Preparing to sell your business: an introduction

In this second issue of our series of blogs on corporate finance, we start to consider preparing to sell your business. We will continue through the process, and in more detail, in later articles.

Getting your business ready to sell is very much like preparing to sell many other things; such as a car or house:

When selling your car, you’d make sure that you had invoices to prove your service history, ideally a fresh MOT, so that the next owner knew they wouldn’t need one for the next x months, and sufficient tread on the tyres. You’d also be wise to give it a clean.

If selling your house, you would be sensible to consider a fresh ‘lick’ of paint in a neutral colour, de-clutter, replace any loose tiles, and generally do all of the jobs around the house that you have, at least in my case, been meaning to do for the last few years. And that’s before you bake a loaf of bread and brew some fresh coffee on the morning of a viewing!

With both of these analogies, the aim is to make the house or car look as good as they can do, and a worry-free purchase for the buyer. People don’t usually want to buy a wreck… and if they do, they will expect a big reduction in the price. Knowing that they will need to get the roof repaired, or the engine fixed will put some people off. Those that remain interested will factor in the repair costs, plus premiums for risk and hassle, and make lower offers.

And so, what does that mean for planning the timescale of a sale? Well you can just go ahead straight away with marketing your business, but time spent fixing any problems really is essential.  Generating interest is critical, as the more people that are interested, the higher the price achieved, as a result of competition. There is usually a very strong correlation between the amount of time spent preparing a business for sale, and the value achieved on sale.

In this article we look at three of the initial steps: -

  1. The decision to sell;
  2. Housekeeping; and,
  3. Other steps before marketing.

The decision to sell

You will know the reasons why you would like to sell: It could be that you are ready to retire; or have reached a dispute with your business partner; poor health / worn-out/ fancy a new challenge; or just recognise that it is a good time to realise the value in your business. These are a few reasons, and there are of course a host of others.

Regardless of the reason, you need to be able to convey the decision to a buyer in a positive way. The buyer needs to believe that the reason is genuine, and that your decision to sell is not going to have a detrimental effect on the business that you leave behind.

Having made the decision and coming back to timescale, you need to choose the best time to market the business. That might be at a time after winning a long-term contract, demonstrating that the business has a strong sales pipeline for the next few years. It could be led by personnel - perhaps at a time when none of your key management time are due to retire. Even a basic thing such as holidays can have a bearing: starting the marketing process before the summer holidays or Christmas is always best avoided.

This is a very important discussion to have with your advisors, at an early a stage as possible, so that you can discuss a schedule of what needs to be done before marketing the business.

Housekeeping

This section is all about booking the MOT, or painting the walls.

Unless you plan to do everything yourself, you will need to choose advisors. Your business will be one of your most valuable assets, so you need an advisor you can trust. Look for advisors with a proven track record, and who can point to transactions they have completed. You will have to work closely with them for a period of time so make sure they are likeable, and that you feel comfortable that they will be able to explain very complicated things in a way that you will understand.

Make sure you understand their terms, and how they work and that they are aligned with your goals. Typically expect to pay a fixed fee followed by a (small) percentage of the value you receive. Be wary of advisors whose business model is to rely on the fixed fee, and treat the percentage based on a successful sale as a bonus; rather it is better for you if you and your advisor have a common financial interest in the sale completing.

Finally having a strong tax planning team is essential so that opportunities to save tax are identified, and sales structures planned to capitalise on them, are put in place. (See the end of this article for some examples).

With advisors appointed, it is time to undertake housekeeping. This is best done by considering what your business should be like in the mind of your buyer. What will they be looking for? What can your business offer their customers that they can’t already do themselves? Ask yourself what things are there in my business that I would rather a buyer not know about. Then think what it might be possible to do to fix those things.

You advisors will be used to being on the other side of a transaction carrying out due diligence on companies that they are helping to acquire, and so will be able to guide you through the things you need to address.

You will need to identify what assets are included in the sale and that you have legal title to them. If there are any not included you should look at extracting them now.

Other steps before marketing.

Before going any further, and now having clarity of what is being sold, and what problems, if any, exist, you should formalise the value of the company. This can be a complex calculation, but will typically consider the value of assets and liabilities in your balance sheet, as well as a multiple of profit. You might think that this is a purely mathematical process, but far from it, and for that reason we will discuss valuing your business in our next corporate finance blog, as it is a subject in itself.

If the value is sufficient for the sellers, and more importantly is believed by them and their advisors to be achievable, an Information Memorandum needs to be prepared. This is only ever sent to potential buyers who have expressed an interest, based on reading a carefully worded and very brief introductory document that they will have already received and having signed a Non-Disclosure Agreement. ("NDA"). The NDA is to protect you from recipients using confidential information that might damage your business. For example, you wouldn’t want your customers or staff to know that you were planning to sell, in case they decided to leave. The Information Memorandum would always keep customer names anonymous, but again the NDA is there to protect.

In the interests of trying to keep this edition of our blog reasonably brief, as with valuing your business, we will pick up what goes in an Information Memorandum, and marketing your business in later editions.

The final things to consider at this stage are tax and structural planning. Examples of things to look out for here include: -

  • How much cash is in the business? Excess cash can affect the availability of Entrepreneurs Relief, which could be a costly thing to lose!
  • Are shares held by the right people? If some are owned by spouses who do not work in the business, then, again, Entrepreneurs Relief can be at risk.
  • Estate planning: Shares in a business qualify for IHT relief, but cash after a sale is fully exposed, so it is important to give some thought to what you will do with the proceeds.

If any points in this article strike a chord with you then please contact us. CBSL Accountants' Corporate Finance team have a proven track record of helping companies to acquire and business owners to sell. We help you to identify possible buyers, to understand what those buyers are looking for, and how to present your company to them in a professional way, to maximise the chances of selling your company

For a confidential discussion, please contact Adrian Barker: adrian.barker@cbslgroup.com