4 Things You Need to Prepare Before Selling a Business
For some entrepreneurs, selling a business is a long way off, following decades of hard work. For others, that dream is only around the corner.
Whether in one year or ten, preparing to sell early can set you up in good stead for the sales process. The process takes an average of 9 months in itself - you wouldn't want the timeline extended due to lack of preparation!
In this blog, we've rounded up four things you need to prepare before selling your business.
1. Clearly define your objectives
There are several reasons entrepreneurs may want to sell their business. Although you may have these in your head, it can be useful to clearly jot them down on paper, or even combine them as part of a progression plan. Reasons could include:
Many entrepreneurs buy business, or start them, with the sole purpose of selling for profit in mind. If this is the case for you, you'll need to continue to add value to your business during your time as the owner by carrying out actions such as:
- Keeping detailed records - future buyers will look at these in-depth
- Consistently striving to improve your service or products in order to bring new customers and clients in
- Maintain your staff - the longer they work for the business, the higher the value
- Diversify your customer base
- Reducing your staff's dependency on you as the business owner
This way, you can sell on for a large profit and enjoy the reward for your years of hard work.
Maybe you are at retirement age, or want to retire early, and are simply ready to pass the business on. Or, perhaps selling the business will give you the funds you need in order to retire comfortably. In this case, it's important to define a ballpark figure that will allow for this, and aim to reach as close to this amount as possible during the selling process.
Looking for another venture
Some entrepreneurs simply get tired of working in their industry and want to seek opportunities in other areas, or expand into emerging markets. In this instance, it's important to consider whether you will have the money after selling to either buy a new business or start anew.
2. Get your accounts in order ahead of time
As mentioned earlier, keeping detailed records and accounts is absolutely crucial to ensure a smooth transition. Buyers will most definitely want to see them as part of due diligence and may put them under the watchful eye of an external accountant or even a solicitor, so make sure you are being as transparent as possible and ready for any questions that might be thrown your way.
Buyers typically request three years' worth of trading accounts, so if you are not planning on selling for a few years, it's worth making your accountants aware now so that they can start setting them out the way a buyer would want to see them. This avoids rushed last-minute work.
Buyers will be looking to see the potential for growth - after all, they want the business to be successful just like you did. They will also be looking for a consistent and diverse client base. If you are too reliant on one or two clients for a large sum of your income, this could potentially put them off. If you lost one of them, how would you be able to keep the business afloat after the big hit to cash flow?
3. File paperwork accordingly
Again, buyers will ask to see these, so organise these early on - whether that's in a folder in a shared drive or physical documents (it's a good idea to have both in case physical documents become misplaced).
The file should contain the following:
- Any licences you hold, e.g. licence to sell alcohol
- Details of insurance, especially in high-risk industries such as chemical engineering
- VAT returns
- A full asset sheet, including non-physical items such as computer software
- Tax returns
- Lease details
- Supplier details with information about the best person to contact
- An anonymised list of staff with details such as age, salary and how long they have worked for the business
- If you own a limited company, double check that all details at Companies House are correct
4. Thoroughly review your processes
Documenting your processes clearly can help with the handover process and avoid further questions once the sale has been completed. This could be in the format of flow charts, e.g. 'How the team signs off content', presentations, or simply a Word document.
The aim is to get to a point where business operations are not so heavily reliant on you to be present. Some of your systems and procedures may even be outdated - if you've documented processes regarding software or programmes previously, software updates may have completely changed since the document was last updated.
These processes need to be easily accessible. The last thing you want is to accidentally save them into your drive specific to your work email address and have everything disappear once you are removed as a user! If a password is required for these files, make the password easy to find for those who need it, and don't just leave it down to one person.
You should include information such as who is involved in each step, what their contact details are (if external), the resources needed in the process (e.g. specific software) and screenshots of anything that is difficult to explain without a visual aid.
You may also want to include hyperlinks to documents that explain certain steps in more detail, especially if you are working with small squares in a flow chart that don't allow for a full explanation.
This should be done well in advance of selling to allow time for relevant team members to review the process and even write some themselves, especially for departments where you do not have so much involvement. It may even be worth testing this process between teams to see if it can be carried out without the experts' help.