Achieving an optimum sale price for an enterprise isn't something that everyone thinks about when starting up their business. Like most things in life, it's far more effective if you prepare in advance.
Most facets of enterprise development are planned, whether it be a marketing plan, IT plan, overarching business plan or disaster management planning. Foreseeing the sale of your enterprise should be approached in a similar manner.
These hints provide you with some handy insight into the selling of an enterprise.
1. Plan early. A detailed, well thought out plan for selling a business will give you the greatest chance to get the highest value for the business. If you haven’t planned an exit strategy, you may not recognise the time to sell when it arrives! By failing to plan or prepare a business for sale, you may be giving away significant value.
2. Ensure your plan is not only detailed and well thought out, but also systematic and procedural. Quite often, with a business that has been built up over a number of years, emotion and hype can take over.
3. A proactive planning process provides an action plan that prepares a business for sale, without needing to have a specific date of sale in mind. This strategy will rapidly reduce the due diligence and place your team in a stronger position during the negotiation period.
4. Predicting at which point in time a business will be sold can be a very difficult task. The only way to deal with this is to be prepared to sell at any time the opportunity arises.
5. Look at how the business is going to create value for a potential buyer. Is it going to be through its own profitability and the money that flows through the business? Will it create value by enabling another business or larger corporation to take advantage of a specific opportunity by combining their enterprise with yours? Do you have access to a niche market that another organisation could leverage by offering new, add-on or additional services?
6. Are you able to articulately communicate the nature and depth of future business opportunities to buyers? This is important so as you can communicate the value of your company to others.
7. Do you have accurate records of past sales, expenses and investments for the business enterprise? Having good records increases the faith that a potential buyer has in the history of the business.
8. Is your business currently structured in a way that hinders or advances the sale? Some commercial vehicles are far more easy to dispose of than others. For example, a proprietary limited company can be easier to sell than a sole trader setup with a registered business name.
9. Prepare an information memorandum or profile document on your business. The purpose of this document is to be a brochure on your business, and to draw responses from prospective buyers. While supplying information only on demand may save costs, having the information at hand will not only make you confident in your business sale negotiations, but also demonstrate to a potential buyer your preparedness and organisation. Some headings to help you include:
History and ownership of business
Market, competitors and customers
Nature of operations, facilities and suppliers
Management, organisation and control
Historic and projected
10. Do you have an up-to-date inventory of all your business property? This includes the intellectual property of your business, which should be recorded in an Intellectual Property Register.
11. Attract more than one bidder before entering serious negotiations with one bidder for your enterprise. You will benefit from the competition between them.
12. Use a representative as your agent in attracting bids. This can be a solicitor, accountant or business broker. These professionals can make a real difference at the bidding stage, especially if you are uncomfortable dealing with multiple competing bidders.
13. When attracting multiple potential buyers of a business, confidentiality can be an issue. Consider requiring potential buyers to sign non-disclosure agreements regarding the information you have provided. Preventing discussion of confidential matters by potential buyers is a good idea. Such discussions can make existing staff feel uneasy about staying with the company, and impact on the profitability and saleability of a business by unnerving customers if the information flows through to them.
14. When thinking of potential buyers of your business, ask yourself the question “Who can make more money out of this business than me?”
15. Are all your relationships with suppliers, contractors and employees well documented? Do you have signed copies of agreements with these parties?
16. If you have any outstanding legal notices (such as council notices, taxation notices, long-outstanding invoices) deal with them long before your envisaged sale date.
17. In the situation where you are forced to sell your business (due to unforeseen circumstances, illness, litigation, etc) having a systematic process mapped out as stated in point 1 can make a difference of many multiples in the final sale price.
18. Planning the sale of your business is the same as disaster planning, or any other form of planning one undertakes in the operation of a business. The planning process itself provides a great deal of education.
19. You don’t have to sell all of your business at the one time – and this should be kept in mind during your exit planning.
20. Plan to use your current business venture as a platform to a new venture. This will allow you to think objectively about the business which you are planning on selling, and gain a greater sale price for the business by selling it at the right time. (Easier to determine the right time when one is being objective).
21. Underlying and unexplored business potential can often be discovered during your planning of an exit, succession or sale strategy for your current business.
22. The more time you give professional advisors (e.g. business brokers, accountants, lawyers) in planning the sale of your business, the better the outcome they can help you to achieve.
23. When seeking out potential buyers, see if you can find one with a serious problem, threat or weakness that your business can solve. As examples, your business may be able to offer intellectual property or access to a unique or unified team with specialist or technical knowledge.
