How to prepare to sell your business

Preparing for the sale of your business, well in advance of deciding to sell your business, is crucial to maximising the value that you will eventually get. You should start to prepare to sell your business at least a year in advance of any potential sale. What any buyer is looking for is a ready made ‘business-in-a-box’ that they can buy, plug into their existing operation and it run as it did before.

Having sold my business, without it being ‘for sale’ and thus having not fully prepared the business, I know how important this is.

Watch my recent webinar on the topic below, or read on to find the 11 key things you need to be doing to prepare to sell your business.

Below is a list of the 11 key things that you need to have in place before you go to market. Indeed, most of these are actually very good housekeeping issues and habits that you should be doing anyway.

• Company runs without the owner
• Management team
• Documented operations and systems
• All contracts to hand
• Passwords and log ins
• Up to date contact details
• Understand market metrics and valuations
• Data and analysis
• Chase up old debtors
• Management Accounts
• Statutory Documents

Company runs without you the owner

You have to get to a position where your business runs without you in the office day-to-day, being part of the daily operation. What any potential buyer wants, ideally, is a purchase that doesn’t need you for it to run. Once they have bought your business they are going to want to run it as they wish, putting in place their strategies and plans. Whilst this ‘could’ happen with you still in place, it will work best if you are not there.

Also, from your point of view, once you have sold, you want the freedom to be able to walk away, with your proceeds in your pocket and no need to go back in to the office. If you are still an important cog in the machine this won’t be possible. The best way to do this is to delegate as much as you possibly can.

The best way to check if you are on track for this is to do the ‘holiday’ test. Can you go on holiday for a week (even two perhaps?) and turn off the phone and sit by the pool and the business still run as usual? If the answer is yes, you’re in the right place, if no, then you are not yet ready for a sale.

Good Management team in place

Linked to the above, any purchaser of a business will expect to see a good management team in place. This will need to be a team that have the experience, know how and authority to run the business, ideally as above, even when you the owner, aren’t in the building. One of the keys to this is getting a great ‘Number Two’ in place.

Good delegation of responsibility, relevant training and quality recruitment will ensure that such a team is in place. A good understanding of your business’ strategy and its aims, along with clear and measurable roles & responsibilities will always help ensure such a team is in place.

Well-documented operations and systems

Following on the from the concept of a ‘business-in-a-box’ you should ensure that your operations and systems are well-documented, and regularly updated.

When selling the business, any new owners will constantly ask ‘how does this work?’, ‘When this happens how do you deal with it?’, ‘what’s the process for this?’ and many many questions of that ilk. The more you have the answers ready and prepared the better. Indeed it’s actually very good business practise to ensure that this is already in place. It ensures consistent delivery and also protects against the loss of any key staff who may take valuable knowledge and experience with them. Plus it will always help new recruits to get up to speed as soon as possible.

Read the book ‘The E-myth’ by Michael Gerber for a brilliant explanation as to why you need systems and processes.

All contracts to hand

When a purchaser buys your business, they need to limit their risk as much as possible, fully understand all of the contractual obligations whilst retaining as much as possible of the business they buy (or think they are buying). No purchaser wants to see what they thought were guaranteed clients disappear as soon as they get hold of they keys. In the same instance, a buyer will want to know what their obligations are.

You may well have a long-standing client who you started working with years ago on a verbal agreement. With no contract in place, they could walk away tomorrow. Are your staff contracts, particularly with regards to salary and benefits, up to date? What you will definitely be asked for are the agreements that you have with suppliers. And what about leases and asset finance? You need to ensure that all of this paperwork is to hand and up to date. You will definitely be asked for it, so get into the good habit of always having it stored somewhere, and always up to date. The last thing a buyer wants is any unexpected surprises after they hand over their money.

Passwords and log ins stored centrally

As your business grows, and you take on more staff, and use more and varied software, it is easy to lose control of passwords and access.

When the purchaser of your business takes over they will need, and want, every single password and log in. You need to have all of that to hand. It may be the online bank details, it may be a piece of software, it might be the CRM system. Whatever it is, you need all of it to hand. I fell foul of this when I sold. Many passwords were kept by individuals on a ‘need to know only’ basis. It took a long time to collate them all!

