If you’re thinking of selling-up, take note of these preparatory ground works to ensure you get he best value out of your business. Dr Colin Thompson, managing partner at The Cavendish Academy gives his top tips.
Building and communicating the value of your business is key to getting the most out of it when it’s time to sell-up. So prepare well.
The creation of value is a key objective of any organisation and research indicates that the pressure directors/business owners already face to deliver value will intensify significantly into the future with a global economy. Today, it is vital to build and deliver superior long-term value to meet and exceed the expectations of all the organisation’s shareholders – and those of potential buyers down the road. And that means opening your mind to the challenges facing everyone in a difficult and changing global trading environment so that your business remains competitive and on line to attract the best possible price when you want to sell it.
Mergers and acquisitions have become one of the more widely used methods for companies to achieve growth, so there are potential buyers for your business out there. But they will want value for money!
There have been mergers/acquisitions that have succeeded but over recent years there has been a noticeable trend towards failure – and these can often be traced back to a lack of proper planning and poor execution.
Selling or buying a business is an enormous step for most. With careful planning, you can increase the value of the business and create a smooth transition to a new venture. Depending on the condition of the business and the state of its internal operations, these steps could take several months, or longer, but they will pay off. Undertake the necessary work and you will be able to consummate a deal more quickly than other business owners and/or garner a higher price than comparable businesses that have not worked out these issues. So, here goes:
Get rid of excess stock/inventory.
Dispose of it, sell it, use it yourself, give it to charity and use the gift as a marketing tool and obtain media exposure of your generosity. Or return it to vendors, if possible. Distributors also should work with clients/customers to purge their warehouse of obsolete items.
Clean up your act.
Does your facility present a negative image of your business? Will disorganised piles of management reports and other data affect potential buyers’ opinions of your management skills? A rundown looking building will fetch a lower value than one that looks clean and well maintained. Plus, sloppy record-keeping or outdated information about customers could affect your company’s value.
Conduct regular customer surveys.
Regular customer surveys can tell you what you are doing right, which could help you market your company to a prospective buyer. Perhaps more importantly, they can tell you where you need to improve. If you make corrections, you may boost profitably, customer satisfaction and customer retention, which ultimately may improve the value of your business.
Take on board an excellent lawyer.
Get a professional with sound commercial and business knowledge to draw up a non-compete agreement and have all new salespeople sign it with immediate effect. Check with your lawyer about the feasibility of having existing employees sign the non-compete agreement. It can be difficult, if not impossible, to enforce a non-compete signed by existing employees because ‘consideration’ must be given for signing the agreement. For new employees, consideration is the employment contract.
Take on board an excellent accountant.
Have them audit, or at least review, your financial statements/accounting processes. Prospective buyers will want access to financial statements that are easy to read and follow accepted accounting practices. They also will require some assurances that the statements are accurate. Audited statements provide peace of mind for buyers. The larger your company the more important it is that you have your statements audited.
Be self-critical.
What areas of the business need improvement? Are there any issues that would trouble a potential buyer – if so, settle them. If you have been thinking about releasing unproductive salespeople, do it now. Planning to diversify product lines to make the company more profitable/competitive? Go to it so you get the benefit. It’s not too late to attend industry events to learn the ways other business owners are adjusting to rapidly changing times.
Improve collections from customers.
Most business owners would like to improve sales invoice payments given they have a direct effect on cashflow and profitability. Begin to improve the processes on customer collections from those that do not pay within the agreed terms of payment. Follow up with frequent reminders, telephone calls by the sales people and if they do not pay, follow up with your accounting department, and visits by the salespeople or managers/directors if necessary. Consider offering prompt pay discounts if you do not already. Or, prompt payers could receive points towards future discounts. Consider ‘firing’ very late paying customers or request they pay up front or upon delivery. Prospective buyers will not wish to deal with such headaches upon acquiring your company.
Compare your company against industry margins.
When it comes to selling your company, ignorance is not bliss. You may have put up with slow paying customers and salespeople that never seemed to charge satisfactory margins, but that does not mean a prospective buyer will want to. Currently, with many potential sellers to choose from, a buyer will be interested only in companies with top-notch margins and higher than average financial performance. So know how does your company compares to other firms in a similar space – look at categories such as net profit as a percent of sales, gross margin, return on investment, average age of receivables (debtors), sales per employee …
Gather sales data about your company.
The better prepared you are for the acquisition process the more smoothly it will progress. Also, excellent preparation may even result in a higher selling price for your company. Prepare documents that show your company`s strengths and major product lines/services. Calculate the age of active accounts, the number of accounts added within the past year and the percent of accounts that contributed 80% of sales within a recent time period, such as the last six months to a year.
Update and maintain better customer records.
If you are the only person who knows whom to call on at major accounts the results of the last sales call, or the buyers’ quirks and preferences, write them down. Better still record them electronically. Such information could be critical to the future buyer’s success in your accounts, which in turn may dictate your amount of compensation depending on how the deal is structured.
Determine the future you want.
Analyse your personal finances, perhaps with the help of your accountant or financial advisor. How soon can you afford to retire and still maintain your current lifestyle? Will you need some sort of an employment contract with the new owner of your business? If so, what would you do if the new owner fired you? Business owners who have poured their heart, soul and free time into their companies for decades sometimes find it difficult to retire. Think about that long and hard as your prepare the business for your exit.