10 steps to a successful sale

Photo: Phil Doyle

Be prepared: Paul Devcich and David Newport say owners should run businesses as if they had to sell at the drop of a hat.

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TOO FEW business owners are operating as if they could have a heart attack or be diagnosed with cancer tomorrow.

Although the thought may not be palatable, say David Newport and Paul Devcich of Switch Business, that's the only way to think when trying to build a business with value that could be easily realised through a sale.

For many New Zealanders, personal finances and business interests are inextricably linked, but although things like homes and shares can be sold with relative ease and at short notice, businesses can be much trickier to sell – especially if they are not kept primed.

The pair say there are 10 golden rules for running a business so it will fetch a decent price should the owner decide, or be forced, to sell. And the best time to begin following such disciplines is the day the business is set up or bought. For those already running a business, the pair advise owners should adopt these principals immediately.

1. Look the part: Believe it or not, the profitability of a business is often overshadowed by the look of it to potential buyers, said Newport. "Perception is reality in most people's eyes and you don't get a second chance to make a good first impression." A lick of paint, attractive modern signage, tidy gardens, presentable flooring and no refuse piled up make a huge difference. "We had a client who recently struggled to sell his business because, even though the business made good money, prospects couldn't see what they would get for their investment because it looked a mess. The prospective purchasers never got past their first impression of `I couldn't work here'," he said.

2. Separate lives: Reduce "add-backs" to a minimum. When businesses are sold, the financials are normalised by removing or adding back the items of personal business conducted through the business. One of the attractive reasons for having a business is that it blurs the line between personal finances and business finance and there can be tax savings made by running things like cars, mobile phones and travel through them. "No matter how accepted the practice is by most parties, excepting the IRD, it never leaves a prospective purchaser with a good taste regarding your business," said Newport. That's not a good look as it looks like fiddling. "People ask, `If this is what you are telling us, what are you not telling us?"' Newport said.

3. Current affairs: Have current contracts in place for as much of the business as possible. "You may have operated by handshake for years with customers, suppliers, site leases and sometimes even key staff," said Newport. "None of this means anything to a purchaser or his or her financiers, so formalise everything that you can. If they can't count on it, or it is not on paper, in most cases then it doesn't count."

4. Always do accounts as if you are preparing for a sale: "Verifiable records are essential to demonstrate the historical performance of your company," said Newport. End of year financials and monthly management accounts are the minimum requirement.

5. Debt simple: A clean ledger of debtors and creditors is essential to demonstrate to any purchaser that there is no risk to the sustainability of the company's cash flow. Ensure that where possible there are no receivables outside of normal terms because the "aged debtors" report is essential reading for any buyer.

6. Working capital: Negotiate the best terms possible for the company with its domestic and off-shore suppliers. Newport said any experienced purchaser will add the working capital requirements of the business to its listed sale price when calculating the return on equity they are likely to get.

7. Replace yourself: "Where possible you should try to replace the business's reliance on you as the owner in the day-to-day operations," Newport said. If you are selling a business and not your own job, buyers will want to see the business can be run in this way. Also, if your business can be shown to run day-to-day without you at the helm, the perceived risk is reduced in the purchasers' mind.

8. Deal to aged stock in a timely fashion: "If you have any stock in your warehouse that has had a `birthday', a stock adjustment will apply so get rid of it now," Newport said. If possible, ensure that your business has a modern stock control program which can show not only you but any prospective purchaser how all your stock lines move. Stock and its treatment in any sale process is always one of the major sticking points, he said.

9. Formal business plan: "The value of any business is based on the risk associated to `future maintainable earnings' so minimise the perceived risk by having a sophisticated business plan and measure your progress," Newport said. Make sure it includes budgets, actual targets for growth, margins etc. and ensure that you measure your current performance against your targeted levels.

10. Demonstrate process: The risk associated to ownership transition can be greatly mitigated if there is a manual in place for a new owner, instead of being between the current owner's ears. "A purchaser and his or her advisers will relax marketedly in due diligence if they are able to see how your business operates day to day," Newport said.

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