Seven Things to Fix Before Putting Your Business on the Market
By Greg Johnson
Selling a business is rarely as simple as finding a buyer and agreeing on a price. Buyers will closely examine the financial performance, operations, risks and future prospects of the business before they are prepared to proceed.
Issues that may have been manageable for the owner can become significant concerns during a sale process. They may reduce the value of the business, delay negotiations or cause a buyer to withdraw altogether.
Addressing these seven areas before going to market can help improve buyer confidence and create a smoother, more successful sale.
1. Clean Up the Financial Information
Reliable financial information is one of the first things a serious buyer will request.
Accounts should be current, accurate and easy to understand. Any personal expenses, one-off costs, related-party transactions or unusual adjustments should be clearly identified and supported.
Buyers will also want to see that the reported profit can be reconciled to the financial statements and tax returns. Poor or inconsistent records create uncertainty and often lead buyers to reduce their offer.
2. Reduce Reliance on the Owner
A business that depends heavily on the owner can be difficult to transfer.
If the owner manages the key customers, approves every decision, controls important supplier relationships or holds most of the operational knowledge, a buyer may question whether the business can continue successfully after the sale.
Delegating responsibilities, strengthening the management team and documenting key processes can help demonstrate that the business is capable of operating independently.
3. Address Customer Concentration
A business that relies heavily on one or two customers carries additional risk.
The loss of a major customer could have a significant impact on revenue and profitability, particularly if the relationship depends personally on the owner.
Where possible, businesses should diversify their customer base, strengthen contractual arrangements and demonstrate a consistent history of customer retention.
4. Secure Key Employees
Experienced and capable employees are often a major part of the value of a business.
Buyers will want confidence that key people are likely to remain after settlement and that their knowledge will not leave with the owner.
Employment contracts, clear responsibilities, appropriate remuneration and retention arrangements should be reviewed before the business is offered for sale.
5. Review Contracts, Leases and Compliance
Unresolved legal or compliance matters can quickly disrupt a transaction.
Important customer and supplier agreements should be documented and transferable. The business premises should have an appropriate lease term, and licences, permits, registrations and insurance arrangements should be current.
Ownership of intellectual property, websites, trademarks, business names and operating systems should also be clearly established.
6. Improve the Quality of Earnings
Buyers are not only interested in the profit the business has earned. They want to understand whether that profit is sustainable.
A business with consistent revenue, healthy margins, recurring customers and predictable cash flow will generally be more attractive than one with volatile results or heavy reliance on one-off projects.
Before going to market, owners should review unnecessary costs, pricing, margins and underperforming products or services. Even modest improvements in sustainable earnings can have a meaningful impact on business value.
7. Resolve Issues Before Due Diligence
Most buyers will undertake detailed due diligence before completing a transaction.
Any disputes, unpaid liabilities, employee issues, tax concerns, obsolete stock, equipment problems or unresolved shareholder matters are likely to be identified.
It is better to address these issues early rather than allowing a buyer to discover them during negotiations. Unexpected problems can damage trust and give the buyer an opportunity to reduce the price or introduce additional conditions.
Preparation Creates Better Outcomes
The strongest business sales are usually the result of careful preparation.
Owners who begin planning several years before a potential sale have more time to improve profitability, reduce risk, strengthen management and present the business in the best possible position.
Thinking of Selling in the Next Few Years?
The best outcomes usually begin well before a business goes to market. Early preparation can help improve value, reduce risk and make the eventual sale process smoother.
About Greg Johnson
Greg Johnson is the Founder and Managing Partner of Ascend Partners. With more than 25 years’ experience as a strategic adviser, CPA and M&A specialist, Greg helps business owners grow value, prepare for succession and achieve successful business sales.