Do you know how to prepare your business for sale?
Imagine that one of your friends tells you he will run a marathon tomorrow, but he hasn’t trained a single day. What would you say to him?
It is likely that phrases like “you’re crazy, it’s dangerous for your health” or “without doing any preparation, it’s reckless” would come out of your mouth. You would be right. Preparation in racing is essential.
It is the same in many other facets of life, such as preparing your business for sale.
Table of Contents
11 key points to preparing your company for sale
1. When preparing your business for sale, the more attractive you make your company to the buyer, the more you can ask for and the more you will get for it
As advisors in mergers and acquisitions of companies, we usually indicate that preparation is behind 90% of the success of a company sale. When an entrepreneur decides to sell a business, we often find companies are not prepared for an optimal sale, so it would be advisable to spend time to resolve any ‘weaknesses’ that we find before the sale because these factors will certainly reduce its value and/or hinder the sale process. Logically, this takes time, and unfortunately, on too many occasions, the entrepreneur no longer has it.
Provided you have this time, preparing to sell your business one to two years in advance is advisable. The aim is to focus on improving the company, which will increase its value, make it more attractive to buyers and increases the likelihood of success. It is also important to remove obstacles that could hinder the sale and minimise its negative impacts and equity consequences.
You might find this interesting: How long does it take to sell a business?
The work done during the preparation of the sale of the company focuses on identifying the critical aspects for improvement, acting on them, and reducing the possible risks that a potential buyer would perceive today. Throughout this article, we indicate some aspects you should work on to prepare your business for sale.
It is time to get the company in shape to seduce investors. The “training” begins.
The first thing to do is conduct an extensive analysis of your products or services. Analyse what your costs are, the margin you apply, etc. Ask yourself if diversifying your portfolio of products or services makes you more competitive and attractive to an investor.
Work on the differential elements of products that are difficult to copy, patents, exclusive area contracts, specific qualifications from the public administration, etc. Buyers can highly value any of the above. To do this, it is recommended to reflect on whether there are barriers to entry in your sector and see if you have key elements that will enable a buyer to overcome these barriers.
Linked to your portfolio of products and services, you should analyse whether they can be exported. That is, if they can be sold/offered outside your borders. Nowadays, many investors are looking for a product or service portfolio that is diversified in terms of customers and geography. They are looking for the product or service to be saleable in markets they operate in, often globally in the case of multinationals. If you have not done so, try to analyse the foreign market (for example, your neighbouring country) to see if it is beneficial to have new alternatives to commercialising your products or services.
Try to be product-oriented and not service-oriented. Even a service company can standardise them into an efficient product.
To prepare your business for sale, it is best to keep a monthly inventory of your stock as up-to-date as possible and at market value.
If you have unaccounted stocks, you must regulate them if you do not want your company’s value to be reduced during the sale negotiation. Keep in mind that the buyer is not going to pay for unaccounted inventory. There may be tax contingencies, so this would open up “hot” negotiation points in selling the company.
Avoid stockouts. Plan your purchases and the stock you have in the warehouse so that any unforeseen event does not lead to a stockout with customers left out of supplies. For example, during the 2020 pandemic, some companies had to stop production due to the shortage of raw materials because they did not have a safety margin in their warehouses.
If you have not already done so, invest in good software for management control. Small and medium-sized companies usually find opportunities for improvement in day-to-day management with solvent software.
Overcome resistance to change on your part and the part of your employees. Good software is an investment that pays off in profitability, efficiency, and management control.
Here, the quantity and quality of your clients are key to an investor’s attractiveness. If your client portfolio comprises only a few companies, consider whether it is appropriate to look for alternatives.
New services or products
Create new products or services that allow you to have a diversified client portfolio and not depend on just a few. The investor will ensure that the company’s future is not compromised at the time of your exit and that they remain in charge of the company.
In addition, when selling the company, excessive dependence on one customer may lead to a reduction in price or a conditional payment in the future, depending on the maintenance of that customer.
Ideally, ensure no customer accounts for more than 15% of your income statement.
Qualify your customers
You should also analyse the quality of your customers. To do this, break down the margin you obtain with each one of them.
We have worked with companies where reducing sales by eliminating unprofitable customers resulted in an absolute margin improvement.
