Preparing your business for sale – 5 key drivers of business value
When new clients come to see us, one of the first questions we ask them is when they would like to sell their business.
This can be quite disarming for some people. Many clients react with surprise. After all, they have only recently set up the business and we are asking them when they want to sell.
We believe that the sooner you start thinking about the sale of your business, the more you are likely to get when it comes time to sell. It also ensures that you are disciplined about how you go about building your business.
Revenue and expenditure are the two greatest contributors to cash flow.
There is an old adage that businesses fail because of cash flow – or rather the lack of cash flow.
From our experience small businesses usually fail from a lack of sales. Expenditure is almost always cut to the bone.
There really isn’t any problem in business that cannot be solved with more revenue.
Some clients tend to avoid talking about sales. They think it is a dirty word and conjures up images of used car salesmen.
The sad reality is that if you can’t sell you won’t survive in business. Learning to sell is critical to business success.
We encourage clients to use the word ‘sales’ regularly. We want them to measure sales growth against a budget. We encourage them to pull together a marketing plan and making selling an integral part of the business.
Simply put, the more money your business brings in, the more its going to be worth when it comes time to sell. Consistent sales growth is a major contributor to an attractive business valuation. It also avoids concerns over cash flow.
An engaged team is another area where purchasers will pay a premium. Buyers want to be assured that the team will hang around when you depart.
For that reason contractors will be less attractive.
Smart business owners will prioritise a positive culture where your employees want to work for you and see the business flourish. Long term incentives such as profit share or bonuses are one area to explore once the business is on a solid footing.
Offering equity (or shares) to key employees may also be something to consider.
We posted an article on the topic a while back which you can read by clicking here.
It’s really important to consider diversifying your customer base to ensure that you don’t have all your eggs in one basket. The more you rely one or two key customers, the less attractive your business will be to a prospective buyer.
Contracts are a vital ingredient here. Future owners want to see recurring revenue that’s locked in. Even if you aren’t ready to sell, recurring revenue is so important. It also means that when you wake up on the 1st of January each year, you know that part of your annual budget has already been achieved.
If you are in a services industry, consider monthly recurring fees or retainers. You can read more about recurring revenue by looking at our blog article here.
The other side of the cash flow equation is expenditure. Negotiating good terms with your suppliers is essential, particularly if you hold inventory. Long term supply contracts where there is certainty around cost will give a purchaser comfort when it comes time to sell.
5. Systems and procedures
McDonalds is successful not because it makes the best hamburgers in the world but because they have systems and procedures that allow a franchisee to produce a consistent product.
Any future purchaser of your business will need to be assured that they can pick up the business and run with it long after you have departed.
There are some key considerations here:
- How much of the operational part of your business is documented in a manual?
- Are you accounting records digitalised?
- Do you have your IT in the cloud?
- Do you delegate essential tasks to trusted team members?
- Do you know when important contracts expire?
- Is your business plan regularly updated?
- Do you have a budget and cash flow projections?
- Are your debtors under control?
This sounds like a lot of work but thorough documentation and accounting records will reduce any doubt in the minds of a purchaser when they go through the due diligence process. This is something you should prioritise.
We recommend chipping away at a little of it regularly rather than devoting resource to a big project. All of these things should be part of business as usual for you.
There is a lot to consider when preparing a business for sale. The earlier you can attend to some of these things the better. After all, good businesses are always for sale – so long as the price is right. Having a tidy business will make due diligence easy and significantly increase the price you command.
Have you considered some regular mentoring to prepare your business for sale? Generate Accounting offers both Generate Growth and CFO packages that will help you apply a little more strategy to your business. A growing number of clients are seeing real value in regular contact so don’t hesitate to contact Angus for more information. You’ll be surprised at how cost effective and productive these sessions can be.
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