Every business is for sale – at the right price. DOROTA (Dee) BRYKS provides an insight as to why you should start readying your business for sale from day one.
Generally speaking, business owners only think about selling their business when they are approaching retirement, if they become frustrated with the way their business is progressing, or if they think it’s time to realise the fruits of their labour. But sometimes an unsolicited, yet very desirable, offer can turn up out of the blue and you wouldn’t want to miss out on an amazing opportunity simply because you weren’t prepared.
As a commercial lawyer, I’m regularly approached by business owners needing help with selling their businesses, and many of those owners lament that ‘missed opportunity’. My advice to all business owners is to think about the sale process early on in the business venture. Why? Because, through no fault of their own, business owners only focus on what they do best: establishing, running and operating their business to make a profit. Then, when it’s time to sell the business or an opportunity arises, it becomes apparent that the business is not sale ready, and the sale negotiations can become difficult and protracted.
Ideally, thinking about selling your business should start before you even commence operations. The idea of being ready to sell should remain with you throughout the life of your business. This is because the decisions you make early on in creating a business will have consequences during the life of your business, and when you ultimately sell it. Good decisions, combined with good business performance, go a long way towards helping you sell your business at the highest possible value. Remember, the lower the risk in your business, the more attractive the business is to any prospective buyer.
10 steps to becoming sale ready
Some simple steps can be taken early on in the life of your business to increase its value, minimise potential cost and effort down the track, and ensure it is always sale ready.
Structure your business well
Before commencing operations, you should decide on the best legal structure for your business – whether that is a company, a trust, incorporated joint venture or partnership. Getting the right structure from the start is crucial, because each option results in different legal and tax implications throughout the life of the business. Changing the legal structure during the life of your business may be costly and have unintended tax consequences, which could be avoided with the right advice from the start. Strong legal and accounting advice should always be sought when considering the right vehicle through which to run your business to ensure it works for you.
Prepare (and update) your business plan
We all know that it is important to have a business plan. Although each business approaches it differently, the business plan should have a strong focus on marketing (including the attraction and retention of customers, image and branding), and should contain realistic financial goals and funding analysis. However, the business plan is meant to be a working document and should be reviewed throughout the year, as well as annually, having regard to how the business is growing and changing, or is being affected by external forces. A current business plan is critical when negotiating the sale of your business.
Conduct a SWOT analysis (strengths, weaknesses, opportunities and threats)
As a business owner, you know the strengths and weaknesses of your business, and the areas on which you need to focus to improve its performance. Again, by documenting and regularly reviewing your situation, you can ensure prospective purchasers have a clear picture of your business situation and minimise the risk of uncertainty in the sale process.
Protect your intellectual property
If you use any trademarks or logos in your business, they should be registered to protect your rights. Legal protection of your business name through a trademark or logo increases the value of your business by ensuring your exclusive use of the brand.
As a commercial lawyer, I strongly recommend that evidence of all intellectual property, business names, email addresses and domain names be kept in one current legal archive so they can be easily retrieved and identified. Someone in the business also needs to be given the responsibility of ensuring that trademarks and other registrations are renewed when they are due, and that any third-party breaches are addressed promptly.
Protect any personal property
An important part of reviewing your business processes and operations is also to look at your contracts and terms, and then consider whether your security interests should be registered on the Personal Property Securities Register. Registration of property creates additional value in your business and enables your business to enforce these interests if necessary.
Review all your contracts
Throughout the life of your business, you should ensure that all of your commercial contracts are accurate and up to date, including leases, hire purchase agreements, client and supplier contracts, and licence agreements. Ascertain whether any of these contracts are assignable on the sale of the business if they are long-term contracts or lucrative supplier contracts – it will make the business very attractive to a potential purchaser. Take a look at your employment contracts to ensure that they include confidentiality provisions and identify who owns any intellectual property created by the employees. Are the restraints of trade in any employment contracts enforceable? Value is created where these terms are favourable to your business.
Streamline systems and processes
During operations, you should be creating a strong infrastructure of both systems and processes, so that buyers will be comfortable that the business can operate on its own without you being there. You must be able to hand over the corporate memory. You should also make sure that client records are accurate and take steps to reduce any debtors, if applicable.
Keep accurate financial records
A prospective buyer will assess the performance of the business based on the latest financial records. Work with your accountant and auditor to make sure everything is reported accurately and that all of your figures can be explained. Any taxation liabilities should also be clearly explained.
Value the business properly
One of the most critical tasks when preparing a business for sale is to determine the sale price, or value, of the business. Financial advisers, lawyers and specialist valuers can assist you in determining a sale price for your business. A range of methods is used to reach a sale price that incorporates equipment, plant and premises, if applicable. Financial advisers and lawyers can also help you to determine the value of the more intangible assets, such as the goodwill, reputation, trademark and intellectual property of the business. Having a realistic idea of the value of your business is particularly important. All too often, business owners have an unrealistic perception of what their business is worth, which can cause problems when entering into sale negotiations.
Be ready for due diligence
Due diligence is the important legal and financial research process that a buyer’s lawyer and professional advisers conduct on their behalf. The process highlights any issues that need to be addressed prior to the purchase, or in some cases, alerts a prospective buyer to the fact that it would be unwise to buy the business. As a business owner, it pays to ensure you are familiar with the issues a purchaser will consider, and that you know what they will find when they start digging.
Due diligence includes understanding the following: the ownership of the assets being purchased; any outstanding debts; pending and potential litigation or claims from any party dealing with the business; leases; warranties; contracts and employee agreements.
It is never too late to start readying your business for sale, even if it has been operating for some time. Speak to your lawyer and accountant for advice when setting up your business to ensure you establish the best possible processes and procedures from the outset. If your business is already operational, make 2013 the year you get your business in order and ensure that it is sale ready. A little time and effort spent housekeeping and preparing your business now, can mean the difference between seizing an opportunity and enjoying the rewards, or getting bogged down in a long and protracted sale process.
Questions a potential buyer might ask
- Why is the business for sale?
- What is included in the sale (goodwill, location, customers, assets, phone numbers, domain names and so on)?
- What is the current business plan?
- How valuable is the brand name?
- What other intellectual property is critical to the success of the business?
- How is the business perceived within the marketplace?
- What share of the market does the business control?
About the author
Dorota (Dee) Bryks is an experienced commercial lawyer and an associate with Coleman Greig Lawyers. She has particular expertise in the preparation of contracts and assisting clients with the sale and purchase of businesses. Dee is recognised for her commercially-focused approach and strong communication skills, keeping clients informed at every step. Website: www.colemangreig.com.au
PH&G May 2013 – Issue 131