and are operating efficiently and have maximised earnings. Values are largely based on historical profits and an established track record strengthens your position at the negotiating table.

Articulate Clearly your Vision and Story

Buyers are interested in the future and the potential of the business. It is important to articulate what the business will look like in the next 3 to 5 years, how defensible your current business is and where the new business and profits will come from.

Understand Your Business Value & Value-Drivers

Most business owners don’t understand the potential value of their companies. Factors like multiples of revenue or EBITDA can be helpful in establishing some benchmarks. But they are far from conclusive when it comes to defining market valuations. Buyers are often willing to pay higher prices based on their economics, synergies, specific goals or even the reputation of your business. It is important to understand all of your company’s value drivers to avoid leaving money on the table.

Avoid Surprises

Surprises during due diligence are a major problem and lead to reduced deal values or cancelled deals. Ensure that all aspects of the business dealings are clear and transparent, that the financials are up to date, all matters are identified and recorded. Rigorous self assessment is important. Your advisor will assist in partial due diligence when preparing the business for sale. Many questions will be asked, they may seem superfluous at the time but do assist in answering later questions during formal due diligence. One off costs can be identified and earnings normalised see Normalised EBITDA to Increase Business Sale Value. 

No company or transaction is perfect, but  being up-front before coming to the negotiating table can keep a “deal-killer” from killing yours!

Manage Customer and Supplier Concentration

There are two areas of risk that can affect  business continuity in the minds of potential  buyers: customer concentration and supplier  concentration. If your business is highly  dependent on just a few customers or suppliers  it could have a profoundly negative effect on  your valuation. Long term sales contracts can mitigate this to a degree but expanding and diversifying the business beyond the core customers is highly beneficial.

Optimise Working Capital

Money is often left on the table due to working capital levels that are higher than necessary. When a mid-market business is sold (by share sale), the working capital is left in the business (surplus cash excepted). By establishing a “normal” level of  working capital, you will optimise your company’s value and at the same time allow the extra funds to be invested elsewhere or returned to the shareholders.

Always Focus on the Business

It’s important that you continue to run your business as though you plan to own it forever, especially during the sale process. You need to keep running your business and doing the things you’ve been doing to make your business successful. Many transactions have fallen over or prices have been significantly reduced when revenue or earnings decline in the period running up to completion. A good advisor will ensure that they manage the “heavy lifting” of the sale process enabling the owners and managers to stay focused on the day-to-day operations.

For further information on business sales, please go to Insights