How should you prepare your company for sale?
Fail to prepare, prepare to fail, goes the famous quote by Benjamin Franklin. This is never more true in the case of a company sale transaction.
If you’re an entrepreneur considering selling some or all of your company, you should be ready to answer a number of questions as part of your pre-transaction preparations, such as…
What is driving value within your business? How have you demonstrated growth? What’s your ambition as a business owner?
And many more.
Although transactions can happen quickly, skipping through the preparation stages can be risky for entrepreneurs and mean missing out on important action steps, such as achieving the best possible financial structure and communicating effectively with the senior team. Worst of all perhaps is failing to determine the best possible timing for a transaction as part of the process plan, as this can ultimately undermine the deal’s success.
Below we will take a detailed look at preparations entrepreneurs should consider before initiating a change of ownership, from creating a process plan to reviewing growth avenues and markets to establish a company valuation.
Create a process plan.
Understanding the motivations of the seller(s) is usually front of mind of interested buyers, and one of the first questions asked is why choose to sell a profitable business with high growth potential? For this reason, it’s important to have a clear view of your own objectives and long-term goals as an entrepreneur, and to get a firm idea of what any other owners in the business would like to achieve as part of a deal.
A review of the owners’ ambitions is the starting point for decisions regarding exit options, the transaction process, and its timing. Other parameters to consider in the process plan include the company’s current position and business model, tax implications at the time of sale, and any further risks which could affect the timing of the sale.
Although transactions can happen quickly, skipping through the preparation stages can be risky for entrepreneurs and mean missing out on important action steps, such as achieving the best possible financial structure and communicating effectively with the senior team.
Understand the key value drivers.
Getting a fair price for shares in the business is a chief concern for all, therefore it’s wise to undertake a thorough review of the drivers which affect how the business is creating value now and to outline its potential growth trajectory going forward.
Examples of value drivers include new business initiatives or opportunities to expand into new markets or through acquisition. We also highlight the company’s strengths and future potential through points such as:
- Reduction of dependency on customers or suppliers as this can restrict agility
- Demonstrating successful growth through an expanding customer base, talent, premises, or new products/services
- Assessing the health of the market and how it may evolve in future
Review financial dynamics.
A significant amount of detailed information will form the basis for valuation, including but is not limited to: descriptions of the USPs of key products or services, the credentials and experience of key people on the team, market conditions, competitive advantage, reputation, IP and more.
However, your company’s financial dynamics will become the most fundamental factor in its valuation. Because you will want to determine a credible, defensible valuation for your business ahead of the transaction, a mix of related statements and analyses of your business’ financial structure will provide evidence of its financial health.
Potential buyers will want a clear picture of the business’ recent financial history – through income statements and balance sheets over a period of two or three years – as well as the assets tied up in the business and its working capital.
Because it will be analysed by buyers in order to gauge the health of your business in the longer term, working capital, i.e the difference between your company’s assets, (including receivables, raw materials and stock of products) and its current liabilities, should be optimised prior to entering the sale process.
Find the right timing for selling.
Many entrepreneurs approach the sale of a business with a deadline already in mind. However, careful selection of the ideal time frame is important to ensure the best possible deal and a smooth transaction.
Most UK corporate finance advisers agree that selling a business usually takes around six to nine months. However, sellers should anticipate a post-sale period in which as owner/manager they remain in the company for a length of time; this could be anywhere from a few months to a year or more.
Owner-managers who wish to leave the business quickly, for example if they want to turn their focus to their family or pursue other projects, should prepare for this by strengthening the business’ management team and passing responsibilities onto them as part of their pre-transaction preparations.
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