Selling your business always starts with planning and takes a lot longer than you expect. Many businesses need to be cleaned up or revitalised to maximise the ease and ROI on their exit. And this takes time, writes Brad Turville, senior accounting professional and director of BJT Financial.
Each business owner is unique and business models vary, as do planned exits.
Even if the thought of a business exit is way off in the future, the process of de-risking and revitalising a business for sale will result in a much more valuable, profitable and smoother running ship.
Most people know from selling a car, in many cases the best it ever looked and performed was when someone handed over the cash and drove it out of your driveway.
Ask yourself, what if you were approached tomorrow to sell your business? Would you get the maximum dollar and terms based on how it is running now? Most business owners cannot confidently answer yes.
So let’s look at some of the most common areas a business needs a tidy up before selling.
Four smart ways to ready your business for sale
1. Reduce dependence on business owner
Is the business dependent on you being there? This is one of the most common issues with not only growing and scaling a business, but also when looking at an exit.
A business that runs itself with marketing, sales and delivery systems and team members in place, will be FAR more attractive to a buyer than a business that relies on one key person.
Think of it from the buyer’s perspective – if they have two businesses to choose from, one runs itself and one revolves around a key person, which do they choose?
So the first step is to put a plan in place to start removing yourself from the business before selling – and that starts with identifying what exactly are you doing. I call it the ‘task transfer’. What are all the tasks that you do personally and how can these be delegated to other team members? Do you potentially need to hire?
2. Standard Operating Procedures
Is your business documented on a task by task basis, compiling what are known as Standard Operating Procedures or SOPs? This is a forced method of extracting your way of doing things onto paper (or Google Docs) so it isn’t lost through key people leaving, and is a process to easily train new team members.
Imagine a role such as a receptionist. There would be an SOP on how to book appointments, how to answer the phone, how to do the mail, how to structure a letter, how to do a stocktake on office supplies. When someone needs to fill in or a new team member comes on board, they are given access to all the SOPs for the role to learn and refer to.
This proprietary way of doing things becomes powerful when you’re ready to sell your business. You might be very efficient, or very fast, or you might never make a mistake. That is important not only for every other team member to learn and implement, but a buyer of your business could reap massive rewards from implementing your procedures over their much larger and clunky workforce.
There are a few ways to create SOPs:
Firstly, if a task is completed more than once, create a SOP. I like to use Google Docs and keep them brief, say 10 dot points. I like to go a step further and record my computer screen to give a live demo.
Another example I use is recording client discovery sessions, so future team members can learn how I take the written Discovery Session SOP and translate it into a meaningful session with a client.
I’m sure there are tasks you do really well in your business – but it’s no use having them in your head, so get them on paper.
3. Accounting and legals
Most business owners cannot confidently say that they are on top of all things compliance, accounting and legals in their business. If you are, kudos to you.
Proper legals include shareholder agreements, employment contracts, supplier contracts, client engagements, lease agreements, financing agreements.
Ensure you have them in place and up to date before even considering selling your business. If unsure, get on the phone to your lawyer.
Now let’s talk the fun stuff – accounting. Is all of your compliance up to date including all things ATO & ASIC? Do you have your most recent and last three years’ worth of financial statements prepared by an accountant (and possibly audited)? They are pretty run of the mill when prospective buyers are examining a business for sale, and should be a standard.
What about these questions to see if your finance department is up to scratch?
- How do your revenue, gross profit and net profit margins look over the last 3 years? Trending upwards?
- Do your clients pay their invoices within your stated terms?
- Are you holding too much or obsolete stock?
- Do you have a budget and 3-way rolling forecast?
- Do you understand what metrics drive growth in your business? Do you prepare monthly management reports?
If your accountant is not providing these services or this level of advice, you need to speak to a virtual CFO.
4. Reduce reliance on key customers and suppliers
When valuing a business, the framework commonly used is something called the Porter’s Five Forces – and two of the components revolve around your customers and your suppliers.
There is an inherent risk around what the Porter’s framework calls ‘Bargaining Power of Customers’. This basically means if you have a handful of customers that make up a large chunk of your revenue, then there is a risk that if they leave or put the hard word on you, they have the power to really hurt your business or put a strangle hold on the way you work together.
The same goes for suppliers. Do they have any power over you and how your business operates? If so, what strategically can be put in place now to de-risk key customers and key suppliers? Imagine your biggest client advised they are leaving in six months’ time; what can you start doing today? Or what if your key supplier could no longer supply a product or service in six months’ time, what alternative could you action to hedge your bets?
So how does your business stack up? Need a bit of work to de-risk before you consider selling?
This post was originally published in 2016 and has been updated for 2022.
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5 reasons why sound business legals are a must from the very start
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