For anyone who has put so much effort, selling their own company is the most difficult decision to make. . Here are some best practices for preparing a company for a future sale. You have incurred an undefinable amount of “sweat equity” apart from the money you invested.
But as soon as you make your decision to sell your company, you must put proper preparation in place to ensure your objectives are met before you actually approach the market. If you have an exit plan you will get better value for your company.
You have put in a lot of hard work to make your business into a valuable asset and just the thought of selling it can be overwhelming. The first and foremost thought to selling a valuable asset is to get a fair price for it as you have worked hard to create that value. Whatever best practice you follow in preparing a company for a future sale, the ultimate goal is to get the right value for your hardwood and dedication.
When you have decided to sell your business, the real work starts after that. It needs extensive preparation and prompt action for a future potential sale. This guide can be of great help to prepare your business for sale and get the good price that your company deserves.
Prepare your documents
The first step in preparing a company for a future sale is to get your documents ready. When a buyer is evaluating your company the primary factor he will look at is its earnings. Make sure your company’s financials give your potential buyers a clear picture so they can completely evaluate the production of your company.
Examine your company’s financial history before selling it. Do you have financial statements prepared by an accountant that show your company’s earnings and cash flow? Balance sheets and income statements are examples of financial statements.
I you do not have a proper and well-documented financial history of your company then it is a major red flag for business buyers. The average Canadian bank requires 2-3 years of company financial statements to provide loans to interested buyers. Buyers want to see financials that go back 3-5 years.
This is done to eliminate the risk of purchasing a company with low profitability and scalability. Financial statements are critical in determining the strength of a company’s foundation for the future. Financials also aid in determining a company’s sale value.
Buyers prefer to observe a well-balanced sales distribution among a company’s clients. When a company relies on a few important clients, buyers risk losing those clients after the sale. Your organization has a high client concentration if any customer contributes 10% or more of your revenue. This is another very important aspect while preparing a company for a future sale.
If this is a worry, consider diversifying your customer base by acquiring new client contracts. This will reduce your firm’s risk from the perspective of an eager buyer looking to build a business over time. They will feel secure knowing that the company has a stable customer base.
Have control over the stocks
To prepare your firm for sale, keep a monthly inventory of your stock as up-to-date and at market value as possible. If you have unaccounted stocks, you must govern them if you do not want the worth of your firm to be diminished during the sale discussion. Remember that the buyer will not pay for unaccounted inventory. There will be tax implications, etc. Therefore, this would bring up “hot” bargaining grounds when selling the company.
Stockouts should be avoided. Plan your purchases and warehouse inventories, so that any unforeseen event does not result in a stockout, leaving clients without supplies. For example, during the pandemic, some companies were forced to halt production because they lacked a safety margin in their warehouses due to a lack of raw supplies.
If you have control over the stock then preparing a company for a future sale will be a smooth ride.
Determine a value for your company
Set a reasonable asking price for your company. Too high, and you’ll turn off potential purchasers; too low, and something can be wrong with your company. That is why it is beneficial to hire a corporate finance accountant who will estimate your company’s value based on current and anticipated market conditions, uncover value drivers, and assist you in evaluating the offers you will receive.
There’s little point in creating value in your company only to have it destroyed by a valuation that doesn’t hold up to scrutiny or, worse, fails to address the value drivers in your company. While preparing a company for a future sale, you should hire experts who can justify your company’s value.
● Sellers who understand the process and market practice of deal structures have a superior foundation to negotiate better transaction terms with their advisors
● Dealing with difficulties detected by the buyer mid-process rather than in advance entails the danger of adopting less-than-optimal remedies, such as price chips or requirements that the sellers stay liable for a problem after the sale
● A professionally-presented firm for sale is more likely to generate interest and price competition, as well as facilitate a smoother transaction process once the purchase is underway
● A well-presented business is more likely to increase competitiveness and pricing while avoiding price leakage caused by difficulties discovered only during buyer due diligence
● Identifying and fixing difficulties will incur costs anytime they are addressed, but they can often be properly channeled via the target company if done as part of pre-sale planning, potentially permitting for VAT recoverability and a corporation tax deduction.
Put yourself in the shoes of the buyer. Do everything you can to increase the worth of your firm. Ensure that your financial records are up to date and correct. Is your store/office/restaurant/facility in good condition? Finish any loose ends. Buyers favor enterprises with low risks and large potential benefits.
Finding the ideal customer is only the beginning of the sales process. You must also prepare to give over the company to them. You must transfer all of your knowledge and ensure that the firm can function without you. Your broker can assist you in preparing for the transfer so the business may continue running smoothly.