But it’s also very good business house-keeping. At the simplest level, you don’t want a member of staff to leave and be the only one with the log in details for that vital piece of software. At worst it’s a safety and security hazard.

The same actually is relevant to old school things like office keys, car keys and any other access too.

Contact details of all clients, suppliers, etc

Similarly to the above, any purchaser will want full details of clients and suppliers. Over the years they may now be in your phone only, or your Sales Manager’s computer or on a piece of paper pinned to the noticeboard of the accounts department.

As a good housekeeping exercise, both suppliers and clients should be collated in a central access system. Ideally a full CRM system, but if not at least ensure they are all centrally stored and up-to-date. They will be one of the first things your buyer will want to see.

Understand market metrics and valuations

“I’m going to offer you a million pounds for your business”. Whilst a million pounds sounds wonderful, do you know if that’s a good deal or a bad deal for your business?

The only way that you are going to know if that £1m is indeed a good deal or not is if you understand the market values in your industry sector. In simple terms you need to know what other businesses, similar in size, age and profitability to yours, have been sold for recently. And how do you find that sort of information? Keep an eye out in your trade press and online as numbers, or at least multiples, are usually quoted. Or ask a couple of business brokers who specialize in your sector, or ask lawyers or accountants again who know your industry. DO NOT ask them ‘what is my business worth?’ as you will not get a useful answer.

In addition, you also need to understand how valuations are reached. Which multiples or metrics, are used to value a business. Often businesses are valued by a multiple of EBIT (Earnings Before Interest & Tax) or EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) or a simple multiple of annual profit, or an average profit over say the last three years. Sometimes it’s a multiple of MRR (monthly recurring revenue) or number of clients. And there are many many more. What you as a business owner need to know is which one(s) are used in your sector. That way you will understand your potential value.

Collate the data/analysis that the market uses to evaluate businesses

Linked the above, once you know how the sector values, and evaluates your business, ensure you are collating data in that form.

As an SME owner it is easy, and very understandable, for you to collate only data that is of commercial benefit to your operation. In fact this is key to any business. However, there may be data that potential purchasers use to evaluate your business, but you don’t collate it. You may have it, but not in the form, or analysed, as a potential purchaser would want it. As an example, in its simplest form, if I asked you how many live clients you have that have purchased in the last one, three and six months, could you give me that? If that’s how your industry evaluates businesses, then make sure you have recorded.

When I sold my business I fell foul of this. We had the raw data, but not in the form, or analysis, that the purchaser wanted. It was an industry standard analysis, but not one that had any commercial benefit to us, so we didn’t collate it. In the run up to the sale, I had to go backwards and collate 3 years of stats, that we had in raw form, but not in the form they wanted!

Chase up old debtors

When a purchaser looks at your accounts, they’ll want to know how much of that invoiced work you have told them about will actually turn into cold hard cash. The more long term debts that you have on your books, the more worried they will be, and more likely to ‘chip’ you on price. “Oh Dave always pays on 100 days, and sometimes more but he’s been a client for years, no need to worry” is not going to ease the worries of the purchaser’s FD.

Either make a point of chasing up old debtors (something you should do on a regular basis anyway!) or, if it’s getting close to the sale, you may be best to write them off, or at least in the management accounts. The cleaner and smaller your debtors list, the better for any potential purchaser (and you, of course).

And of course, you are up to date with your Corporation Tax, PAYE, National Insurance, pension payments etc etc aren’t you !

Management Accounts

Do regular Management Accounts. It’s easy not to do them, particularly in the early days of business, but once you are out of the bootstrap start up phase, there is no reason not to do Management Accounts. Unfortunately, far too many SMEs don’t, for various reasons. And with almost everyone now on online accounting software it’s easy to pull management accounts at any time.

Apart from the fact that they are a great management tool, any potential purchaser will want to see them. Firstly to be able to assess the current state of your business, but also, if you don’t have them to hand, it will probably ring alarm bells at their end.

