1. Building the buyers’ confidence in your business is key
It is tempting to compare the sale of a business to that of a house, but that is a trap. Walking through a house will give you an immediate impression of all of the key benefits and disadvantages of the house, and if you like it you could be close to making an offer subject to a building inspection. Businesses are quite different; what you see is not always what you get.
Businesses can come with hidden liabilities, customers who are about to go elsewhere, staff who have future compensation claims from old injuries, product liability claims, tax liabilities, misleading information on the performance of the business and various threats from technology “game changers” and the entry of global competitors, margin pressure due to commoditisation of the market, changes in customer preferences and more.
In order to gain the confidence to pay the “market price” for a business, a buyer needs to be convinced that all is well inside the business and the company vehicle being acquired. It is the vendor’s job to convince the buyer of this.
OK, but how do you do that?
There are two phases to a sale process: planning for the sale and running the sale and usually the most critical of these is planning.
2. Start planning for the sale several years in advance
There are certain things that really build a buyer’s confidence in a business and they nearly all take time to achieve. They are:
- Audited financial statements for the last 3 years
- A comparison of performance against budget for the last 3 years
- A well constructed and realistic budget for the current year
- A financial model forecasting the future performance for the next 3 to five years showing the growth expected and how it will be achieved
- A concise business plan that is up to date
- Properly signed contracts with all major customers and suppliers
- Signed EBAs and contracts with employees
- Changes to the ownership structure to optimise the after tax return
- Other changes that may make the business more attractive to buyers.
3. Do your tax planning at least 12 months in advance
Any changes needed to the ownership structure will usually need to be done at least 12 months before a sale. This particularly applies when claiming the general Capital Gains Tax (CGT) concession on the sale. Getting this right could have a significant impact on the tax you pay, so it is worth doing well in advance and getting professional advice from a specialist in the tax law of transactions.
4. Do a “dry-run” of the buyers’ due diligence investigations
This is called a Vendor Due Diligence or VDD and involves the vendor engaging specialist advisors to run through their due diligence checklist as if they were acting for a buyer before the sale. This highlights any improvements needed prior to the sale and avoids the embarrassment of the buyers finding problems which may affect the price. It should also result in the VDD advisor producing a VDD report which is signed off by them on the understanding that the eventual buyer will be permitted to rely on the report in making the acquisition. This theoretically avoids the need for the buyer to do their own due diligence, and if not it should reduce the amount of due diligence done by the buyers.
A smooth due diligence builds confidence in the buyer’s mind and increases the chance of a better price and a successful outcome. Also, by providing a VDD report to the potential buyers, the vendor has a much greater chance of rejecting buyer’s requests for exclusivity to complete the sale process. For more information on how this works please contact us.
5. Appoint your sales adviser well in advance of the sale
There is much a sales advisor can bring to the planning process so it is best to use them early on to identify: ways to add value, strategic moves or investments that could be made to make the business more attractive, plus areas of strategic weakness that could be addressed before the sale starts. Sometimes it is possible to increase prices or reduce costs which improve the margins and add value before selling.
There are a multitude of ways of potentially increasing the value and a good sales advisor will help you spot these and assist you achieve them.
Identifying the likely buyers early on and then watching out for who else might be a buyer for a year or two before the sale can expand the list of buyers by the start of the process. Your sales advisor should investigate the interest of private equity buyers and overseas companies that might be planning to enter your market by acquisition.
Another key part of the sales advisor’s role is developing the sales strategy and starting this early could help position the business or start promoting the business early.
6. Focus on creating value for the buyer
Ideally in the few years before selling, you manage, grow and invest in your business with the aim of creating value for the buyers. Creating something that is highly desirable to buyers because of customers, management team, market position, technology, location or other features will pay off in the end. It could lead to the business appear on the buyers’ “radar” as an acquisition target.
If this happens, then they may approach you! And, there is nothing like being approached as a way of boosting your negotiating position in the price discussions.
Conclusion
The key is to remember that realizing the value of your hard work over the years all comes down to is delivering a business the buyer firmly believes will create value for them in the future. Think of it as a product you are developing for market – perhaps it will be the last product you sell before retiring.