Preparing a Business for Sale

Are you considering selling your business?

Here’s how to ensure your business stands out from the crowd.

 

Introduction

While maximising the price in a business sale is important, the departing business owner may have other important objectives. Common objectives are preserving the brand reputation and ensuring all clients continue to be serviced well. This is especially common when the business is in a regional area where the business owner will remain part of the local community.
Sellers must first establish in their own mind what aspects of a sale are critical or non-negotiable and which aspects of a sale can be flexible: for example, the timing of the transaction, transition support arrangements and period, payment terms, and clawbacks etc.


We use the following formula when determining a business’ value:

Value = (Revenue – Costs) x (Growth – Risk)

In simple terms, value is maximised when the income stream from the business is more certain and there is less risk that this income stream could be disrupted.

The seller should constantly seek to demonstrate these key points in their communications and in the data presented.

In this article, we address some of the less obvious yet critical considerations in preparing and presenting a business for sale rather than a generic checklist. If you require a comprehensive checklist of specific items that should be addressed please contact us by completing the contact form below.

 

1. Understanding the structure and what you are selling

Understanding the likely buyers, clarifying what assets are being sold and what the likely after tax value realisable is are critical first steps in deciding how best to position a sale.

Is the entity that owns the business being sold, is the business being sold, or are the business assets being sold? (i.e. the Client Service Rights – CSR) Understanding what is being sold affects the type of material presented in the information memorandum, the nature of the contract and the supporting documentation to be prepared.

The business structure in which the business or assets are held may have specific restrictions on how the assets can be dealt with. Approval may be required from share/unitholders or financiers if the asset being sold has been offered as security for external or internal loans. Understanding and resolving any restrictions prior to discussions with potential purchasers prevents these complications being used to reduce value.

An understanding of the tax implications and access to various concessions must be understood to appreciate the net after tax realisable value of the asset being sold. To enable the estimation of tax, a considerable amount of factual data must be available to understand the impact of any previous acquisition, continual ownership, access to concessions, historical cost base and whether any rollover relief has previously been claimed. This information should be maintained by the accountants for the business.

 

2. Presenting the financial information

Financial data should cover a minimum of three years and address both financial figures as well as operational data.  

The financial data for each financial year should

1) be reconciled to the tax return lodged for that period and

2) fully disclose and explain the normalisation adjustment made to derive at a “normalised earnings” figure. Identifying both favourable and unfavourable normalised earnings adjustments is essential to avoid unproductive debates over individual line items.

As staff costs generally represent 75% of the total costs of a professional advice business, detailed financial information and analysis of staff performance, productivity and cost are required to assist purchasers understand the business and explain past performance. This information can also assist with identifying synergistic savings or role reassignment as part of a post-transaction integration plan.

Operational data to demonstrate improvements in productivity and throughput assist validate the strength of the business.  A business that can demonstrate limited reliance on any one individual be they a principal, adviser or office staff member is more valuable than one reliant on the efforts of a key person.

 

3. Identification of synergistic buyers

In order to present a strong acquisition proposition to potential purchasers, it is essential to first understand the strengths of the business being sold. Is it, the type, the size or the diversity of the client/revenue base, quality of business processes, effectiveness of the client engagement process, utilisation or integration of technology? Understanding the combined opportunity including the comparative strengths of the vendors business to the purchasers is essential in extracting a premium price.

 

4. Preparing the data for due diligence

To minimise claims for reduction in the price asked, every aspect of the business being promoted should be supported by some external source in order to validate the claims being made.  We are continually amazed at how little attention is applied to validating, cross checking and analysing information gathered and used to support the sale process.

Recent examples include one business failing to identify $85k of ongoing revenue due to poor record keeping.  Another business having in excess of 700 client letters being returned foregoing value in excess of $50k.