And it goes without saying, any potential purchaser will want to see, at a minimum, your last three years of annual accounts. Make sure you have easy access to copies of them.

Statutory Documents

Make sure your statutory documents are up to standard and up to date. Have you got your share certificates? Are your board minutes up to date? If you’ve issued shares, or sold shares, or bought shares back in the past has this been properly recorded? Share option schemes are a minefield if you have not done them correctly.

All of the above may not be required immediately, or even as part of your day-to-day, month-to-month running of your business, but they will be required. Get into the good habit now of having these up to date and to hand.

In summary

If you put all of the above in place, well before you are thinking of selling, then when you do indeed decide to start looking at options, much of the donkey work will have already been done. But even if you are not selling, the above are all great habits to get into, and will help with the running, and increasing the profitability of, your business.

Think of it like sprucing up your house, bit by bit in the year before selling, rather than rushing around the week before the Estate Agent comes round !

And here’s three other suggestions to consider when you think about selling. These on-going suggestions really help increase the profitability of the business, and hence your final sale value.

Firstly, have a solid set of internal KPIs. If you have these over an elapsed period of time, it will give confidence and demonstrate to any potential purchasers that you have strong traction, along with the relevant level of insight to drive growth and spot issues. It is easy then to say to a buyer ‘here, look at these stats…it proves we’re doing the right things well’. It’s harder to argue against data when you get into the final negotiation stages and it can be critical to have them in your back pocket. Plus it’s a great tool to hand over to a purchaser to assist them as they go forward.

Secondly, think about what you would do as a purchaser in the first 90 days to enhance the value of your business …and then do it. This great mind shift means that you get the benefit of the uplift that they would have got, and also could increase your final sale value.

Thirdly, your goal is to maximize the price you receive for your business. You can take proactive steps to increase the value of your company before you go to market. Generating more revenue and profits while you remain the owner increases the value of your business, helping to justify a higher sale price. A great starting point is to perform a SWOT analysis on your business. Get input from the whole team, share your own SWOT analysis with your team, and ask them for feedback. Once you’ve completed this analysis, you can start focusing on business improvements, and eventual increase in final value.

3 months prior to sale

All of the above 11 points are strategies and actions that should be put in place in the year before you think about selling. Once you do decide to ‘press the button’ here’s eight quick things to consider and put in place in the three months prior.

1) Have the right professional advice in place. Your accountant may not be the best in respect of helping construct/advise on the best structure for the sale. A solicitor with experience and the right skill set to keep the deal and SPA on track is also essential. You may also need specialist tax, IP and HR advice too.

2) On one page explain what you would do to grow the business if you were keeping it. And a clear answer on why you haven’t done it yet (because I’m selling is the usual answer!). These two questions will be asked so you may as well be prepared.

3) Preparing yourself emotionally. Be prepared to hear things you might not want to hear about your business (but you need to hear). It can be gruelling if lots of people keep picking holes in your ‘baby’.

4) Consider transition periods. Will you work with the new owners? On what terms? And for how long? Don’t be surprised by the question, but have an answer ready, but be prepared to be flexible.

5) Write a good Information Memorandum. This is effectively the sales brochure that will open the door to potential acquirers.

6) Understand your true profitability. As mentioned above you should have a broad idea of your market value – but don’t proffer an ‘asking price’.

7) Have clear reasons for selling. Again, you will be asked this so be prepared. Be honest. There is no ‘right’ or ‘wrong’ answer.

8) Make sure your business is ‘clean’. No outstanding or pending legal issues, taxes paid to date etc

And finally…

One thing you might want to consider, especially if you own a growing business, is the potential for an earn-out. If you are in a growth phase, entering a new market or bringing out a new product, the purchaser of your business will be excited about this but may not be prepared to pay you upfront for this potential. An earn-out structure may bridge this gap. It will require you to stay on for perhaps a year or two and you will need to build in protections to ensure that the earn out is measured fairly but it could be a route to substantial additional value. The key here is to ensure that you get a fair price for the business ‘as is’ now – don’t let the earn-out be a route for a purchaser to dilute the initial value.

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