How you charge your customers is also important to prepare your business for sale. If you charge for your services in advance, for example, in the form of bonuses, be careful about the correct allocation of sales.
Sometimes we see that companies recognise the entire bonds as revenue when they sell it, and, in reality, they should recognise it when they provide the service. Failure to do this correctly can result in profit adjustments for the year that affect your margin and EBITDA. This can affect your company’s value.
Remember that company value will be key in negotiating the final sales price.
In the same way, we talked about customers. The same applies to suppliers. It is not convenient to depend on just a few. Have alternatives to any rise in raw materials, any change in contract conditions, etc.
Look for alternatives to be able to face price increases of materials. In today’s environment, we see more and more industrial companies facing a generalised price increase in raw materials. Rising fuel and electricity prices accentuate this.
Companies with a more efficient material supply strategy (a more significant number of suppliers) and a repercussion of a price increase to customers will be able to defend margins better.
If your machinery is obsolete, try to find a way to renew it and maintain it properly every year. If an investor has to make large investments in fixed assets (CAPEX) when entering the company, he will probably try to deduct it from the price he offers for the company.
If you know you want to sell your company, as part of the sale preparation, we recommend hiring a tax advisor who is an expert in company sale and purchase transactions. You need to have an appropriate corporate structure according to the operation you want to carry out.
There are many corporate factors that you must contemplate when you prepare your business for sale that will affect it fiscally:
- A holding company forms the corporate structure.
- The sale of assets instead of shares.
- The inclusion of real estate in the company.
- Dividend policy before the sale.
You must have a tax plan for the operation between 6 months and a year before starting the sale of the company.
On the other hand, family factors will also affect the sale and, in some cases, even prevent it. Some examples are companies with many shareholders, some even untraceable, companies in the hands of the “generation of cousins”, or in which its shareholders are at odds. Identify as soon as possible any possible family conflicts and put them on the table as soon as possible, and let yourself be advised and mediated by expert lawyers in these types of family conflicts.
The first thing to do is analyse whether you have become “the orchestra man” in your company. Does everything depend on you?
If that is the case, you need to professionalise your company. Create a structure that allows you to distribute responsibilities and in which everything does not depend on you. If you don’t have one, hire a general manager to manage the company and report to you as president or CEO.
This will allow you to make a much smoother transition when the buyer, whether a financial investor or an industrialist, enters the company. The deal often falls through when the buyer observes very hands-on company management, especially with international buyers.
Focusing on your workforce, you must regulate all your employees, i.e., pay overtime, per diems, etc. Analyse the possible employment of freelancers or the status of partners who provide services in the company.
Buyers look for well-organised companies and do not want problems to arise because of any labour irregularities. All possible sources of problems detract from the attractiveness of your company. Therefore they can lead to complexity in the price paid in the form of contingent payments, escrow accounts or lowering the price.
The labour aspect in a service company is especially relevant for the sale of the company. As long as everything is in accordance with the current regulations, you will avoid possible contingencies in the sale process. Remember that the objective when you prepare your business for sale is to eliminate obstacles that may hinder the process.
Also, it would help if you created a management team with attractive incentives for the fulfilment of objectives and with personal development plans to keep them loyal to the company.
It is advisable to involve key executives in the sale because you will need them to offer the best face to the investor and ensure that the company is in the best hands.
When you prepare your business for sale, it is desirable to prevent executives from leaving during the negotiation phases of the sale, as this could be devastating to the buyer’s perceived value.
One measure we have implemented on occasion with the entrepreneur has been to inform key executives of the sale idea and reward them with a percentage of the transaction value. This will encourage them to collaborate to improve financial ratios during this period.
Improvisation is not a factor that attracts investors’ interest. Do not define your strategy “on the fly”. Small and medium-sized companies often do not have a strategic plan.
Strategic plan to prepare your business for sale
A strategic plan defines some crucial points:
- Where the company is.
- Where it wants to go.
- The objectives to be achieved.
- The means to achieve those objectives.
Therefore, draw up a strategic plan containing all these, including a business plan for 3 to 5 years. Within your business plan, try not to generalise. Focus on doing a few tasks very well and not too many regularly.
You must involve your employees in this strategic plan, making them aware of it, defining the company’s overall strategy, and specifying it at lower levels that will take the form of action plans (departmental or of the different areas).
