We have recently been chatting with Dave Morgan, who is the General Manager of Link Business Brokers, about how business owners can prepare their businesses for sale, to get the best possible return on their investment. Below is a condensed version of an article that Dave wrote on this very subject. If you want a copy of the full version, then I encourage you to contact Dave at Dave @ Linkbusiness.
A recent survey by accounting firm Grant Thornton revealed that 70% of New Zealand business owners were expecting to sell their businesses in the next decade to fund their retirement – nearly three times the global average of 25%. This creates a significant problem for NZ business owners in an economic environment with a low appetite for risk combines, with tight capital markets and a shrinking market of buyers.
Most good entrepreneurs often make the bulk of their wealth by maximising the sale price when selling their venture. A well-orchestrated exit strategy is a critical component of any business plan and should be produced well in advance of starting a business in order to maximise returns. However, most business owners only consider their exit when it comes time to sell. As a general rule, the faster the owner wants to exit the business, the more the buyer will try to force a reduction in the purchase price. A desire to exit signals either risk or opportunity to the buyer, both of which will have a negative impact on the price.
These can be summarised as:
As the volume of businesses for sale increases in the coming years, the market for buyers will start to shrink. Add to this the fact that the market of buyers will be mostly generation X buyers – well educated and savvy, they’ll pick the eyes out of whatever is left. If it doesn’t stack up, they’ll move on because they’ll be spoilt for choice.
All buyers are looking for the following in their search for a good business:
Prospective buyers typically review every detail of the business in a process called ‘due diligence’. A seller will need to anticipate the buyer’s questions & scrutiny, and prepare their answers & arguments in advance. In order to do this, the owner will need to be their biggest critic.
Most business owners review their financial performance on an annual basis and judge the ongoing performance through their business bank account. Compliance, contract and employment documentation is often poor or non-existent, and the value in documenting business processes & operating systems is never even considered. When the time comes to sell, there is no documentation to demonstrate the value of the business aside from annual accounts, which have often been prepared to minimise tax rather than demonstrate financial value.
If you want to sell your business to create retirement funds in the future, take the time now to create an appropriate business exit strategy. Identify your critical assets and your potential buyers. Carefully structure your plan so you understand what liquidity should be there for you. Make it an objective to run your business in a manner that if you received an irresistible offer today, you would be confident that the buyer’s due diligent wouldn’t uncover anything that would cause them to withdraw their offer. Now is the time to get it right!