How to prepare for selling a business for maximum value
When you’re involved in a business sale as an HR Director many elements come into play. For example, how it is packaged, marketed and presented will affect the final price achieved. But so too will the management of the sales process. This will influence the quality of potential buyers who are attracted, which in turn will directly impact on the valuation received. In order to generate the best offers for your business – from the right buyer at the right price – there are a number of tips and strategies you need to be aware of.
1. Maintaining the existing business during the process
We all know the purpose of any business is to satisfy client needs, so this must not be interrupted at any time. If it is, then the business you are selling will not hold its original and/or potential value. It is essential that during any sales process the business continues to function as normal and, ideally continues to grow. HR will need to review operations and staffing to see how the allocation of you, and other relevant company members’, time may be affected. Start planning for this as soon as a sale is mooted. Managing confidentiality and involving people only when necessary is clearly key.
2. Defining what you are selling
What is it that you are selling? Bigger businesses may need to split up portions of the business for sale. If you are splitting a business to sell only a portion the finance team will have to work out the costs associated with the part that is being sold. Put in place costs for required external services (for example, those the company may currently source internally, but will no longer be able to do so after the split and sale). These budgeted costs need to hold up to third party scrutiny and must be in-line with current market prices.
3. What price can be achieved?
What price can you realistically expect? If you are a listed company you need to look at the listed market valuations and sales. If you are a private company look at the sale prices from the last two to three years to form a benchmark price for your company type, scale and size. You might want to engage an external adviser who may have better knowledge and access to this information.
4. Preparation for sale
If the business is an SME, you will need to identify shareholders’ expenses that are charged to the business and other “one off” expenses that may have been charged to the profit and loss account. These figures may need to be added back to the P&L to establish the recurring profitability of the business. Buyers like to see consistent trends and therefore a sale may need to be managed over a two to three year period taking in to account the industry, the market, managing sales and achieving a targeted growth curve.
5. Vendor due diligence
It’s a good idea to get external legal and accounting companies to do due diligence on your company – so you know what may come up when a potential acquirer looks at your records. This kind of work is commissioned by you, and the term of references are such that they can be handed over to a potential purchaser at the right time during the sales process. The genius of this is that it highlights issues that you may not have been aware of so that you can manage them in advance. Being forewarned means there will be no nasty surprises which could led to price reduction. This situation can be avoided if time is taken to ‘dig deep’ before the sales process commenced. Checking your own business sale fitness before any due diligence from potential buyers is particularly important in the SME environment. This is because accountants often finalise accounts without clearly explaining what the adjustments at year end are for and what their impact has been.
It is imperative that you understand the impact of any sale on your business’ own tax position; be that corporate and/or personal tax. Depending on the shareholders involved, it may be possible to shape the consideration to enable the tax payable to be minimized legitimately.
7. Warranties and Indemnities
These are important legal terms meaning that in any sale you have to warrant the information to the purchaser i.e. you must be able to truthfully say that it has been prepared on a proper basis and gives a true and fair view of the business you are selling. In addition, be aware that if certain items come to light a purchaser may be entitled to make a warranty claim. The sale and purchase agreement will therefore need to have a procedure to deal with this. You will also need to give various indemnities on the taxation position of the company, i.e. guaranteeing that the position of the company is as you say it is. Should any issues come to light, then again there will need to be a procedure to deal with this, including a notification process if you need to make any payments as a result.
8. Completion Arrangements
Ensure you fully understand the “completion statements”. These deal with the cash and other assets within the business and lay-out what happens when the sale is completed. By being fully aware of these you can ensure that everything is in good order on completion.
9. Project management
There is an awful lot of information that needs to be prepared for a sale. Depending on company size and resources you may not be able to handle it on your own. A project team will need to be created with a project manager assembling all the data and information that the advisers will require. This is a worthwhile investment of time and money as this will make the deal process more efficient, identify any issues that need to be worked on or that may require careful consideration on how best to present them to potential buyers. In additional seconding staff onto a project team can be a useful professional development opportunity.
10. Information Memorandum
As part of any sale an information memorandum will need to be prepared. It is usual to instruct an external party to do this as they will be able to present the information in a way that is acceptable to potential acquirers. Such a document may take six to eight weeks to prepare. As HR Directors you are used to running multiple projects. You can play a valuable role in helping everyone to simultaneously keep the business and the sale running smoothing. This gives the company the best guarantee of achieving maximum value from the sale.