Limit value leakage – Prepare early for selling your business
Limit value leakage – Prepare early for selling your business
This article was originally published 28 November 2023, updated 28 August 2024.
Are you thinking it may be time to sell your business in the next two to five years? In our experience, business owners who seek professional advice early, reap the rewards at sale time.
Being ‘sale ready’ is critical to maximising your exit value. Your business may have started out small and grown into a sizable enterprise - one that is now attractive to corporate or even private equity buyers. This growth may have resulted in the outgrowing of business systems and processes and the financial function no longer producing the information expected by third parties, who don’t know your business as well as you do.
When it comes time to sell, the business will undergo an intensive and thorough due diligence process and it’s important that these issues are identified and resolved well in advance of any sale process.
A buyer will struggle with their due diligence if the financial, tax and operational information is not in good order.
In our experience, buyers often negotiate a purchase price reduction as a result of:
- Inaccurate financial information
- Information that doesn’t reconcile
- Information that is unavailable
- Normalisation adjustments that reduce earnings because of the above factors.
Prepare with our six phases of sale-readiness
To prevent impacts on your purchase price, BDO has developed the six phases of sale-readiness. The objective of these phases is not just cosmetic enhancement, but real operational change where necessary to maximise transaction value at the time of sale.
These should be considered well in advance of a sale, two years or more, so you have the reporting rhythm and history to impress potential purchasers of your business.
Phase 1: People
Developing a sound management team can greatly enhance the value of a private company, distributing the intellectual property of the business and reducing the buyer’s investment risk.
Phase 2: Profitability
Increasing sales and margins as well as controlling overheads before entering a transaction are important and desirable. Capitalise on existing opportunities to improve the profitability of your business.
Phase 3: Non-recurring expenses
Identifying non-recurring expenditures is a valuable exercise. This expenditure may include exceptional owner’s expenses and remuneration, and one-off expenditure, such as the costs of relocation or unusual disruption to normal business. Even if it means paying more, investors can accept adjustments to reported profits if these adjustments are robust, justifiable, and provide useful information about ongoing future profitability.
Phase 4: Capital expenditure
Deciding whether to incur significant capital expenditure in the lead-up to a transaction is always difficult. In forming a view of value, an investor will consider the quality of assets. If the business has been run for cash and there has been underinvestment in capital and operational resources, a sensible purchaser will focus on what remedial investment is required and factor this into the assessment of value. In most cases, it is sensible to continue investing in your existing business as though you were going to continue running it.
However, it is also often prudent to avoid major capital expenditures on new projects leading up to a transaction, where the incoming investor may have complimentary existing operations or a new strategy it proposes to implement that negates the need for that investment.
Phase 5: Forecasts
Most investors will want to understand your business forecasts and credible budgets and longer-range forecasts can enhance value enormously. Their existence tends to indicate that you have systems in place to consider what the future of your business can look like. Forecasts should be underpinned by reasoned assumptions and be prepared on a bottom-up basis with the full involvement (and buy-in) of the management team.
Phase 6: Legal
During the sale process, your investor's lawyers will conduct extensive legal due diligence, including a review of all material contracts and title to assets. A common issue for entrepreneurially managed businesses is the absence of contracts or documentation where they might reasonably be expected to exist. This issue may become acute in relation to a key employee, customer or supplier, intellectual property or asset ownership. Where practical you should ensure this is addressed before a transaction. Having a good understanding of the state of the company and its tax, financial, environmental, customer and supplier relationships and other legal affairs is important.
A word of caution: An investor’s due diligence will almost certainly discover any quick fixes that are unsustainable, particularly those relating to revenue and profit margins. There is no advantage in presenting a fine-looking company, which on detailed investigation does not have the necessary operating base to sustain the business.
How BDO can help
We know when it comes to selecting professional advisers, it is the people that make the difference – the chemistry, technical experience and partnership need to be right.
Our team will work with you to achieve your business goals, collaborating and providing reliable advice to help fine-tune your business practices and navigate the challenges of growing and strengthening your business.
We will help you develop strategies and tools to position your business for the future, ensuring this is done holistically with your entire group in mind.
Contact us to learn how we can work with you, and your existing accountants, across the sale readiness journey, including preparing or reviewing forecast financial information, providing vendor due diligence services (both financial and tax) and facilitating workshops in the lead-up to exit.