Top Tips For Selling Your Business: Fail To Plan At Your Peril

As a business owner, it’s easy to focus on short term performance and the day to day. However, it’s crucial to consider the future management and ownership of the company. Now, not tomorrow or next year. Business owners generally look to realise their equity when approaching retirement or looking for a lifestyle change. It can take time to ensure your business is ‘sale ready’. Even when that sale is to existing management, or the next generation of family it needs careful planning. By planning effectively, owners can maximise the value received from the sale of their business. That’s why we’ve put together our top tips for selling your business.

Here are 5 areas to consider now to ease the path to sale in the future:

Management Succession

Reducing dependency on the owner or retiring management team can result in a more valuable business in the buyer’s eyes, and shortens the required handover period post-sale. It is important to have a motivated, reliable, and robust management team that can carry the business on if the owner wishes a “clean” exit or as short a handover period as possible. Handovers can be anything from 6 months to 3 years, so it’s crucial to keep in mind the preferred retirement/exit date right at the outset.

Profitability

Owners should consider how to maximise profits in the periods before sale, ideally demonstrating a trend which shows a year-on-year rise in performance, but more importantly a sustainable level of profitability, as this is fundamental to the buyer’s view on the financial robustness of the business, and will heavy influence the valuation. It’s also important to understand the profitability of each customer. It’s a well-known saying that turnover is vanity.  Unprofitable turnover should be dealt with, which could mean revisiting the price, working to reduce the cost of production/servicing, or both.

Reporting

During a sale process, the buyer will complete financial due diligence and will place reliance on the company financials. Prior to going to market, it is crucial to consider the efficiency of the internal finance function, record keeping and preparation of accounts. It is important to ensure all financial information is accurate and will withstand a diligence process. Key to this is an efficient accounting software package and monthly (or at the very minimum quarterly) reporting packs which include financial statements and KPI’s for the business. A lack of strong financial governance, and the risks this creates, is one of the most common reasons for price chips or deals aborting.

Customers and Contracts

A key factor in demonstrating stability is reducing the reliance on key customers and diversifying the customer base across sectors or geographies. It’s usually the case that over reliance, which can be as little as 10% in some buyers’ views, will influence the valuation of the business. Of course, as we said earlier, finding new customers isn’t enough: they need to be profitable ones too. In addition, if customer relationships can be underpinned by contracts, then every effort should be made to formalise these, providing comfort that some of the future profitability is already underpinned.

Tax planning

Efficient tax planning can result in higher after tax sales proceeds. This is challenging to do immediately before or during a sale process, so it is vitally important to consider options as far in advance as possible. Calls to align Capital Gains Tax rates closer to Income Tax rates and scrapping of Business Asset Disposal Relief have long been muted, and there could be significant increases in tax on business disposals in the future. It is important that advice from a tax advisor with transaction experience is sought well in advance of a potential sale of the business.

We often see many businesses receive off market approaches, selling their businesses when even they least expect it. A lot of these business owners say that they would have liked the luxury of time to get their houses in better order. Don’t let this be you. It’s truly never too early to start planning. If you’re looking to sell your business or if you need support getting your house in order please do not hesitate to get in contact with Gordon Christie or a member of our Corporate Finance Team.