When you put your company on the market, any investor, whether financial or industrial, will ask for a realistic and credible but also ambitious business plan on which to base the company’s future.
This will help you give credibility and generate interest in the investor. Keep in mind that the buyer will have more resources and will accelerate the growth of your company.
Strategic plan’s compliance
When you prepare your business for sale, you must monitor the degree of compliance with the strategic plan starting from the operational management of the defined action plans to see its coherence and deviations.
In this way, buyers will see that the projections are being fulfilled when you are in the sales process. This will have a triple effect:
- Give investors confidence.
- Lower risk of the transaction.
- Increase your company’s value.
Competitive environment of your company
Your competitive environment is essential.
Be sure to analyse your competitors during this process. Try to track your competitors’ performance annually and compare yourself with them.
It is crucial to make an industry comparison. You need to identify if you are growing at the same level as the industry. Are you below or above? Are your margins aligned with those of the industry? If not, try to find the reason behind this situation.
You have to know what your role in the market is to be able to negotiate the sale of your company.
Preparing the company for sale requires a thorough review of its financial status. This extends across many areas, from real estate assets to the company’s cash surplus.
A balanced scorecard is a management tool that facilitates decision-making. It gathers a coherent set of indicators (KPIs, key process indicators) that provide top management and area managers with a coherent vision of the business or their area of responsibility.
Do you have a balanced scorecard for the financial control of your company? If not, now is the time to do it.
The information provided by the scorecard helps focus and align management teams, business units, resources, and processes with the organisation’s strategies.
Although it sounds logical, preparing annual, quarterly, or monthly budgets is important. Preparing an annual budget at the end of each year is necessary for the successful planning of the company. Also, for setting short-term objectives.
In addition, keep control of your accounts monthly, calculate budget deviations and look for their origin.
Seek to define your company’s financial debt. It is crucial to be clear about what is part of the company’s debt. We refer specifically to the debt with a financial cost to banks and any other institution (leasing, bondholders, invoice discounting, etc.).
In this sense, it is also necessary to differentiate debts with customers, such as advances, that are generally considered debt.
Another issue that you must manage is debt with partners. If it exists, you must formalise it through loan contracts so that it is clear how it will be amortised when it comes.
Real estate assets
The company frequently owns the asset where it is located. Sometimes, it even owns unnecessary assets for the company’s operation. Analyse the real estate assigned to the operation of the company.
It is always advisable to separate the real estate activity from the productive activity, charging a market rent to the company.
One point that it is recommended to review is the surplus cash. In small and medium-sized companies, it is common to find a conservative profile, where the profits of previous years have not yet been distributed and have increased the cash flow.
At the company’s point of sale, it is necessary to extensively study the real cash needed for the company operation (working capital) and have a clear idea of the amount that can be distributed to the partners before the sale.
Finally, avoid cash flow tensions. Manage your cash, if possible, by charging your customers in advance, generating a positive cash flow cycle.
11. Valuate your company before facing the sale process
The valuation of your company is an essential step during the sale of a company.
The valuation will allow you to understand the strengths and weaknesses of the company from a financial perspective. These strengths and weaknesses are translated into numbers and affect the company’s value. This is especially important for preparing the company for a sale process.
You may be surprised by how the value changes when you touch some elements, for example, paydays or stock days. It will help you understand how potential buyers tend to value the company. This way, you can maximise the price by taking steps before the sale that will affect the valuation.
You must take time to understand the different valuation methods. Also, the values of companies similar to yours that have been sold. This way, you’ll have a logical orientation of your value range depending on your actions.
You might find this interesting: The usefulness of the business valuation process.
The importance of preparing your business as well as possible for sale
During the final stages of the sale, the potential buyer will always perform an audit or due diligence of the company’s financial, legal, commercial, labour, environmental, and business aspects. Therefore, anticipating possible contingencies that may arise in the due diligence is essential to prepare your business for sale.
On the other hand, there is a lot of information to prepare for the buyer’s review. Anticipating its preparation will speed up the subsequent review process and alert you to possible deficiencies in the information.
As you have seen, you cannot go out to sell without first preparing yourself. Start training now if you want to reach your goal and sell your company. Preparation will be the key to your success.
Are you considering the sale of your company and need professional advice? Do not hesitate to get in touch with us or fill out the form below: