By Melissa Needham, Davies Arnold Cooper LLP
This challenging economic climate is a perfect opportunity for entrepreneurs to prepare their businesses in order to be ready to achieve a sale at maximum value once the market turns. It takes on average 18 months from deciding to sell a business to completing the deal so if you want to sell a business on your terms and when you want, early preparation is key.
Buyers undertake extensive due diligence on their targets and a canny seller will be looking to find the issues now that the buyer will inevitably find and focus on later. If rectified now, a seller may well save themselves a reduction in the purchase price or the possibility of having to indemnify the buyer at the point of sale. Preparation can therefore provide a cleaner exit and more money for the seller.
What can an entrepreneur do to prepare?
• Specialist advisors are crucial to a successful sale. Corporate finance advisors, expert lawyers and accountants should all be consulted as soon as a seller begins to think about a potential sale; these experts may be willing to provide preliminary advice and pointers for little or no fee as they will want to build a relationship with the seller early on
• Remove themselves from the day-to-day running of the business. The business should not look to a buyer like its continuing success is dependent on the seller, because the seller will exit on or shortly after a sale. A strong employee management team which will remain post-sale should be built as early as possible. That team itself may become interested in buying the business, which can only be good to increase the price achieved
• Improve working capital by controlling levels of stock or work in progress, improve aged debt by implementing stringent policies, review maintainable earnings to ensure that costs are in-line with industry norms and expenditure is not being incurred which is unnecessary to maintain the business
• Ensure accounts for at least the last three prior years are readily available (with adjustments if required) and take a thorough inventory of fixed assets to ensure that it is completely clear exactly what the business owns
• Try to diversify the business’ supplier/customer base. If possible, a business should not be too dependent on any one supplier or any one client, as the loss of any of those relationships could cause a loss in value of the business and the buyer may not find that an acceptable risk
• Document and minute internal procedures and meetings. Written procedures show a professionally run business and meeting minutes will show that the seller is not a crucial part of the business’ management team
• Review customer contracts for change of control clauses. If the contract can be terminated on a change in ownership of the business, consider seeking to renegotiate now rather than when the pressure is on later
• Make sure all the business’ intellectual property is in the ownership of the business and not, for example, in the seller’s personal name. Where IP is not owned by the business, ensure the business is legally entitled to use it
• Ensure that good written contracts are in place with all material clients, suppliers and employees
• If possible, settle any outstanding or pending litigation. If the business is embroiled in litigation during a sale, the buyer will inevitably want an indemnity against potential costs. The entrepreneur will have left the business and will be liable for the cost, but it is the buyer who will probably have conduct, of the litigation
• Make sure that the business’ statutory books and filings are in good order; these will be examined in detail by the buyer’s lawyers and it is better to rectify them if necessary now rather than later