The decision to sell your business can be a difficult and emotional one, particularly when the sale may be the culmination of a lifetime’s work. In an ideal world, the planning process to sell your business should be put in place when setting-up your business. Yet the reality is, many business owners only begin to think about planning the exit of their business when it comes time to sell.
Ideally, to derive the most value out of your business, planning the exit of your business should take three to five years, which allows enough time for the results of any strategies undertaken to flow through the business
Exiting a business is a four-stage process:
- Establish objectives of the business owners
- Ensure veracity of financial information
- Review business operations to maximise value of the business
- Assess value of the business and establish price range for the business
- Align your business and personal wealth plan
- Preparing an information memorandum
- Identify and evaluate potential buyers
- Prepare data room
- Approach priority qualified potential buyers
- Exchange confidentiality
- Assist potential buyers with their initial review of the business
- Create competitive bidding environment and receive offers
- Negotiate heads of agreement and other agreements
- Manage due diligence Q&A
- Finalise sale negotiations
- Complete sale including settlement adjustments
- Post-sale matters including finalisation of accounts and working capital adjustments
- Deploy Sellers discretionary earning proceeds as per personal weath plan
William Buck Corporate Advisory provides complete end-to-end transaction support during the entire sale process using our integrated approach which incorporates; strategic planning; valuation; and specialist taxation and accounting skills.
In this article, we discuss one of the most critical and overlooked phases of selling a business – preparing for exit.
Ideally, your personal objectives and those of the business will be aligned. Thus, understanding your personal objectives should be central to any business plans. Some key factors that need to be considered in determining your best exit strategy are your:
- Preferred ownership timeframe
- Willingness to fund further growth
- Preparedness to work with or for another external shareholder, e.g. during a staged exit process
- Non-financial concerns, e.g. to look after the interests of current employees
- Personal wealth outside the business
- Longer term goals, e.g. retirement, operate another business, etc.
- Readiness to work in the business post sale
Once your personal objectives are understood, a strategy should be implemented to maximise the value of the business at the time of exit.
To help derive such a strategy, we refer you to our other article Seven steps to increase the value of your business.
One of the reasons to start planning for the exit early, is that it can often take considerable time for business improvements to translate into financial results. Good planning will also help you to exit at an optimum time when the business is doing well, and market conditions are favourable. The plans should also help you identify your best exit time-frame and strategy – having regard to both the businesses’ growth potential and your personal objectives.
There are many exit strategies available to private businesses including:
- Investors looking for a business to operate for themselves
- Venture capitalists or private equity firms
- Industry participants, including customers, competitors or suppliers
- Listing on the stock exchange
Our advisors can help you to identify and plan the strategy that is likely to provide you with the optimum result.
Areas to consider and discuss with your advisors, which can help you maintain and increase the value of your business whilst you own it, include:
- Structures that enable you to access research and development grants (if applicable)
- Structures that enable you to access capital to support any growth plans
- Potential to transfer intellectual property (IP) or other tangible assets to a separate entity to better protect these assets and potentially result in better tax outcomes
- Effective ways to protect personal assets from the business operations
William Buck can assist you to structure your affairs and maximise your after-tax outcome to ensure you keep more of your well-earned money, while still meeting your tax obligations.
In our experience, the importance of strong financial reporting systems is not well understood.
Many business owners consider investment in systems as non-productive costs that don’t drive profit.
However, as businesses are frequently sold on a multiple of their earnings, buyers place considerable emphasis on the quality and reliability of the financial management systems. Ideally you will be able to provide a potential buyer with:
- Financial statements for at least the last three full financial years
- Monthly management accounts that help them understand business trends and working capital levels
- Budgets and forecast models prepared for the next financial year and detailed assumptions that drive the budget
- A comparison between actual and budget results for the last three financial years with explanations for any variances
- An analysis of business metrics such as gross margins and revenue by customer; product/service; region; salesperson, etc., this should include being able to explain the key drivers for each and reasons for movements
The earnings on which the business is valued will normally need to be assessed in accordance with accounting standards. Therefore, having your accounts audited not only helps provide credibility to your reported financial results, it also gives you some assurance that unexpected earnings and price adjustments will not arise during the buyer’s due diligence process.
Legal issues identified during buyer due diligence are also a common reason for either the deal falling over, or a substantially lower price being offered.
Common legal issues include trademarks and domain names not being registered, or important IP that is not subject to a patent or copyright.
Often business owners have insufficient protection in their agreements with employees or contractors that ensures IP developed by the business is owned by the business. Another key problem area can be that the business is actually operating in breach of another company’s IP.
Some other key items to include on your legal review checklist are:
- Leases are in place for important operational premises
- Employment agreements in place with all personnel
- Confidentiality agreements exist to protect critical business information
- Compliance with operational health and safety regulations
- Maintenance of proper company registers and records
- Change of control clauses in contracts that may create issues during a sale process
It’s important to deal with legal issues before you start a sales process. It can take considerable time to resolve any legal issues, particularly if key contracts need to be renegotiated. Hence, we suggest that you engage with a reputable M&A lawyer early in your planning process.
We have observed that many owners of private businesses do not hold accurate views as to the value of their businesses. To ensure you have a realistic view as to the value of your business, we recommend you seek an independent valuation.
A good business valuation process will robustly analyse your businesses strategy; market position; customer base; historical and forecast financial performance; as well as search for sales of comparable businesses. A proper business valuation process can identify issues which may challenge the sale of your business or depress the sale price. Business owners who are unprepared for sale often only discover such weaknesses during the buyer’s due diligence process – invariably having a negative impact on their position in negotiations.
Common financial impediments may include inadequate financial records; existence of redundant or non-core assets; high working capital usage; lack of written agreements and records; or issues with statutory compliance.
Business and market impediments may include low market share; gross-profit margins below that of competitors; static or declining turnover; lack of protection of intellectual property; reliance on a few customers; reliance on too few products or services; or the lack of a good strategic plan.
Ultimately, the objective is to help you as the business owner to achieve your financial goals. As any business decisions are likely to have a direct impact on your personal wealth plans, it’s critical that any business planning also considers and aligns with your personal wealth plan. Your personal issues that need to be considered include your tax and estate planning, asset protection, retirement planning and your immediate plans following the sale of the business.
Our specialists work closely to understand the interaction between your business and personal situation. This ensures that you get the best from both your personal and business wealth.
Once your business is well prepared for sale and your personal objectives are aligned, you can move onto the second stage of exiting your business, which involves preparing an information memorandum and finding a suitable buyer. Our specialists can work with you through the whole transaction process to help you realise the optimal value for your business and secure your future wealth.