Top 10 Tips for Business Owners: Preparing your business for sale and getting it succession ready – Part 1
By Michael Nibaldi, Lawyer, MST Lawyers
Part 1: Clearing up your business
As a business owner, no matter what size or stage your business is at, you must plan and implement a strategy to have your business ready for sale. When selling a business, the ideal buyer is one who will pay at or above market value and to interest those buyers, you need to prepare your business. Starting now.
Follow the 10 steps in this two-part series and it will help you and your business be well on the way to a profitable sale.
Before anything else, you need to plan goals for yourself and your business. Think about where you want to go and when you want to get there. If you wait until you are near retirement to think about your exit strategy and succession plan, you might miss the opportunity to make a substantial profit on the sale of your business.
You need time to prepare your business for sale; it won’t happen overnight.
2. Complete and accurate financial records
It is important to keep financial records that show complete and accurate information (avoid under the counter transactions) and make detailed annual budgets. Sophisticated buyers will conduct thorough due diligence, particularly looking at tax returns and other financial records for the last three years, using inconsistencies in those records as leverage to negotiate a reduced purchase price.
Having detailed budgets, which are based on reasonable assumptions, shows that you can accurately forecast future profits. Accurate budgets for the prior three years gives credence to the projected profit you give to a potential buyer to demonstrate the value of the business and negotiate a higher purchase price.
3. Strong internal governance
Schedule regular board meetings (don’t forget to take minutes!) and consider inviting an external person, such as a trusted adviser, to sit on your board. If your business is in a heavily regulated area, develop & implement policies and procedures to ensure compliance with the law at all levels.
Buyers require complete records showing good governance (including minutes of meetings and up to date company folders) and accurate financial information. It reduces the risk taken on when purchasing and the less risk a buyer perceives to exist, the more the buyer will pay.
4. Asset protection
Buyers value long term leases for valuable locations, registered trade marks, patents and business names, clear legal rights to assets and a clean corporate structure that supports it all. Remember that key employees are also valuable assets and you should lock them in to employment agreements with strong restraint clauses. This will reduce the risk of a key employee leaving to start their own business or going to a competitor, taking part of your business with them.
5. Lock in suppliers and customers
Try to enter into favourable long term contracts, such as supply and distribution agreements, with important customers and suppliers. Don’t forget to make sure the contracts allow you to assign them to a purchaser of your business at your direction.
Recently I was at a presentation given by a successful business owner, who was very proud that the foundation of his family business was a handshake agreement with a highly important supplier. Although those kinds of agreements are a nice throwback to the times that were, it is a real red-flag for potential buyers, which will drive down the value of your business. Buyers want certainty and, with handshake agreements, any future earnings become uncertain.
You only get one chance to sell your business, so if you receive an unexpected offer, or are forced to sell for an unplanned reason, you don’t want to miss out on potential profits because you had not done your homework and prepared your succession plan
Stay tuned for next month’s newsletter, which will include the final 5 tips for preparing your business for sale and succession.