Business Advice

How to prepare your business for sale

- September 14, 2022 3 MIN READ

To maximise value, it’s imperative that you consider your legal obligations and financial ramifications when you prepare your business for sale, writes Joanna Oakey, author of Buy Grow Exit and founder and Managing Partner of Aspect Legal. Without the proper protections in place, you could be hit with unexpected financial and timeframe burdens.

Preparation is critical for maximising value at exit. Businesses that are prepared from a legal and accounting perspective generally experience a larger pool of buyers, a higher sale price and a quicker sale.

However, many businesses come undone by gaps in their legal protections and financial preparation.

When exiting a business, consider these elements.

The dirty three-letter word: TAX

Tax considerations are complex. Many owners leave a sale paying no tax, but others can end up paying millions.

Get advice early in relation to how suitable your structure will be at exit. You need to understand the tax outcomes of different ways an exit can happen. To achieve this, get regular reviews from your legal and accounting/tax team.

Understand the business from a buyer’s perspective

Determine key areas of value in the business. It’s critical to understand what a buyer will value and what could scare them away. To start, you need to assess the current and possible key areas of value and lock those in.

Also, assess any risks that could destroy value before sale. Once the risks are established, use your insights to import systems for reducing those risks.

Systematise the business

Systematise the business as much as possible by transferring reliance on key staff into systems and processes that capture critical business knowledge.

Buyers love businesses with good systems and processes. A lack of systemisation attracts a smaller pool of buyers and reduces value at sale.

Become independent of the business

Retain a management team and progressively step out of the business.

Businesses that are run under management experience a large uplift in their valuation multiple and a quicker transition.

Share knowledge around to reduce key person risk and build strong systems and processes. You should also create incentives for key staff to help maximise the sale value.

Consider staff ownership and prepare strong legal documents to ensure key staff can’t threaten the value of the business by taking clients, suppliers, staff, IP or confidential information.

Understand the sale process and the timelines

Once you have decided to sell, you need to engage help to find a buyer. Then you will go through the process of providing the information they need, negoti­ating the deal terms, waiting for them to complete due diligence, and then slowly transitioning across the business.

So you must understand what the process of preparation and sale will look like for your business.

Being ready for DD

You want the buyer to feel confident that the business is well organised, that you’re well prepared and that they won’t come across any issues after acquisition.

Preparation for legal due diligence means ensuring the business is legally compliant. Confirm that all value has been captured and can transfer and that risks have been minimised. Then make sure all documents can be found easily and critical contracts are properly signed, current (not expired) and complete.

In other words, that your business looks well run and ‘clean’.

Build your deal team early

Build your advisory deal team from day one.

Ensure you have a team of advisors who can work together—a tax accountant, a lawyer with experience in dealing with businesses at exit and a corporate adviser or business broker.

Build a united force to help you achieve the best exit possible.

Having a post-exit plan

If you are unclear on why you are exiting, it can create a problem in achieving your desired outcomes. It can also be a catalyst for a lack of satisfaction when the deal is complete.

To properly prepare your business for sale, get clear on why you are exiting and what you will do post-exit. Start to visualise that life.

Running your business in a sale-ready state

The goal of all business owners should be to run their business perpetually in a sale-ready state.

This includes locking in the elements of value in your business, minimising the risk and being aware of what creates value in the mind of a buyer.

As a bonus, if you need to exit quickly, your business is primed for that to happen.

The best time to prepare your business for sale is on the first day you own it. Sellers who fail to prepare properly will suffer a massive impact on sale progression.

Businesses that are considered less risky and more sale-prepared experience fewer speed bumps along the way.

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Now read this:

What’s your exit strategy? (Yes, you need one!)