How to Prepare for the Sale of Your Business

This article discusses how to prepare for the sale of your business in the open market. These steps should be taken as part of a broader succession planning strategy which includes ensuring you’ve optimized your tax position and exit strategy.

Preparing your business for sale requires careful planning and execution to maximize its value and attract potential buyers. The price that buyers will pay for your business reflects the future earnings they expect to achieve, and their perception of the risk associated with achieving those earnings. To maximize value, your focus should be on increasing your business’ earnings potential and de-risking the business in the eyes of potential buyers.

Here are eight essential steps to help you get your business ready for a successful sale:

  1. Data Quality:
    • Managing your business and supporting your perception of business performance with reliable data reduces uncertainty and perceived risk for an incoming purchaser.
      Ensure that you have robust systems and procedures in place that provide confidence to a purchaser that your financial records are complete, accurate, organized, and up-to-date. Considering obtaining reviewed or audited financial statements to boost confidence or speed up due diligence.
    • Data is increasingly critical in the sales process. When potential purchasers understand the intricacies of your operations, it removes uncertainty and enhances value, as they’ll have full understanding of the opportunities and risks with your business.
  2. Financial Performance:
    • Understand your historical and current profitability. Having a robust forecast is a critical part of a purchaser’s evaluation, but they will be placing significant weight on your actual results as they are supportable and verifiable during due diligence. Analyzing profitability includes identifying “normalization adjustments”, which are non-recurring, non-business or unnecessary expenditures that might be driving down your true profitability. We recommend tracking these expenditures, and to the extent appropriate, eliminating them in the years leading up to your eventual exit- the fewer the number of normalization adjustments the more credible the argument that such expenditures were not necessary for business. It lowers risk over the true historical profitability.
    • Analyze your revenue streams and customer base in order to determine whether there are opportunities for organic growth with your existing clients, or whether there are real opportunities for entering a new market. Whether or not you choose to invest in these opportunities depends on your time horizon and capability. However, being able to articulate these opportunities and present them with a robust strategic action plan can have a meaningful impact on your valuation as it demonstrates that such growth avenues are achievable.
    • Avoid over-reliance on a single customer or a handful of customers. A diverse customer base minimizes risk for potential buyers. Demonstrate proven strategies to attract and retain customers to support growth potential.
  3. Build a Strong Management Team:
    • Establish a competent management team that can operate the business effectively in your absence. If you are the key driver of your business without a strong continuing management team, there is a higher perceived risk that your business can continue to be successful under new ownership. Show that the business can thrive under new ownership, even if you’re no longer directly involved.
    • Create detailed documentation of your business processes, standard operating procedures (SOPs), and employee roles. This will help potential buyers understand how the business operates and make a smoother transition post-sale. It also de-risks the uncertainty over existing owners having all the operating know-how “in their head”.
  4. Legal Considerations
    • Ensure your corporate records are up to date.
      b. Review and organize customer and supplier contracts to ensure they’re transferable or assignable to the new owner.
    • Protect and properly document your intellectual property (patents, trademarks, copyrights) and ensure they’re transferable.
    • Identify any legal issues and address them before going to market.
  5. Capital Assets and Premises:
    • Ensure your physical business location is well-maintained and visually appealing to potential buyers.
    • Address any necessary repairs or improvements to leave a positive impression.
    • Create a comprehensive list of assets being sold, including equipment, technology, real estate, and inventory.
  6. Professional Advisory Team:
    • Engage professionals in advance such as M&A advisors, accountants, tax advisors and lawyers with experience in business sales.
    • They can guide you through the selling process, handle negotiations, and ensure legal and financial aspects are properly managed.

Remember that the selling process can take time, so it’s essential to start preparations well in advance. By following these steps and seeking expert advice, you can increase the likelihood of a successful sale of your business at the highest price and optimal terms.