In both cases, this value could have been captured and possibly enhanced by investing in proper data cleansing and updates prior to the sale process. $5,000 to $10,000 invested in data cleansing cannot only clarify the true value of the assets being sold but in the above examples could have resulted in an instant 500% – 2000% return. Engaging Seaview to manage this process can significantly enhance the value of the transaction.

In addition to a detailed analysis of staff costs, other significant information that needs to be prepared include dispute registers, claims history, details of any ongoing commitments, specialist or proprietary tools used to manage the revenue and any other aspect of the business that distinguishes it from its peers.

 

5. Defining the ‘take to market’ strategy

The most successful sale is likely to occur when there is competition from multiple interested parties. Creating interest from multiple parties is one of the most important roles a business adviser plays in the sale process. The more widely engaged the adviser is, the more likely they have a larger pool of potential buyers to contact.

After identifying likely interested parties, an assessment of the most likely “synergistic acquirer” for the business can be made.  Understanding the attraction of a particular transaction to the purchasers as well as their capacity to purchase enables a strategy to be formed on how best to engage.

If the potential purchaser is significantly restrained in their ability to transact, they are more likely to introduce deferred payment terms and other transaction complexity, which should be avoided if possible.

A marketing strategy is best determined after completing the above analysis and after obtaining informal feedback from a number of potential acquirers to understand appetite and critical success factors.

 


6. Negotiating the sale

This is where adviser business adviser adds the most value not only in terms of extracting a favourable deal but also in managing the emotional stress that exists as the transaction evolves. Minimising the vendor’s engagement in the process is essential.  Limiting the vendor’s role in decision making on key strategic and pricing decisions enables the business owner to continue to focus on their business in order to preserve value and maintain staff morale.

It is impossible to fully shield staff from the process, especially, during the due diligence process.  When to communicating to staff about the sales process is a separate and important discussion.  There is no single right approach as it depends on the vendor’s preferences, likely reaction from staff, and their ongoing involvement (if there is to be any) it is always prudent to be open and honest with staff throughout the process once they are engaged.


 

7. Documentation

The most important initial document to have all interested parties sign is a confidentiality agreement (CA). The CA this should be supplied, signed and returned by your business adviser or legal representative to every interested party.

It is important the vendor engage a legal representative, one with experience in the particular industry and or asset being sold. Transactions involving financial services businesses should always use an experienced legal adviser given the unique interpretations around this type of transaction.  The vendor should also control the legal documentation process.  The term sheet should be constructed in a manner that enables the easy transfer of terms sheet arrangements into a contract.  The term sheet should represent the structure of the transaction desired by the vendor with the adviser having clarity over areas that are negotiable and those not negotiable.

 

8. Professional support

Seaview Consulting is not a broker, but rather corporate advisers who act in the best interest of our client to achieve a successful outcome.  Engaging a professional experienced in the issues that may arise during a transaction is essential to reducing the emotional stress that accompanies what is likely to be the largest asset sale most business owners will undertake.

From a vendor’s perspective, Seaview’s role is to:

  1. Help the business owner properly prepare the business for sale
  2. Present the opportunity in a most favourable light
  3. To assist the business owner in preparing the supporting documentation necessary to present during  due diligence;
  4. Negotiate on behalf of the vendor
  5. Assist translating agreed arrangements into contracts
  6. Manage the settlement process to ensure correct transfer occurs.

An experienced adviser is able to eliminate unsuitable purchasers in terms of price, culture, arrangements, or payment terms quickly, saving an enormous amount of emotional stress on the vendor.


 

Conclusion

A well-prepared business owner will be able to promote their business in the best light and link their claims to material that substantiates their position. Furthermore, a good business can defend its performance or position on perceived negative factors.

Ultimately, it is not what you think your business is worth, it is the purchaser’s perception of value. The purchaser is the one investing capital and/or borrowing money to acquire the asset. The more secure the income streams and the less risk there is to those income streams the more comfort the purchaser has in paying a higher price or even a premium to other businesses in the marketplace.