As a founder, you should take time to consider how and when you’ll exit your business. It’s easy to get caught up in the day to day of running a business and miss the opportunities to maximise ROI. Learning how to prepare a business for sale and having an exit strategy can increase your multiple and ensure a smooth transition to new owners.
When is the best time to sell a business?
The best time to sell your business is when it is performing well. A well thought out exit strategy that aligns your personal circumstances with the business goals allows you to take a proactive approach to maximising your ROI and timing of an exit, instead of a reactive approach which is often more costly.
Business succession planning is a process we help clients go through to map out a strategy and plan to achieve the best result for the business owners and their stakeholders when they sell their business. However, even if you aren’t planning to sell your business in the short term, proactive management is always better than a reactive state.
Often businesses are sold following an approach by a potential buyer. The buyer may be a competitor, supplier, private equity type investor or international purchaser and you may need to move quickly.
Another scenario is when you are no longer enjoying the business, or when a business transaction occurs and is outside the control of the owners is in times of business distress. A bank, a financier or other creditor could force the sale of your business.
7 Business Succession Planning Considerations
1. Business Structure: How Will It Impact Your Business Sale?
Your business structure will influence whether you can sell the shares or assets of your business, and the after-tax outcome and legal obligations of your sale. For example, if your business is operated under a partnership or trust, then you may be entitled to certain Capital Gains Tax discounts under a share sale – a benefit not available to companies.
When it comes to your business structure, there’s no one-size-fits-all model. The best structure will depend on the type of business, the industry it operates in, the size of the business and the owners’ other assets.
Shareholders agreements and partnership agreements are essential in the context of a business sale because they provide the structure for how owners and partners interact. They define each party’s rights, roles, and obligations, ensuring that everyone involved understands the operation and governance of the business helping to avoid conflicts. They also reduce the potential expense and unpredictability associated with dissolving a business, leading to a sale process that is more streamlined and reliable.
2. Exit Strategy: Do You Have A Business Succession Plan In Place?
Do you have an up-to-date business plan that helps preserve the value of your business, minimise disruption, and maintain/improve employee engagement? This will identify areas of focus help you boost investor and stakeholder confidence as you look to move your business through the sale process.
To achieve a smooth transition, consider your exit strategy as part of your on-going business planning . As part of the plan, evaluate areas such as your ideal timeframe and the key milestones to lead to a sale of your business. Weigh up the options to exit your business, such as, an initial public offering, a trade sale, or a management buyout.
3: Key People In Your Business: What Role Will They Play?
A key part of preparing a business for sale is considering what role the founder/s and key staff will play after its sale.
If you’re to remain in the business post-sale, consider what role you’ll play under the new ownership. The sale not only affects you - your employees will also be seeking job security. It may also be a fundamental requirement of the buyer that the management team remains in place.
Taking proactive steps to develop and align the communication strategy with key people will assist with smoother sale process.
4: The Numbers: Are You Selling Your Business At The Right Price?
Obviously, the more profitable the business, the easier it is to sell. But are you fully across the key drivers of profitability in your business? Understanding the micro and macro drivers of business revenue trends, growth, and costs are key. Understand ing the levers that drive these factors allows you to understand the levers that can be pulled to protect and / or maximise the value of your business.
Proactive monitoring and management of your customer concentration levels, addressing competition and macro headwinds, ensures that your business maintains its competitive edge and continues to generate revenue from a sustainable mix.
Do you have details on your customer segments profitability, your industry segment margin, or fixed/variable costs? Your accounting system and financial reporting tool should provide you the data needed – ensure your systems are set-up to report what you need before supplying financial data to a buyer.
Do you know what your business is worth today? There are various ways to value a business, and you and your accounting team should be across the most common methodologies in your industry. An independent business valuation adds negotiation power, allowing you to set a competitive price and attract high quality buyers.
5. Key Contracts, Licences & IP: Are You Confident Handing Them Over?
When negotiating a sale of a business it is important to be aware of risks when handling commercially sensitive information such as key contracts and IP that is in place or held by the business. Without careful management, you can put at risk current contracts and licenses that your business operates under, which may result in negotiation loss and devaluing your business.
Before giving access to commercially sensitive information, we recommend that you undertake vendor due diligence to assess if the buyer is suitable for your business.
6. The Sale Process: Build a Team To Successfully Sell Your Business
A business sale transaction requires an experienced team to ensure that the process is smooth, risks are managed, and the transaction is legally compliant. Key stakeholders that you should engage with includes:
- Tax advisors and accountants to manage the financial aspects of the transaction, including tax planning, financial due diligence, and valuations.
- Transactions specialist to help find potential buyers and handling negotiations while maintaining confidentiality.
- Lawyers to protect your interest throughout the process and to ensure compliance and the right legal documentation is in place.
7. The Sale Contracts: Are You Confident You’re Protected?
So, you’ve found a buyer. Now it’s time to put the contracts in place. The sale of business contract or share sale agreement (depending on the most tax-effective structure for you) should be prepared by your lawyer to ensure that your interests are protected. It’s a commercial lawyer’s job to manage the risks to you if something goes wrong, either during the process or when the buyer takes over.
Get Help to Prepare Your Business for a Successful Sale
If you’re considering selling your business, careful planning and consideration of your business structure, key people, contracts, and internal processes is critical for a smooth and successful sale. If you need help with business succession planning, get in touch with our team for expert advice via the form below.
