Hello again, the title above asks a question relating to last week’s post on business acquisitions. If we had a client that was interested in your business, and we made contact with you as the owner, would your business be in a saleable condition?

A valid question because when you ask any business owner whether their business is for sale, the great majority would say ‘yes, if the price is right’. Now the condition of the business and its future prospects determines at what level a price could be set, and hopefully agreed in a possible transaction.

So we have the proverbial ‘chicken and the egg’ or ‘circular’ situation here because if most business owners would sell if the price was right, and the ‘science’ behind setting and achieving the price is the ability of a purchaser to verify the business in questions, past and future maintainable profits.

An acquisition of your business, as I explained in last week’s post, often is the simplest ever exit for any business owner. The buyer pays the broker, the business never hits the open market and you have an extremely motivated buyer because he/she chose your company. So as a business owner what do you need to do to be ready?

1. The obvious place to start is the aesthetics. Perception is reality in most people’s eyes and, sorry for another cliché but, you don’t get a second chance to make a good first impression. Paint, signage, gardens, flooring, rubbish etc. We had a client who recently struggled to sell his business because even though the business made good money, prospects couldn’t see what they would get for their investment because it looked a mess. The prospective purchasers never got past their first impression of, ‘I couldn’t work here’. We advised the owner to withdraw the business from the market, clean up the premises, and re-launch the sale process. The first person that looked at the “new” business purchased it!!
2. Keep your personal and business lives as separate as you can. I know it goes without saying that there are obvious benefits of business ownership relating to personal expenses, but it needs to be kept to a minimum. No matter how accepted the practice is by most parties, excepting the IRD, it never leaves a prospective purchaser with a good taste regarding your business. Add backs on the whole need to be minimized.
3. Have current contracts in place for as much of the business as possible. You may have operated by handshake for years with customers, suppliers, site leases and sometimes even key staff. None of this means anything to a purchaser or his/her financiers, so formalise everything that you can. If they can’t count on it, or it is not on paper, in most cases then it doesn’t count. Operating by a handshake means nothing in modern business society.
4. Make sure that your financials are current. Verifiable records are essential to demonstrate the historical performance of your company. EOY financials & monthly management accounts are the minimum requirement. Ensure that your Debtors are in check and that you have negotiated the best payment terms possible with your suppliers, because the ‘working capital’ requirements of your business greatly impacts the businesses saleability. Any experienced purchaser will add the working capital requirements of the business to the listed sale price of the business, if the working capital requirements of your business are out of control the perceived ‘price asked’ for the business being “List price + WC/EBIT’ will make the ROI look less attractive.
5. If your business has to hold stock then it is paramount for it to be current and in good condition. If you have any stock in your warehouse that has had a ‘birthday’ a stock adjustment will apply so get rid of it now. If possible ensure that your business has a modern stock control program which can show not only you but any prospective purchaser how all your stock lines move. Stock and its treatment in any sale process is always one of the major sticking points.
6. Have a business plan that shows the direction the company is following. Make sure it includes budgets, actual targets for growth (customer or products/service), margins etc. and ensure that you actually measure your current performance against your targeted levels. The value of any business is based on the risk associated to ‘future maintainable earnings’ so minimize the perceived risk by having a sophisticated business plan and measure your progress.
7. Put together a comprehensive procedure manual. The risk associated to ownership transition can be greatly mitigated if there is a manual in place for a new owner, instead of being between the current owner’s ears. A purchaser and his/her advisers will relax marketedly in due diligence if they are able to see how your business operates day to day and can take comfort knowing that it is documented should they have problems once you have exited.

There are obviously going to be other areas that will need attention but in my opinion the points above highlight the major areas any purchaser will be concerned with. First impressions are incredibly important in business sales because the last test for most purchasers when they have completed Due Diligence, have taken on all their advisers’ advice, will be to listen to their gut.

If the process started with a bad first impression, information was slow, or your accountant needed to ‘dress up’ any numbers, stock take required a major stock adjustment or customer/supplier relationships weren’t as represented then an experienced purchaser’s gut reaction will often lead to a negative result. So don’t wait, get organised now because you never know when we might give you a call.