24. Identify how your assets and skill sets could be used by a potential buyer to generate new business. This will assist greatly in how you should pitch your sales proposal to these potential buyers.
25. Understand where your business is positioned in the business lifecycle and act accordingly. Is your business in its start-up, development, growth, maturity or decline stage of the business lifecycle?
26. Ensure that your financials encompassing operating margins (gross profit and pre-tax profit) are cast in a way that show the way the business should look to a new notional owner. An accountant should be instructed to recast financials in the way in which they should look to a new owner. This may involve reconfiguring:
the presence of spouses and other family members who are drawing salaries but not present in the business;
loans made to the business or loans taken out of the business accounts;
rent payments made by the business to a "family" member which are not at a market rate;
salaries paid to founders which are well below the market rate.
27. Earn the loyalty of your people. Some staff, suppliers, contractors and collaborators are essential people for the continued successful running of a business.
28. Minimise the impact of certain limitations that may hinder the ability for your business to grow dramatically. These limitations could include physical location, dependence on key staff, highly customised products or solutions, non-documented knowledge, or legislative constraints.
29. Groom the business for sale well ahead (at least 6 months, preferably longer, ideally about 18 months ahead) of any anticipated sale date. Target an environment where you or other key people are not essential to the day to day running of the business. This can only help to increase your sale price.
30. Demonstrate the fact that the business is transferable to a potential buyer by revealing the environment outlined in point 29. Being able to demonstrate this to a potential buyer will increase their confidence in your business, and thus increase its value to them.
31. When considering the sale of your business, think carefully before incurring significant capital expenditure.
32. Ensure that key intangibles in your business are codified or noted and honoured. These include its operating legal structure, its intellectual capital, its customs, traditions and culture.
33. In preparing the information memorandum, highlight cost-reduction possibilities, volume discount arrangements, no-fee deals or fee waivers available for long term loyalty to suppliers.
34. Document your customer satisfaction levels through the use of surveys, customer retention statistics, lower-than-standard customer turnover rates, repeat business, documented testimonials.
35. Identify competencies that would be of interested to a potential buyer, and that could be turned into significant revenue. Develop these competencies, and ensure they are demonstrable to a potential buyer.
36. For business processes and procedures prepare detailed documentation of risk assessments and quality control regimes.
37. Profile and identify potential buyers, by researching and determining which buyers could best utilise the assets and capabilities of your business.
38. Some potential questions you could ask when profiling a buyer:
Who makes money when we make money?
Who does not make money when we make money?
Who can make more money from our products?
Who has a problem we can fix?
Who sells to the same customers we sell to?
Who needs our customer base?
Who needs our technology?
Would the staff buy this business?
39. Make the business ready for sale. Minimise integration issues, identify areas of potential strategic growth – this can all be included in your information memorandum. Articulate how a potential buyer could best exploit your strategic value in the marketplace.
40. Prospective financial information should be prepared for the next 3 to 5 years. While a potential buyer will carry out its own analysis, this assists to build a trusting and confident relationship between the business seller and the potential buyer.
41. Conduct comparative analysis with other companies in relevant industries. Among other things, review sales growth, gross margin, and earnings before income tax as a percentage of sale
42. Attempt to look at your own business through the eyes of a potential purchaser. What would you improve? What areas would concern you? What process would you use to value the business? What criteria for you would be ‘non-negotiable’? A professional such as an accountant, solicitor or business broker can help you do this with objectivity.
43. Build personal relationships with potential buyers.
44. Planning and preparing for negotiations over price and for due diligence on your business will help secure a greater price.
45. Standardise your legally binding agreements and related non-legal documents, including supplier agreements, customer contracts, and employment contracts, manuals, policies and job descriptions.
46. Ensure that all processes, procedures and instructions are documented clearly, and that staff are trained in complying with these procedures and instructions.
47. Determine the intention of your key employees should the business be sold, so that this can be used when negotiating the sale price of your business.
48. Try and include employees as part of the process of selling the business with incentives to ensure they assist in the preparation process, assist in due diligence and have a desire to work for a potential buyer.
49. A business that is prepared to be sold will build buyer confidence, and allow for a willingness to agree to a higher price and full payment on sale, rather than by instalment payments.
50. Determine your preferred sale process before entering into negotiations. While this can change during negotiations, having a predetermined sale process increases the confidence of the parties and their advisers. Be willing to negotiate. Target for everyone to walk away from the negotiation table feeling like a winner.
51. While any pre-sale capital expenditure should be carefully reviewed, it may be worth investing time and money in developing areas of the business that a potential buyer could further exploit after takeover.