How to get your business ready for sale

A lot of businesses aren’t sold for one simple reason: because it’s something the owner never planned to do. 

From our experience, we know that business owners often focus on increasing profitability and cashflow, which is very important. However, the primary focus should be on building business value. 

But how can you build value to get your business ready for sale? 

Set a realistic sale date 

Firstly, you need to set a realistic timeframe. In other words, ensure you allow yourself enough time to build value. 

We normally recommend allowing at least three years to plan your sale and business succession. Ideally, it would be more like 3-5 years. For many business owners, this seems like a long time, but it’s how much time you need to get sale ready. 

Get your business valued 

Next, determine what your business is worth today. Ball parking can be complex, so we recommend getting it valued by a professional such as a CA-qualified accountant or business advisor. We can weigh up various factors to give you the most realistic figure.  

Once you have this figure, you can now use the 3-5 years to increase it! 

Related: How do I increase the value of my business?

Work on improving financial performance

Financial performance is a key driver in business value. Ultimately, it comes down to increasing profit to argue increased value.  This means you need to look at how you can potentially improve both the income and efficiency of your business. 

Here are some suggestions, but note they’re situation-dependent: 

Ways to increase income

• Strengthen your marketing strategy
• Encourage repeat business
• Increase your prices 
• Enter new markets
• Add new products or services

Ways to increase efficiency 

• Get clear on what matters
• Identify areas where you can cut costs 
• Automate to become less people-reliant
• Redesign your process
• Outsource certain jobs

Related: Business development and marketing: are you nurturing growth?

You should also look at removing expenses that contaminate profit. This includes: 

• Business owner costs 
• Costs that need to be at commercial rates (e.g. rent if paid to an associated entity)
• Non-recurring expenses

Arguably, these costs can be added back in calculating maintainable profits, but the fewer addbacks the better.

Calculate tax on sale

As well as looking at ways to increase profit, we also recommend you look at calculating the tax on sale and whether a review of your structure could help in reducing the tax consequences to maximise after-tax value. 

Tax considerations can be complex, so again, engage professional support. 

Related: Monitoring business performance: the whats, whys and hows

Consider non-financial aspects 

As well as looking at increasing value from a financial perspective, there are also some non-financial matters that can affect the value of your business and what target buyers will be willing to pay.

Reliance on key people

Relying heavily on key people in the business can create a dependency risk. If they leave, so does their intellectual property (aka their specialised skills and knowledge and stakeholder relationships) that are critical to your business.

To avoid this, you need to:

• Identify roles and responsibilities in your business
• Identify anyone, including you the business owner and your management team, who would have a significant impact on business value if they left
• Plan to delegate and/or make others aware of and capable of performing their role or part of it
• Consider whether these key people have adequate employment agreements and are fairly compensated, e.g., have a realistic, maintainable salary

Your business premises 

The terms and conditions of your lease agreement, such as its length, rate, and renewal options, can affect your business's financial performance and value. 

To positively affect it, you should:  

• Look at when your term ends and if options for an extension of the lease apply
• Negotiate a new lease that will give you more favourable terms, for example, the length of the lease

If your lease only has a short term remaining, it’s harder to argue increasing value!

Your clients

Clients are the primary source of revenue for most businesses. The value of a business is often closely tied to its ability to generate revenue, and a strong and diverse client base can significantly enhance your business's value. 

To minimise the risk associated with your clients:

• Review and optimise your current client contracts 
• If a significant portion of your income comes from one client, look to diversify. Relying on that one client presents a risk, and strategic buyers will argue a reduction in price because of this
• Focus on maintaining good, strong client relationships

Related: 3 steps to client/customer strategy success

Do the analysis and take action!

Let’s wrap things up with one final question. 

If you undertook this analysis now and were able to increase your profit performance and improve on non-financial matters, what could your business then be valued at? Do the calculation and take action! 

Working with professionals through the process of getting your business sale ready for prospective buyers, such as lawyers, accountants, tax specialists and business advisors, will help you achieve the best possible end figure. 

Ensure the best valuation in the first stages of the sales process and a successful sale by reaching out to your Maxim Advisor or contacting our team to arrange an initial chat with one of our exit strategy experts.