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Top 10 Tips for Business Owners: Preparing your business for sale and getting it succession ready – Part 2

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By Michael Nibaldi, Lawyer, MST Lawyers

Part 2: The game changers

Please read our previous article Top 10 Tips for Business Owners: Preparing your business for sale and getting it succession ready – Part 1.

With the initial groundwork laid by implementing the steps in Part 1, buyers can start to see the potential and value of your business. If you execute these remaining steps, you will really drive up the profit that can be made on a sale of your business.

6.  Co-ownership agreements

Too often people get into business with associates without considering how decisions will be made about the way each person’s ownership interests will be divided if something were to go wrong. For example, one or more of you could decide to leave the business, underperform, get injured, or even die.

A Shareholders’ agreement should be tailored to your specific requirements to deal with these issues, giving you and your partners options to buy or sell an interest in the business. The agreement can prevent the wrong person acquiring an interest in the business by purchasing or inheriting it from your partner, such as a spouse with no knowledge of or interest in running the business. Unless a Shareholders’ agreement is in place, a deadlock between the parties may prevent you from accepting a great offer to sell or, in serious cases, even force you to apply to a Court to deregister the company and shut down the business.

7.  Insurance

Insurance policies are invaluable as the payout can be used to finance the purchase of an interest in the business owned by key personnel, such as directors, if they were to die or become seriously injured. Such events are often unexpected and insurance gives certainty to the remaining directors that they will have the financial backing to purchase the equity in the business. Remember to re-evaluate the policy as the equity in your business becomes more valuable to ensure the payout is sufficient.

An arrangement can be agreed upon to force the sale of an interest in the business to the remaining directors on the happening of certain events, such as death or disability of a director. This arrangement can be included as part of your Shareholders’ agreement or be dealt with separately in a Buy-Sell agreement.

 8.  Give up some work

Although you can transition a sale slowly, giving a buyer time to immerse themselves in the business, you can’t sell yourself with the business. A potential buyer needs to know that knowledge of how to run the business exists somewhere other than inside your head. If no one but you can run the business, it will likely fail once you leave.

To limit the business’s reliance on you, involve senior staff with all aspects of the business, including day to day and strategic management. Detailed operations manuals, which guide employees and help the business achieve consistent outcomes, add value to a business and help satisfy the concerns of a prospective buyer about the risk of knowledge disappearing.

9.  Stay in your lane

A business should have something that it does well and stick with it, as a quality business with a competitive advantage is invaluable. That doesn’t mean you should let your business become stagnant, but think carefully before expanding for the sake of expansion if it won’t help your core strategy.

10.  Stay prepared and review your plans

Once you have implemented these steps, you give yourself the best chance of securing a sale when you are ready to sell. But don’t stop there. You shouldn’t hide your plans in a bottom drawer and forget about them, because to be ready for a sale you have to continually review your succession plan. Failure to review the plan may result in it becoming out of date from a taxation perspective, or inconsistent with the business operations and your changing life goals. Reviewing the plan is especially important when significant events occur, such as the acquisition of a bolt on business.

A well thought out, properly implemented and up to date succession plan is as important as planning your will and contributes significantly to the financial outcome of a sale.

If you have any questions or would like further information, please contact our Corporate and Commercial team by email corporate@mst.com.au or by telephone +61 3 8540 0200.