Mistake #1 – Not Making Your Business “Sale Ready”
Blog > 1 of 5 Mistakes Owners Make Selling Their Business
Not Making Your Australian SME Business “Sale Ready”?
In an ideal world everyone starting a business would build it with an eventual sale in mind. They would build it to last, not take shortcuts and develop it so that it can be sold for as much as possible. Every major decision would be taken with that final sale in mind.
In the real world, inhabited by us and most people we know, it is never that simple and therefore you, the owner, need to prepare your business for sale, it must be “Sale Ready”.
A business that is Sale Ready is likely to gain an excellent price and substantially reduce the risk of disappointment.
Most business sale processes that don’t achieve their objectives are rushed and this lack of preparation becomes a real problem during the sale process leading to a weakened negotiating position and undesired compromises.
How can you avoid this fate? Start early; before you want to, before you have all the answers, before it is comfortable. Crucially before circumstances force you to sell at a time other than that of your choosing.
Preparing your business for sale means addressing the areas that will either suffer if you weren’t there tomorrow or that would require substantial work for a new party to understand and execute, or both.
People buying businesses, and we have bought many so we have a fair idea of what they look for, tend to highly value; growth, sustainability, free cash flow and attractiveness of the industry.
Typically, (but more about this in a later blog) a buyer will value your business on a multiple of pre-tax, pre-interest profits.
The size of the multiple will depend on many considerations but the higher the confidence the buyer has in the growth, sustainability, free cash flow and attractiveness of the industry the higher the multiple will be.
What can you do pre-sale to maximise the value? We believe that as part of a plan to make your business Sale Ready the following should be focussed on:
- Make sure you can demonstrate recent sales and profit growth. Buyers don’t tend to believe (well most don’t) stories of a Lazarus or J Curve turnaround in profitability. They like to see recent growth and the actions already taken to make sure that growth continues. This ties in with not leaving a sale too late and making sure you sell your business while it is still growing.
- You will need to demonstrate that the business is not over reliant on any small group of customers, suppliers, products/ services, or people. Most particularly the business must not be reliant on you the owner. A general test is “can you go for 3 months holiday away from the business?” You need to demonstrate that there is a management team in place who can run the business.
Similarly, if a major customer, supplier, product ceases then the business must be able to continue to prosper and grow without it. Buyers seek businesses with reliable, recurring income and a reasonable portion of the costs being variable rather than fixed. They seek businesses that are resilient and can withstand downturns in sales. All of these matters can be developed so that, by the time you sell, the buyer will view your earnings as sustainable and pay you accordingly. - Accounting profits are wonderful but we all pay for our mortgage, school fees, holidays etc. in cash. A buyer will want to see that your business (using an awful 1980’s term) “spits out a lot of cash”. This has the benefit of enabling the new owner to use this cash to pay dividends/ reduce debt and it will mean that growth can be funded largely from cash profits. Make sure that you manage your working capital effectively and consider cash return when considering expansion opportunities.
- People rarely want to buy a business in a contracting industry where margins are being squeezed and sales declining and where costs are mainly fixed. You know the attractiveness of the industry you are in and you know which parts are the growth areas where you should focus.
In the words of Abraham Lincoln “I will prepare and someday my chance will come.”
Who knows, you may be approached by an over eager buyer, they may be your Alan Bond. As Kerry Packer once allegedly said “You only get one Alan Bond in your lifetime, and I’ve had mine“.
Likewise, you may receive an approach from someone doing “an industry roll-up” or from an industry player for whom your business is a wonderful “fit”.
Make sure that your business is Sale Ready to take advantage of opportunities and maximise your sale price.
For a discussion on selling your business, please call either Tony Holley on 0417313136 anytime – we at Hamilton Rich understand these conversations can be difficult to have during business hours.
Read about the 2nd most common mistake business owners make when selling their business.
Blog > 1 of 5 Mistakes Owners Make Selling Their Business
Download the “Five Mistakes Business Owners Make When Selling SME Businesses” PDF
