Maximise value before a business sale

The 2011 Census and 2012 Employment Survey showed the median age of business owners was 47 years; however, almost 30 per cent of business owners are 55 and over. This indicates that business succession planning and exit readiness is a real issue that needs to be addressed by many Australian businesses.

Even business owners who have no current intention to sell their business should consider some key actions now, to maximise the attractiveness and value of their business.

Quality financial information

Inadequate and inappropriate internal financial reporting and management systems that lead to incomplete, inaccurate financial information will frustrate the due diligence process and harm negotiations with a potential purchaser.

Quality monthly management financial reports produced on a timely basis will allow business owners to not only gain a better understanding of their operations, but also provide confidence to potential purchasers.

Likewise, a financial forecast supported by detailed assumptions is likely to demonstrate the future value of the business and help attract a premium price.

Consider the quality of monthly management accounts and whether the current process and systems are adequate. Implementing a new accounting system and management reporting regime does not need to be complicated nor expensive, and all businesses can benefit from timely and accurate financial information to aid decision-making.

Ensure there is a detailed financial budget in place that is backed by documented and achievable assumptions and supports the strategic plan for the business. This should be reviewed and updated on a regular basis.

Strong business plan

Sometimes the business owner’s familiarity with customers, staff and suppliers, or their intention to wind back or retire from the business, can distract them from actually running it.

To maximise value, owners, management and staff need to be focused on the current and future performance of the business. To help achieve this and stay on track, a detailed strategic business plan that has the buy-in of all stakeholders in the business can be an invaluable tool to maintain focus on the core business operations and the success of the business.

This includes:
• listing goals and breaking them down to achievable tasks
• documenting the future direction and strategies for the business
• maintaining focus on the business objectives with a strong, strategic business plan
• using experts (including a transaction adviser) to manage non-core activities, including a potential sale process, so that a focus on business profitability and growth can be maintained.

Staff

A business with a competent management team in place is more likely to achieve a higher sale price than a business that relies heavily on the owner to function.

An acquirer of the business is likely to want the seamless transition of business knowledge and internal management, which can be achieved by demonstrating good management structure along with documented internal processes.

Additional value may be created if a potential buyer can gain confidence that key employees will remain with the organisation for the longer term.

Useful steps include:
• developing internal roles and responsibilities and appropriate policies and procedures so that the functions of the business are not solely reliant on the owners
• considering how to encourage key staff members to buy into the strategic objectives of the business, accept greater responsibilities and keep them engaged with the business
• ensuring employment agreements include effective post-employment restraint clauses to protect the business’ interests should employees leave.

Legal agreements

Consider the existing legal and contractual arrangements involving the business – property leases, customer and supplier contracts, intellectual property patents and registrations, etc: do the agreements contain clauses that allow them to be transferred and assigned to other parties? Non-transferable legal agreements are not ‘sale friendly’, so ensure any existing legal agreements won’t restrict negotiations with potential purchasers.

Seek to formalise arrangements with key customers and suppliers with contracts.

Act now

Professional advice should be sought well before the commencement of negotiations of any business sale.

Professional advice can improve the value of the business and minimise any ‘deal shocks’ which may derail the transaction during the due diligence and negotiation process.

Nicholas Guest, director of audit and assurance, HLB Mann Judd

Nicholas Guest is the director of audit and assurance in HLM Mann Judd’s corporate advisory division. He is a highly experienced accounting professional with over 12 years’ experience in the provision of advisory and assurance services to a broad range of entities and industries. Nicholas is respected for his ability to understand his clients’ business and accounting requirements, while being proactive in meeting their deadlines and identifying ways to add value to their business.